Jun 23, 2022
Freemium is a business model combining free and premium services. Businesses provide a service with basic features at no cost and extra features at a nominal price. The idea behind freemium models is to add new customers by hooking them with a free service to become paid users.
The model is popular among startups‚ software‚ and internet-based companies. Some household-name companies that use the freemium business model include Spotify‚ Evernote‚ and LinkedIn.
The concept for freemium is to offer a product with basic features for free, but make it obvious that there are other more robust features available if the user wants to upgrade to the premium version or a subscription. The trick is to make the basic version robust enough that the user gets used to the product, but not so feature-rich that there is no motivation to upgrade or subscribe.
A free trial is a model where customers have 30 days, for example, to decide if they want to pay for the product. The user enjoys full access to all or most of the features and experiences its maximum value within the timeframe.
Although the free trial model effectively converts users into paying customers with at least a 30% conversion rate, they may fail to convert if they don’t have adequate time to experience the product’s full value. However, that is where the freemium model carries the day since customers can use the basic version for as long as they wish and subscribe to premium anytime they are ready.
The freemium model leverages the fact that people are more attracted to free product and service offerings. Therefore, a company using this model will have a bigger customer acquisition at the beginning of a marketing campaign. Then, when the product becomes an essential part of the user’s workflow or day-to-day life, they will upgrade to access the full version.
Here’s how a company can convert free users into paying users:
The free version must have limitations if you want your users to upgrade to a paid account. If a free plan gives all the value they need, customers will lack motivation or see no reason to move to the premium version.
Freemium and free trial are two different business models. But it does not mean you must forgo one for the other. You can have a full-featured free trial while still providing a limited free-forever plan. The free trial allows users to experience the product’s full functionality without limitations and thus can see the full value before deciding to purchase.
Help customers get more value from your product by answering any potential questions they raise, sending newsletters to new users sharing tips and inspiration, and highlighting new or important features with notifications.
Constantly remind users that they have an option to subscribe to a premium service that allows them to access additional features. You can do that by sending periodic email notifications showing what a user would be getting with a premium plan, and highlighting specific limitations of the free plan through in-app notifications.
1. It creates brand awareness
Free product attention grabs potential customers’ attention towards it, thus creating brand awareness.
2. You can earn from ads
You give services for free to users in the freemium model, but you can compensate for that by partnering with ad networks and earning by displaying adverts to your free users.
3. It has a low customer acquisition cost
Customer acquisition cost is lower as you upsell your premium version to the free consumers.
4. It has less marketing effort
Getting free users for a new product or service requires less marketing effort.
1. Limited features
Limiting features in the free version is critical in the freemium model, but it can make them feel exhausted and reduce their interest in subscribing to a premium plan.
2. Low Conversion Rate
Converting free users to premium users may be difficult for the freemium model, especially if you don’t limit the right features.
There are some situations when you should not use the freemium business model as it may not pay off. These include:
When a business has a limited range of products: The freemium approach won’t be viable if your business has a limited range of products. Premium users expect improved or different versions of what they got in the free plan.
When a business has a low volume: Using a freemium approach when your business reaches a few users won’t be viable since, typically, only about 2% will subscribe to a paid product.
If you sell mainly to corporate clients: If you sell to corporate or enterprise clients, the premium approach may not be ideal since these customers have budgets to purchase products or services; thus, free offerings won’t draw them.
Several companies have embraced the freemium business model, which works great for them. Below are the free vs paid features of well-known companies that use the model:
Dropbox began as a place to back up documents but now offers file sharing, among other features. The basic user version allows uploading 2GB of documents, images and video. For most people, this is not enough space. Faced with choosing which media to upload or paying a modest fee to upgrade, many users choose one of the paid accounts with more generous storage.
LinkedIn is a professional social network and a B2B database. Its primary uses are establishing your authority, finding work or finding qualified leads. Free users can connect with colleagues and classmates, search and view profiles of other members, and save and get weekly alerts of three searches. The LinkedIn premium version allows users to choose a subscription that suits their needs.
The paid version has premium features catering to almost every use case: Premium Career helps with job searches, Recruiter Lite is for finding and hiring talent, Sales Navigator does the heavy lifting for sourcing qualified leads, Premium Business gives detailed business insights, and LinkedIn learning provides a platform for everyone to learn and improve their skills.
Evernote is an app for note-taking and organising. You can use it to take notes in various notebooks across various devices. Free users can only sync notes across two devices, contact customer support through self-serve online forums, and cannot access collaborative notebooks or work offline in the app. The basic version also has limitations on the maximum size of notes and monthly uploads into the app. But if you upgrade to a premium version, you no longer encounter those limitations and can sync across multiple devices.
The Spotify app allows users to stream their favourite music from their computer or phone. The free version allows music streaming, but there are adverts between the songs, and consumers cannot skip to specific songs they want. On the other hand, the premium version has offline playlists, allows individual track selection, and consumers can connect to other devices such as smart speakers.
Zapier allows users to link different digital tools together via sequences of automatic triggers. Free users can only create Zaps at a time, while premium consumers can access multi-step steps and thus can perform more complex automation. For example, an initial trigger would be a survey submitted on Google Forms and a subsequent task of transferring that survey data to an email contact database.
No matter which business model you choose, easy payments is the key to a higher conversion rate, especially now that subscription payments are becoming more and more popular. As the fastest-growing payment processor in Europe, we develop products like SaaS payments to help your business grow.
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