Do you want to start a freemium business? here’s everything you need to know about the Freemium business model, plus examples of successful businesses.
What is the Freemium Business Model?
Freemium is a business model in which companies provide both free and paid versions of their services. Please note that the free version has enough limited functionality to allow users to meet basic needs while encouraging them to upgrade to the paid version. It is a free and premium wallet, and this strategy is very popular among the top players in the .com industry.
Even market leaders like LinkedIn, Tinder, YouTube, Candy Crush and many more are using the freemium model to grow their user base and generate more income through micropayment strategies. This business model can mean a lot of things and its meaning has changed over the years. But it’s a business model that can grab attention like nothing else.
The Freemium business model emerged in the software industry in the 2080s as a limited or limited functionality strategy, commonly referred to as a shareware strategy, in which a free (limited) version of a product became accessible. to all on the grounds that some users will upgrade to a higher quality premium version. It has been organized and designed to allow as many potential customers as possible to try the product for free and then become a premium member after paying for a certain subscription.
The recent emergence of in-app purchases for IOS and Google Play has improved the shareware strategy and called it freemium, which is characterized by free software / game / app, but with a paid add-on. -on function. This economic model uses the zero price paradox, which explains this for maximum participation; the zero price cannot be a victory.
Meanwhile, people tend not to like what they got for free, so they do like the product; they have to pay something for it. This gave birth to the feature of free services – micropayments. The business model is based on the following four principles:
Features of the Freemium business model
- Participation
This unique business model also spawned a new concept known as the Newtonian Engagement. The name refers to Isaac Newton’s First Law of Motion and essentially states that “the player involved in the freemium service will remain involved as long as there is no outside force acting on him.” As funny as it sounds, it is absolutely true. Engagement is the main accelerator of free services, usually games.
This business model is well designed and used to keep customers engaged in using the service and not using the service yet. Games like candy crushing won’t let you get bored even if you don’t play them, making you wait for your life to be restored. These apps also use micro triggers to keep you using the app.
2. Micropayments
It is important to note that Freemium does not include fees for the basic services provided, but does include fees for premium add-ons. In fact, the charge or price of these add-ons is nominal and the customer, involved or dependent on the application / game / software, does not mind. pay for them.
These nominal service charges are called micropayments. Please note that client micropayments pay for various in-app services ranging from purchasing extra life in the game to getting premium functionality in the dating app.
3. Repeated payments
Keep in mind that people who use freemium services never set aside a budget for the same, and since premium add-ons only cost pennies, they don’t even count them as actual payouts. But this is one of the key attributes of freemium services, they force customers to pay for the mic over and over again, which is more than the amount they would pay for the service if it was a premium. . Indeed, addiction to a free service is very serious. After making a payment, customers want to get the most out of their investment, which makes them pay even more.
4. Network effect
Providing a product or service for free is the best way to attract more customers, and while most of those customers don’t reach the premium levels, they sort of act as a magnet to attract more premium leads.
This business model is clearly driven by a business phenomenon known as the network effect, which means that great service becomes more valuable as more and more people use it. In particular, the more people use a product or service, the more its value increases.
Advantages of the Freemium business model
The key to success The Freemium business model is to provide sufficient access for the user to start enjoying the benefits. Launch paid plans at a stage where the user is too interested to opt out of your product. Users of these business models are always encouraged to consider the scalability of their product and where the user should want to pay for the product, or what additional features the product might offer to push them to the point of tilting. Here are some of the advantages of the Freemium business model:
- Safe testing of product functions
A well-planned Freemium program delivers your products or services to hundreds or thousands of free users. It also means that you have flexibility in terms of what features you can test with your audience. You can create a very simple version of a new feature and see if your free users like it – all without worrying about whether they’ll give up if it doesn’t work exactly as expected. You can also run cheap tests where you post or email your free users, offer a feature, and see what interests them.
- Test referral programs
Additionally, having a large group of free users can be useful for testing referral programs and gaining new users. For example, no matter how good the referral program is, it still takes some time to be successful. If you are constantly running tests to get your paid users to share your product, there is a risk that they will get angry and abandon their services.
On the other hand, having free members gives you the opportunity to try out many options of referral programs. If things are going well and you have an effective referral program and five times the number of free users than paid users, referrals can be an effective marketing channel with minimal costs to support free users.
- Test the leveling levers
Thanks to the free users that this business model offers for the first time, it gives you the chance to test what drives users to update. Does a certain feature trigger a lot of updates? How about reaching a number of users? Or memory limit? Regardless of what you find, you can measure why most of your free users go paid.
Once you have this information, you can then design a process on integrating the products to move them in the direction they are arriving at the fastest time. Freemium can also be useful if you have a whole range of products. that you can sell or sell to your audience. In this case, Freemium becomes a cheap marketing channel by supporting your free users.
- A large audience
For example, having a free product tier means you will have more registrations, adding a free product tier means you have a larger audience than if you were paying. This means that having access to this larger audience – and an easy way to reach them – makes other marketing activities easier.
Things like partnerships; Co-marketing, co-webinars, and referral programs are all easier when you tell a potential affiliate that you have several thousand customers, not a few hundred paying. Indeed, partnerships and other types of collaborative marketing take time and are difficult to understand. What makes them attractive is access to a large number of new potential customers.
