Freemium model

A freemium model is an acquisition strategy used by companies where it allows users a basic version of a product to be used for free forever.

What is the goal of a freemium model?

The term freemium is the combination of “free” and “premium”. This model essentially includes a basic version of the product where it delivers the value that a user requires. The goal of this strategy is to attract a large number of user base and penetrate the market. The assumption is that because there are no upfront charges or even saving credit card data, the users who are looking for a solution would give the product a try. Once users sign up for the freemium plan, they can be kept engaged and converted to paid users ahead by offering higher features.

Opportunities

Fast market penetration

Because the basic version of the product is free of cost, it becomes an attractive proposition for users to try out. This can speed up the process of getting the initial user base to try out the product.

Virality

With a large number of users trying the product, it gives the necessary exposure to the product in the market. With mouth publicities and social media, it can have a strong network effect which will effectively increase the number of users trying the product.

Upselling opportunities

A good freemium version of a product offers enough value for the customer to realize its importance and gives motivation for the customer to try more features. A well-designed and thought product has the right touchpoints at the right place and time inside the product. This presents an opportunity to upsell and generate revenue.

Threats

Conversion rate

The average rate of free to paid-user conversion is around 2% to 5%. A company’s revenue depends on this conversion rate as these are the users ultimately paying for the product. Before committing to this model, the company has to really think through the issues around this like managing users on the platform who are not paying, support, infrastructure, etc.

Brand image loss

There can be times when the free users can think the value delivered by the product is not per their expectations. This would lead to them not turning to the paid version. The network effect, that we saw previously, can go the other way as well. This would lead to the loss of brand image and eventually loss of revenue.

Resource allocation

Be it the most successful freemium model, the fact is that most of the users will be free users only. Very few users would pay for the product eventually. This means the company has to provide support and manage the product infrastructure & operations for mostly non-paying users.

Who should use the freemium model?

Because the typical free-to-paid customer conversion rate is low, this model is used by companies that have a huge amount of customer base. Generally (but not limited to) this type of model is used by B2C software companies. Examples; Spotify, YouTube, etc. Users can easily access and experience the basic version without physical constraints.

While the freemium model can be advantageous for many digital businesses, it’s crucial to carefully assess the specific characteristics of the product, target audience, and market conditions to determine if it aligns with the overall business strategy. Not every business can successfully implement freemium, and alternative models, such as a one-time purchase or advertising-supported model, may be more suitable in some cases.