The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
|Definition||The Freemium Business Model is a pricing strategy that informs a whole business model, in which a company offers a basic version of its product or service for free (the “free” + “premium”), with the option to upgrade to a paid premium version that includes additional features or functionality.|
|Free Tier||The free tier is the core offering that is provided to users at no cost. It often includes essential features or services, making it valuable on its own. It serves as a tool to attract a large user base and create brand awareness.|
|Premium Tier||The premium tier is the paid version of the product or service. It offers enhanced features, functionality, or benefits that cater to users willing to pay for a more comprehensive experience. It generates revenue for the company.|
|Monetization||Freemium businesses monetize through a mix of strategies, such as subscription pricing, one-time purchases, in-app purchases, or advertising revenue. The goal is to convert free users into paying customers while maintaining a free user base.|
|Conversion Rate||The conversion rate is the percentage of free users who choose to upgrade to the premium version. Improving this rate is crucial for the success of the Freemium model, and businesses often employ marketing and upselling techniques.|
|Features Packaging||Freemium companies carefully design feature packages for both the free and premium versions. They aim to provide enough value in the free tier to attract users while enticing them to upgrade by offering premium features that address specific needs or pain points.|
|User Segmentation||Understanding user segments is essential. Freemium businesses categorize users based on behavior, needs, or demographics. This segmentation helps tailor marketing efforts, personalized communications, and feature recommendations.|
|Usage Analytics||Usage analytics and data-driven insights play a pivotal role in the Freemium model. Companies collect data on user behavior, feature usage, and conversion patterns. This data informs decision-making and allows for continuous refinement.|
|Marketing Strategy||Freemium models require effective marketing to drive user acquisition and conversions. Companies employ content marketing, email campaigns, referral programs, and more to attract and retain users, often utilizing free users as brand advocates.|
|Retention Efforts||Retaining free users is vital as they can become paying customers over time. Freemium businesses implement strategies like user engagement campaigns, feature updates, and exceptional customer support to maintain user satisfaction and loyalty.|
|Examples||– Spotify: Offers a free tier with ads and a premium tier with ad-free listening, offline downloads, and higher audio quality. – Dropbox: Provides free cloud storage with limited space and offers paid plans with expanded storage and features. – LinkedIn: Offers free access to basic features and networking, with premium subscriptions for advanced job search and business networking tools. – Evernote: Provides a free note-taking app with limitations and offers premium plans with additional storage and features.|
|Benefits||– Attracts a large user base quickly. – Builds brand recognition and trust. – Generates revenue from a portion of users. – Allows users to experience the product before committing. – Offers flexibility to scale and adapt pricing over time.|
|Drawbacks||– Requires careful balancing of free and premium features. – Conversion rates can be low, affecting revenue. – Challenges in retaining and engaging free users. – Competition from free alternatives. – Relying on user data may raise privacy concerns.|
|Applications||Freemium models are commonly used in software and digital services, including apps, games, productivity tools, and online content platforms. They can be adapted to various industries where a tiered offering is feasible.|
Is a freemium a business model?
You create a product or software, you make it available for free on the web, thus (if the tool is good) it gains visibility quickly, and you call your company a freemium business model.
A marketing strategy will focus primarily on acquiring users, leads, or potential customers for the business.
To understand this key difference let’s look at the whole story behind freemiums.
The origin story
On March 2006, venture capitalist Fred Wilson wrote an article entitled “My Favorite Business Model” which said:
Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.
He mentioned examples of this successful business model at Skype, Flickr, and a few others.
According to Fred Wilson, the core advantage of a “Freemium business model” is fast customer acquisition. But he made clear that it had to be as frictionless as possible:
A customer is only a click away and if you can convert them without forcing them into a price/value decision you can build a customer base fairly rapidly and efficiently. It is important that you require as little as possible in the initial customer acquisition process. Asking for a credit card even though you won’t charge anything to it is not a good idea. Even forced registration is a bad idea. You’ll want to do some of this sort of thing once you’ve acquired the customer but not in the initial interaction.