- Single customers and increased brand awareness
One of the easiest ways to get more customers is to provide the service for free. Everyone does it! They even found a way to make money. For example, YouTube provides a free service but monetizes its advertising videos. Additionally, if your users like your (free) product, you will eventually see an increase in brand awareness, which will lead to increased profits.
- Better than premium
Typically, this business model takes precedence over the premium business model, as no user wants to pay up front for a service they haven’t used or experienced yet. Furthermore, the freemium model, if chosen for viral services, not only generates more revenue, but also increases brand value.
Disadvantages of the Freemium Business Model
While the freemium business model can be very effective, it is often criticized because it does not always create a sense of urgency for buyers who are free to pay for a product. Note that the cost of serving free customers is another factor that needs to be carefully considered. But more often than not, freemium fails because its use is inherently flawed.
Experts believe that companies often overlook the importance of the type of freemium on offer and fail to properly develop new on-board leads signed. efficiently and provide a clear path for the customer to a paid subscription. Here are some of the downsides of the Freemium business model and the pitfalls that use them in most cases:
- Doesn’t evoke a sense of urgency
One of the main problems with the freemium model is that it doesn’t create a sense of urgency. The free trial is about to expire, causing users to rush to use it and inquire about the cost of the product. However, companies can create freemium plans that emphasize the urgency factor.
No matter how good your product is, everyone will never find enough money to buy it. So not everyone is a perfect customer. In addition, not everyone has a budget. These free customers can still like your product and share positive reviews.
They can be influencers and promote your product and associated content on social media, but the transition to a paying customer may never happen. This is why it’s so important to focus on urgent engagement with a third tier of free users who match your ideal customer profile, have a budget, but probably aren’t using your product to pay for it yet.
- Doesn’t reward or engage with leads consistently, resulting in lower free conversion rates
In this modern age, many companies overlook the benefits of acquiring free customers, pointing out the differences between their free and paid versions. Instead, they tend to rely on the idea that free customers will influence the value of the product and transform over time or as their needs increase. This business model requires companies to constantly educate users on how they can get more out of the paid version of the product.
- Free customers have no incentive to convert or any incentive
Keep in mind that giving away too much product is one way to fail with freemium. Assuming the cost of serving free customers is low, businesses must strike a careful balance. The company will need to provide sufficient access to the product only for continued profit, but not sufficient to remove the incentive for users to purchase the product. Keep in mind that the goal of freemium is to get customers to increase usage of their products and eventually switch to a paid membership.
- Doesn’t track or analyze how and why customers convert
It is desirable that companies using this model chart a clear path for attracting free users to paying customers. It is a mistake to believe that free users do not need to be analyzed or tracked. Remember, free user tracking can help you better understand target customers and create data-driven search content.
- Does not provide proper experience when landing
Even with a free version of your product, users will have to learn how to use your product. Remember that “empty state” or “zero data” is what potential customers see during the initial registration process when there is no data in the product. That’s why giving free access to your seemingly empty product won’t help you convert free users into paying customers. This is all part of the integration which is essential to the successful deployment of the product and can also guide potential customers through the most data-generating steps so that they can realize even greater value from the product.
- insufficiently effective
As a company using this business model, if you provide functionality that is not really of importance to the user, or if you limit the free version to a level where no value can be extracted from the product, you risk more to fail. Even if you provide your product for free, users will still have to benefit from it.
- The cost of supporting free clients is not estimated
The cost of a freemium offering can skyrocket when you factor in all of your costs – from cloud storage to support. Let your users know what’s included and what’s not included in the free version of the product. Make sure your expenses are manageable over the long term.
50 successful companies based on the Freemium business model
- Skype
- Salesforce
- Microsoft
- Adobe Creative Cloud
- Box
- Amazon Web
- Google G Suite
- Soft
- Mailchimp
- ADP
- Oracle
- DocuSign
- Cisco
- Spotify
- Go to a meeting
- Github
- Business day
- HubSpot
- Twilio
- Coupa software
- Hootsuite
- Xero
- Zuora
- AdRoll
- Xactly
- Trello
- Marketo
- Evernote
- Shopify
- MuleSoft
- corner stone
- Eventbrite
- Paychex
- New Relic
- candy Crush
- Domo
- FreshBooks
- Board
- Druva
- Act-On Software
- Blackboard
- GoodData li>
- SurveyMonkey
- Cvent
- Blackbaud
- Dropbox
- ServiceMax
- Veracode
- Anaplan
- Fast7
Conclusion
In recent years, the freemium business model has become widely used in a number of digital applications, internet startups and SaaS. These businesses tend to benefit from this business model, which combines free software or services with paid upgrades.
Unlike the free trial, the duration of use of free software or services is unlimited. Several factors contribute to attractiveness, but the big advantage of this model is that it can quickly attract leads, conversions and income without intermediaries. …
A lot of developers and startups like the idea of a freemium model and assume it will work for them because it works so well for others. But freemium isn’t the ideal business model for every business. Freemium can accelerate the growth of your product, especially in the early stages of a startup. This can put your product in front of many people early in the buying process. But when everything is badly done or all options are considered, it can be disastrous.
