The Freemium business model is widely tested and accepted in a broad number of online and offline services where a user can download and use the application with limited features. The word ‘Freemium’ is made up of two different words, Free + Premium.
App and software developers work on a new idea or concept to get loads of downloads. In the freemium business model, there are popularly three different types:
- Download and use the app with limited features and pay to access all the premium features.
- Use all the features for a specific period with the trial plan and then buy the membership.
- One-time fees to access all the key features or to remove advertisements from the apps.
Besides this online category, there are many other businesses where the freemium model is used, like you see in grocery stores or in bakeries, where you get tasters for free but have to pay in full for the whole box.
Definition
In the freemium business model, the pricing strategy is to offer a product or service for free with limited features while keeping the advanced features behind a paywall. It can be in the form of online processing, extra functionality, or additional services.
This model is effective because it helps companies build a large user base due to the free plan, but all the premium users help in generating revenue. Additionally, some companies use advertising in the freemium plan, which helps them generate extra revenue even from non-paying users.
Examples of Freemium Business Models
Many companies operate on a freemium model, and you can easily recognize most of their services with just their name.
- Spotify: Allow users to stream music, listen to new podcasts, and a lot more, but requires a premium plan to remove advertisements.
- Dropbox: With Dropbox, users get to enjoy free cloud storage, but with a storage cap. To extend the storage, users are required to upgrade to a paid plan.
- LinkedIn: You can build a basic network without paying at all, and you can also earn through connections. However, for extra insight and InMail features, you need to pay for the monthly subscription.
- YouTube: Watch videos for free from all around the world, but you have to watch annoying ads to watch the desired videos. To remove ads, users are required to get a membership.
The Freemium business model is effective at building a user database, converting leads into buyers, and generating revenue.
Most SaaS companies (Software as a service) prefer this option because monthly subscriptions from users help them make more money than they could ever make with a one-time purchase. The recruiting revenue sells better.
Advantages of the Freemium Business Model
It’s not like the freemium business model is only beneficial to the businesses alone; this model also benefits users.
To Businesses
- Reach a Wider Audience: With the free trial or limited features, companies get access to a wider audience. With the large database, companies get the option to advertise or to convert free users into paid ones with great features.
- Low Entry Barrier: Companies understand that users have hesitation before buying an online service that they have never tried. In the paid services model, most users don’t even try the app, considering the risk of fraud.
- Viral Marketing Effect: Word of mouth is one of the best tactics to get a loyal user base, and it is quite effective with a freemium business model. If a user loves your product, then there are higher chances that he/she will share it with friends or family.
- Upselling Opportunity: The best thing about a freemium business is the ability to upsell. In cloud data storage services, most users end up getting the paid plan to increase their online storage to 100 GB. With time, the storage fills up fast, and eventually users shift to an expensive plan.
- Brand Awareness: With the freemium business model, it becomes easier to build credibility among users through a quality product. Word of mouth, in this case, is effective in ensuring incredible growth for the business.
These are some of the core advantages, which are not limited to the given points; there is much more than this.
To Users
- Use Before Purchase: Users who download a freemium product get to test the product. If they like the product, they can pay for a premium plan and have a quality experience.
- Preventing Frauds: Some apps, software, or services claim many things, but when users purchase a subscription without even trying, they end up getting fooled. Freemium products have an advantage in this category.
Disadvantages of the Freemium Business Model
Just as any coin has two sides, the freemium business model has the same. These are some common disadvantages faced by businesses:
To Businesses
- Higher Cost: With freemium models, businesses have to burn cash for exposure through advertising, running servers, or paying salaries to employees in the early stage.
- Low Conversion Rate: Due to the low conversion rate in the freemium plan, most companies have to rely on showing advertisements in the freemium plan to survive in competition. So this becomes hectic if the conversion rate is not growing with time.
- Potential Abuse: Some users do not switch from the free plan to the paid plan as they use a cracked version or opt for tricks or bugs in the app that bypass the paywall.
- Feature balance Challenge: Deciding which feature to give for free and what to keep behind a paywall is challenging because if the key selling feature is given for free, most users will not buy the premium option. Meanwhile, if the basic features are behind a paywall, most users will download but will never use the service, which will impact brand image.
Besides these disadvantages, there are a few issues that users might face.
To Users
- Poor Transparency: To use freemium software or an app, businesses require you to log in. Users’ data is collected and sometimes sold to third-party companies for advertising purposes, which can be annoying.
Conclusion
No doubt that the freemium business model is an excellent strategy to attract a broad number of users and convert a portion into paying users. However, all this requires a carefully crafted strategy, a quality product, and a balance between premium and freemium interface.