In today’s age, we have various companies offering similar services. When you have so many options, it is normal to feel indecisive. Business theorists understood this notion. Hence, the freemium business model was introduced. The freemium business model has been present for a very long time.
Remember when you go grocery shopping and there are people handing out free nuggets to everyone to promote their product? This is an example of a freemium business model. They give you a taste of their product and if you want more of the product, you will have to pay the owner.
Similarly, many companies have adopted this model for their businesses. The expansion of internet has changed the entire ball game. Back then, you were expected to pay for the game and software that you wanted to use. However, the competition has increased and the consumer habits have changed.
Consumers want to be sure that they are getting a good deal. Hence, the idea of offering freemium services to users was born. The freemium allows the consumer to use the application to get a feel of it. If a consumer likes it, they end up buying the software or the subscription.
This leaves us with a question, how do these companies make money then? For the record, the freemium business model is a tried and tested model. For example, LinkedIn uses this model and it recorded nearly $1 billion in the first quarter of 2017.
What is the Freemium Business Model?
Freemium business model depends on the internet to sustain itself. The basic services of a product are provided for free to the user. However, the premium features are locked behind a paywall and the user needs to pay to use those features.
The freemium business model is different from the free trial method. In a free trial method, even the free services are locked behind a paywall.
The word ‘freemium’ is made up of two words: free and premium. Many big corporations have been using this model lately. LinkedIn, Netflix, Tinder, YouTube etc. have a freemium business model. This model helps to increase their number of users on the platform.
The users help to generate more revenue for the company in the long run. Some of these companies also use micropayment methods to make money off their users.
How Does the Freemium Business Model Work?
“Free can mean many things, and that meaning has changed over the years. It raises suspicions, yet has the power to grab attention like almost nothing else. It is almost never as simple as it seems, yet it is the most natural transaction of all.”Chris Anderson in his book, ‘Free, the Future of Radical Price’
Freemium business model was made mainstream by the growing software industry in the 1980s. The basic strategy was to provide a time limited or a feature limited version to all the consumers in hopes that they will upgrade to the premium version if they liked the product.
The freemium idea was conceived so that potential customers of the software could try the product for free and upgrade to the premium offering when they like it. People are more likely to try out a free software over buying an expensive software without trying it.
Hence, this model flourished as the software industry continued to grow. In recent times, most apps available in the App Store and Google Play Store can be classified as freemium. They are free apps or games that have paid add-ons. For example, PUBG Mobile is free to play, but has micro-transactions included for skins and other accessories.
The Zero Price Point
Freemium business model employs the zero price point paradox to increase the number of participants that use the application. The advantage of a zero price point is that this price cannot be beaten, only matched by the competitors.
Hence, competitors can only succeed if their product is better. This sparks a domino effect that forces the competitors to innovate and push out more value to the customers.
Moreover, it is necessary to have a revenue model in place to generate money and value for the company. Hence, micropayments were born. Micropayment is an important part of the freemium model. The users pay a minimal fee to get access to some premium feature.
Advantages of the Freemium Business Model
Easy to attract customers
The word ‘free’ has a very strong force of attraction. Consumers will come in flocks when they get to know that a certain service is free. Even if they are not interested in the product, they will at least try it.
This creates a network of users. Companies use the customers to monetize their services. Take, YouTube for example. The service is free for users, but they make money through targeted advertisements to their customers.
More brand equity
If your product is a hit among the consumers, you will see a rise in the brand equity of your product. This in the long run will increase your profits.
More successful than the premium model
In today’s time, most users do not want to pay a high upfront price for a product. This is the reason why there is a steep increase in subscription based services. Hence, freemium model is more likely to have customers that turn into premium users.
Known Challenges of Using the Freemium Business Model
Your app needs to go viral
A freemium business model is more suited to products that have a huge market and have a potential to go ‘viral’. If you do not have a huge user base, there is no point of providing your services for free.
The product needs to be engaging and useful
There are many products in the market that you use once or twice a month, even annually. Customers are less likely to buy the premium features of such apps. Your app must have that element which draws the user to come back every so often. Customers who use the app extensively are more likely to be potential premium users.
Profits can take some time
Patience is key when working with a freemium business model. It can take some time before you venture starts generating revenue.