Heard the term before? Not quite sure how it might apply to your business?

A Freemium business model is applicable to businesses looking to acquire customers by encouraging free usage of a valuable value version of your service offering.

Typically, a Freemium model is where you offer a portion of your product or service for free, with premium upgrades available. Importantly, this doesn’t mean the same thing as offering free extras to a premium-paying customer, as with a Freemium business model, the status quo is free. Think Spotify, where the free version is definitely usable, but the paid subscription has useful added features and bonuses, like no ads in Spotify

Chris Anderson in his book “Free” explains that Freemium works on the 5 Percent Rule – where 5% of premium customers support the remaining 95% of free users and also the cost of servicing the 95% is close to zero. 

Why go Freemium?

  • Customers are wary of free “trials”
    • From negative experiences, customers have become suspicious of free trials because of long cancellation processes and hidden fees. They find the idea of free access to a section of the product or service more appealing
  • Customer growth
    • Having a free product, naturally, makes it fairly easy for you to find new customers. Once you have customers using a version of the product or service, they get to learn about it all by themselves, without the need for heavy advertising in the top of the marketing and sales funnel.

      You can focus on the middle of the sales funnel, converting those qualified leads and product users into full subscription purchasers. Even if they might not convert, they could possibly invite other users in who may convert.
  • Value with the network effect
    • The network effect is where a product or service becomes more valuable over time as more people use them. Social media websites rely hugely on the network effect, because nobody wants to be on a social media platform all alone – what’s the point in that?

      Dropbox is a great example of a Freemium platform, which has a network effect; there’s no point in sending a file to someone, if they don’t also have a Dropbox account to open the file! As Freemium products encourage rapid customer growth, products or services that benefit from a strong network effect perform very well on a Freemium model.
  • User data for optimising
    • One of the huge benefits of having a large group of customers using your product or service for free, is that you have access to large amounts of user data. Rather than trying to build a product or service for an audience of non-customers, you can build based on what your current customers like or don’t like, what they use, what they don’t and what they want. You can find out what kind of premium service they would want to pay for and build that.

Is your business a good fit for Freemium?
So, with all those positives, maybe you’re thinking that Freemium is right for your business, but is your business right for Freemium? Here are some boxes to tick before you make that shift:

  • You are positive that your product or service is high quality, and solves an immediate problem, driving people to want to jump on board quickly.

    Part of the appeal of Freemium products is that they solve immediate needs without large set-up. Want to send a file? Dropbox. Need to send an Email? Mailchimp. Want to play a song? Spotify. All of these needs are time-bound activities, and all of these products take all of 30 seconds to 1 minute to sign up for.
  • The cost of 1 unit of your product or service is essentially the same as the cost of 10.

    In this sense, a Freemium model wouldn’t work for a clothing manufacturer who has material costs for every new item of clothing, however it would work for a software company, who isn’t out of pocket every time someone uses their product.
  • Your product or service requires little to no customer service.

    This is important because if you are burning through man-hours on support tasks with your customers, you won’t be able to support a Freemium model. High performing Freemium software products like MailChimp have well-developed online helpdesks, which may take a fair amount of man-hours to set up, but once they are running smoothly customers can find answers and support themselves through your help articles.
  • Your potential customer pool is large.

    With only up to 4% of your customers actually paying for your product or service, the key here is volume. Phil Libin, the CEO of Evernote, explains, “the easiest way to get 1 million people paying is to get 1 billion people using”.
  • Your product or service is one that people would be happy to receive for free.

There are some products or services that customers simply wouldn’t trust if they were free. Would you trust a business that was offering free plastic surgery? Your product or service needs to be a low-commitment decision from your customer, otherwise they might begin to question the value.

There’s a lot to think about when you are considering a shift to a Freemium model. Not only whether the model is right for your business, but also whether your business is right for the model. We’ve listed a few important factors that you might want to consider and on top of that it’s important to have clear goals in mind for your conversion rates, ROI and profitability, so that you know how well your Freemium product really needs to perform. So if all of this lines up for your business, set your goals, and you could be next in a long line of businesses who have built their success on the Freemium Model.

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