The main aim was to “eliminate all barriers to the initial customer acquisition.” He didn’t have yet a name for this kind of revenue model.
Giving it a name
At the end of his article, Fred Wilson had clear in mind what the Freemium business model looked like. However, he didn’t have a name for it.
That is why he invited people to comment and to come up with a proper name for this business model. A commenter, Jarid Lukin suggested the name Freemium model.
Thus, service and product wholly free and frictionless, where most users don’t pay, and a small base of users pay for a product that has premium features.
Over the years Fred Wilson kept emphasizing the importance of free. Today the freemium business model has taken over also the gaming industry. But it has also become the most debated business model in the software industry.
On the power of free
Building a free product and making it available to anyone and then expecting to make money isn’t the right strategy.
Instead, the “free” within the freemium, if appropriately used, can be a lever for quick success.
As Fred Wilson pointed out in October 2008 “freemium is far from dead, in fact, it may be the business model de rigueur.“
What did he mean? He recounted in a later article:
Facebook is a perfect example of freeconomics at work. A woman who works for a major media company was in my office recently. She quoted her CEO as saying “why doesn’t Facebook just charge a monthly subscription fee, they’d be making money hand over fist?”. Well I believe that if Facebook did that, they’d be vulnerable to other networks offering a free service. And certainly not every one of those 200mm+ users are going to cough up a monthly subscription. But by offering a friction free service, they have built a powerful and growing network that they are now starting to monetize in various ways and that they will monetize even further in additional ways. And they are super hard to compete with because they are free.
So that you know what key questions to ask that person to make sure the freemium is the right growth tool for your business. Some of those questions are:
- Do we have the resources to sustain a free product? Many forget that a free product still requires a lot of maintenance, updates, support, or else. If you don’t have those things in place, your free product won’t be good, which will make it flop quickly.
- Is the free product cannibalizing my premium offering? It might sound obvious to some people, but engineering a free product isn’t easy. Do you know how much of that free offering is enough to be valued? Do you know how to strike a balance between what you offer for free and what instead should be paid? Is the free product in line with your overall business strategy?
- Is the freemium in line with my overall business model? For instance, if your organization is primarily structured on a sales team, which works with enterprise customers a freemium might make sense as it enables your brand to be known by more people. But will the fact that more people will know my brand to be a way to speed up the process of acquiring another potential enterprise customer? If not, is a freemium aligned with a business strategy where I want to get the lower end of the market?
Below is an example of what a freemium decision tree might look like:
- Offers free cloud storage with limited space.
- Freemium users can upgrade to premium plans for more storage, enhanced sharing options, and advanced features.
- Premium plans include Dropbox Plus and Dropbox Family.
- Provides a free tier with ads, limited skips, and lower audio quality.
- Premium subscriptions remove ads, offer unlimited skips, offline listening, and high-quality audio.
- Premium options include Spotify Premium and Spotify Premium Family.
- Offers a free version for basic note-taking, organization, and syncing across devices.
- Premium plans provide features like offline access, unlimited devices, and advanced search capabilities.
- Premium offerings include Evernote Premium and Evernote Business.
- Provides a free platform for professional networking, job searching, and basic profile features.
- Premium subscriptions (LinkedIn Premium and Premium Business) offer InMail messages, access to learning courses, job insights, and more.
- Offers free inbound marketing and sales software for CRM, email marketing, and lead capture.
- Premium plans include Marketing Hub, Sales Hub, and Service Hub, offering advanced tools, automation, and analytics.
- Offers a free plan for sending email campaigns to a limited number of subscribers.
- Premium plans (Essentials, Standard, Premium) offer increased subscriber limits, advanced features, and enhanced reporting.
- Provides a free social media management platform for scheduling posts and basic analytics.
- Premium plans (Professional, Team, Business) offer additional social profiles, advanced scheduling, and team collaboration tools.
