Updated: Nov 15, 2021
With the resurgence of apps in the technological market, freemium business models have disrupted the way that the modern world handles business. Prior to today, it would have been completely unheard of to offer any type of service for virtually nothing — after all, it takes precious time and money to produce the service in the first place, so why should a business give that away for free?
What Exactly Is a Freemium Business Model?
A freemium business model has two types of customers: free users and paid users.
If something is free, customers are more likely to try out the service and take advantage of it. They get to test out the feel of the brand or service first without the risk of having to shell out money from their own pocket. This initial service has to have some sort of limitation, though, so that customers feel like your product is good, but not too good that they won’t find any additional value in paying extra.
A paid user is a customer who pays a premium for your product or service. This means they found value in your free trial, but there are certain limitations or drawbacks that don't allow them to enjoy the full advantages of the locked features. They’re willing payers of your service, and it’s up to you and your product to deliver what they paid for.
The ultimate goal of this type of business model is to convert free users into paid users. Popular companies that sport a freemium business model include:
The Upsides of a Freemium Business Model:
Large User Base and Quality Leads
The word “FREE” is enticing in and of itself to the average person, so this should have the same effect on your product or service. These users are already interested in what you have to offer in the first place, so let them see what you’re about, and give them a snippet of what it would be like to go premium with you.
This is also a powerful way of getting them to sign up for all the premium enhancements you’ll be providing. If they're already enjoying the benefits from your free service, imagine the interest they’ll have if your paid version gives them more.
Strong Possibility of Going Viral
If your product is good enough for the free user, chances are you’ll never have to worry about marketing it. Your free users will be doing all of that for you. Word of mouth will contribute significantly to the growth of your brand, and this generally comes at no cost to you.
Expensive to Launch Upfront
This is probably the biggest dilemma that entrepreneurs face when hearing about the freemium business model for the first time. Although your customers will be enjoying your service for free, this still comes at a cost to you. This includes paying for development, support, and of course, marketing.
Your product has to sell itself based solely on what it does, and you have to find some sort of strategy or middle ground to ensure that users find value in both the free and the paid versions. Sometimes, business owners cut corners and produce a sub-par quality product, but all this does is make your customers think that it’s not worth going premium with you.
Your product has to be good to attract customers and turn them into loyal users, but not too good to the extent that they’re already getting everything they need without having to pay for anything. Your paid service has to add significant benefits as opposed to the free one. There has to be a balance, and you have to strike the right medium.
Because let’s face it: why buy the cow when you can get the milk for free?
Challenge in Conversion
The average rate of converting a non-paying customer to a paying customer is only at 1 to 10% of the general user base. This means that typically 90% of your users will be using the product for free and that 10% have to give you enough revenue so you can keep the business going.
If you’re convinced that the best option for your business is to go freemium style, here are a few things you should first consider:
The cost of each user, paying or non-paying: Would this be inexpensive enough that you can keep the business going even with only 10% (hypothetically) paying the full value?
How large is the market for your service? Do you think that your loyal users find your service good enough that they’ll market it for you? Are you able to handle a large user base without any technical problems?
Is there any added significant benefit of going premium with you? What do you think is your most compelling point to make them take the leap?
Do you think there’s a way to monetize those free users? Even if they don’t switch to paid?