What is the freemium business model? Why study this model?
The Freemium business model is most common among businesses delivering services online. I regard it as one of the business models of Web 2.0.
The abundance of information on the internet has taught us there are alternatives to what we already have.
Free news blogging, free listing, free software, free tutorial, free music, and video.
So, people search the internet for hours to find products for a cheaper price or even for free.
The surprising thing is we release later that the difference in price does not worth the time spent in searching.
I would have concluded that the study of a new business model is of no use if the existing ones are working perfectly.
But then it is good we welcome the emergence of new business models to best understand the success and failure of the existing ones.
We can now know if we are to discard or merge.
I am writing this article after my work with a client who needed me to help in the design and marketing of an eCommerce marketplace.
This article explores the freemium business model and explains with examples how you can apply to your business.
Freemium Business Model Meaning
The name “Freemium” which stands for the combination of “Free” and “Premium” was given by Jarid Lurkin – a student of Fred Wilson.
Fred Wilson himself gave the original definition of the freemium business model.
In 2006, he defines the freemium strategy this way in his blog:
“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.”
My personal definition goes thus:
“In the freemium business model, you give away the basic version of your offering for free, hoping to convert enough users to get the premium version.”
The name, “freemium” has become a household name in the eCommerce business marketplace.
Freemium Business Model Strategy
Let’s make an analysis of Fred’s definition.
Give your service away for free:
Giving something away for free is not something new–existing since the creation of time.
The internet offers a lot of services and gives out most for free. Users have become used to this that they expect everything free.
Those who once will pay for a book now want the same knowledge for free on the internet. “Google It” is the slogan of free.
…possibly ad supported but maybe not…
You can use advertisement as an additional income source if you chose to. Users can’t complain about your use of ads since they are getting your content for free.
We see this in news and magazine’s website a lot. Even marketplace like Jiji and Jumia places ads from the third party on their website.
Yet, it’s not the primary source of revenue.
… acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc,…
This is the entire essence of why you are giving your products or services out for free. The intention is to win more customers to yourself.
Users don’t restrict registering free on your site or download your free content. Because they know they have nothing to lose.
Your users will tell their friends about your products and mention the fact that it is free. Before you know, you are having an enormous customer base.
…then offer premium-priced value-added services or an enhanced version of your service to your customer base…
This is your major source of revenue. The premium service does not differ from the free service. It’s advanced of the free.
When users pay for the premium package, they get more features not accessible to the basic users.
So, your goal is to convert many free users to premium users.
If you are considering the freemium business mode, I encourage you to your free offering and user base as a resource to win against competitors. But how?
You do so in three ways:
- Lower the cost of your offerings
- Create an online user community
- Learn and make changes as you grow.
How Does a Freemium Model Work?
A freemium business model works by asking users to sign up on your website. In return, you offered them the basic version of your service.
The basic must not be too limited else they walk away. And it must not be too complete that they see no need to upgrade. Balance is the key here.
Your duty is to persuade enough users of the free version to convert to the premium package.
The purpose is for two reasons:
The premium version is your principal source of revenue and not the free.
The money you get from the premium users is what you used to sustain the website expenses.
The second point shows why at least 10% of your customers should be premium users.
The advantage you have as a service provider is that the cost you used to produce one content same you also use to produce millions of others.
So your cost of production is near zero. But your expenses will mostly come in places like website storage space and capacity.
Freemium Business Model Benefits
- It works best with service business commonly called Software as a Service (Saas)
- It gives you access to unique data for market research.
- The value increases as the number of users increases. I call this Network Externalities.
- Free users lower their expectations of your service since they are not paying for it. Premium users will expect more.
- You can reduce the cost of customer service by creating forums where users can post questions and assist one another.
- It provides you with enough feedback from users to know what features are needed.
The Different Freemium Business Model Type
This is a model type where you offer a user your service or products for free for a limited time period.
Once the time elapsed, the user will either pay for a premium version or stop using your service.
Advantage: It is a straightforward way to separate users seriously with business and those who are not.
Also, users don’t have to stay long before you delete their contents to save storage space.
Disadvantage: Many users will be reluctant to try the service since they know you will kick them out after the time trial.
I called this the free trial model. It’s more of a sales strategy than a freemium business model type.
Freemium Business Model Examples:: Linkedin Premium free trial
In this model type, you offer the basic version of your service and the advanced one as a premium version.
You limit access to pro features you know will be most important to enhance their use of your service.
Advantage: You will attract a lot of new customers, of which a certain percentage may convert later.
Customers will engage more and become loyal to your business since they will have the service forever free.
Disadvantage: Your expenses (website storage space) will increase quickly because of the growing number of new free users.
Again, how will you know you are not giving too little or too much of your service for free?
If it’s too little, users will go away. And if you give too much, users will not upgrade.
Freemium Model Examples: Andtab, Jiji
The seat-limited freemium model type operates on the volume capacity.
E.g. Here you limit the number of users or uploads or storage space.
Advantage: You have control over the number of items a user can access. This may prompt those who need more to pay for the premium version to unlock more space or users.
Disadvantage: User can open multiple accounts which can still make up for the space needed.
Freemium Business Model Examples: Dropbox, Google Drive.
Customer Type Limited
This is a freemium business model where you offer services based on categories of customers.
You offer free to low-income earners, students, or charity groups.
And charge others outside these groups for the premium version.
Advantage: Those who cannot afford your service will accept your offer, but later to paying customers.
Disadvantage: It’s difficult to know the financial status of the customer. An unemployed person using your free service can still claim to used to be unemployed seven years after.
Freemium Model Examples: Example: Liquid Web Hosting, Canva.
Features in the Freemium Model
- The free (basic) version should be enough to make users register.
- The premium (upgraded) version should convince that users feel it worth the price.
- Pay attention to your conversion rate: Make sure you convert enough customers to premium to become sustainable in the long run.
- Lower the cost of production so you can offer free to more customers.
- Have systems in place that would lock in and encourage users to upgrade to the premium version.
- Create forums to connect members and allow for a growing community. It strengthens your network effects.
- Create other revenue sources (ads, affiliate, shops, etc) from the platform.
Freemium Business Model FAQ
Is free trial the same as the freemium business model?
No! Although most business owner sees it that way, it’s not. They offer a 7, 14, or 30 days trial of their software or services.
Users are always reluctant to use such services since they know you will deny them access after the trial period. This is what Fred Wilson has to say about free-trial.
And make sure that whatever the customer gets day one for free, they are always going to get for free. Nothing is more irritating to a potential customer than a “bait and switch” or a retrade of the value proposition
What is the difference between freeware and freemium?
Freeware is a lower quality service a company offers to gain a large user base and then offer the commercial (actual) products for a normal or even higher price.
Freemium is offering a basic version (high quality) of your service with the hope to get many customers to pay for the addons (premium version).
A 100 times, I will choose freemium over freeware.
Freemium Business Model Conclusion
The freemium model offers a free service to gain users and then work to turn these users into paying customers.
The different models are :
- Time-Limited model
- Feature-Limited model
- Seat Limited model
- Customer Type Limited model.
Many have embraced the freemium business model as it profits the two sides of the business – owners and customers.