- Offers a free graphic design tool with basic templates, design elements, and collaboration features.
- Canva Pro provides access to premium templates, stock photos, and advanced design tools.
- Provides a free open-source content management system (CMS) for website creation.
- Premium offerings include themes, plugins, and hosting services from various providers.
- Offers a free project management and collaboration platform with boards, lists, and cards.
- Trello Business Class and Enterprise provide additional features, integrations, and security options.
- Offers a free video conferencing service with limitations on meeting duration and participants.
- Premium plans (Zoom Pro, Business, Enterprise) offer extended meeting capabilities, cloud storage, and advanced admin controls.
- Provides a free grammar and spelling checker for writing.
- Grammarly Premium offers advanced writing suggestions, plagiarism detection, and genre-specific writing styles.
- Offers a free team collaboration platform with limited message history and integrations.
- Slack paid plans (Plus, Enterprise Grid) provide unlimited message history, more app integrations, and security features.
- Offers a free password manager for storing and autofilling passwords.
- LastPass Premium and Families provide secure file storage, advanced multi-factor authentication, and emergency access.
- Offers free video hosting and streaming with ads.
- YouTube Premium removes ads, provides offline viewing, background play, and access to YouTube Originals.
- Provides free productivity tools like Gmail, Google Docs, and Google Drive.
- Google Workspace Business and Enterprise offer more storage, custom domain, and advanced collaboration features.
Microsoft Office 365:
- Offers free online versions of Office apps (Word, Excel, PowerPoint).
- Office 365 subscriptions provide desktop apps, advanced features, and cloud storage options.
- Offers a free trial and free courses on various topics.
- LinkedIn Learning Premium subscriptions grant unlimited access to a vast library of courses, certifications, and offline viewing.
- Provides free public repositories for open-source projects.
- GitHub paid plans offer private repositories, collaboration tools, and advanced features for developers and teams.
- Mobile games offer free gameplay with in-app purchases (IAPs) for virtual items, currency, or content.
- Premium content and features can be unlocked with real money, enhancing the gaming experience.
Key Highlights on Freemium Business Models:
- Defining Freemium: Freemium is a business model where a product or software is initially offered for free, with the goal of acquiring users efficiently and then converting a small portion of them into paying customers for premium features or services.
- Marketing vs. Business Strategy: It’s essential to distinguish between marketing strategy, which focuses on acquiring users, and business strategy, which explores the overall logic and scalability of the business model.
- Origin Story: The term “freemium” was popularized by venture capitalist Fred Wilson in 2006. He emphasized the importance of acquiring customers efficiently and eliminating barriers to entry.
- Power of Free: Offering a free product can be a powerful marketing tool, but it should be aligned with a clear plan for monetization. The goal is to build a large and engaged user base.
- Not One Size Fits All: Freemium is not suitable for every business or product. The success of freemium depends on factors like the customer profile, cost structure, and the ability to convert free users into paying customers.
- Freemium Business Models that Work: Examples like Dropbox demonstrate the success of freemium models. Dropbox gained traction through free storage offers and converted many users into paying customers for additional features.
- Balancing Free and Premium: Striking the right balance between what’s offered for free and what’s paid is crucial to a successful freemium model. Overuse of free services can strain resources and negatively impact revenue.
- Freemium in Enterprise: In the “freeterprise” model, a free product is used to gain entry into organizations, with the aim of converting free users into enterprise customers through sales efforts.
- Questions to Ask Before Adopting Freemium: Businesses should consider whether they have the resources to sustain a free product, whether it might cannibalize premium offerings, and whether it aligns with their overall business model.
- Key Metrics to Track: Businesses using freemium models should monitor metrics like the cost of serving free users, conversion rates from free to premium, daily active users (DAU), average revenue per user (ARPU), and more.
- MailChimp’s Lesson: MailChimp’s success with freemium emphasizes the importance of having a solid foundation (the “1”) before chasing scale (the “10”). Building up a user base before seeking venture capital funding can be a more sustainable approach.
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