Closely related to tiered services, freemium has become a popular method to build a consumer base where the marginal cost of generating extra units is inexpensive.
For most developers, an active user is worth about 4-cents a month. With everything else being equal, it's better to avoid the user having to pay directly for the core functionality of the application.
Despite its popularity, making freemium work better for marketers does contain some landmines that savvy marketers will consider in developing their products life-cycle.
Internet startups and smartphone app developers have turned freemium into the prevailing business paradigm. Allowing users to get essential features at no charge, freemium can morph into a gold mine for savvy marketers. Freemium is a business model that is known to anyone who has ever networked on LinkedIn, distributed files via DropBox, watched television on Hulu or looked for a Friday-night date on Match.
A variety of factors makes freemium tactics appealing. Free is always a vital marketing tool. Developers using freemium in their marketing can attract a user base without tapping financial resources on ad campaigns or a more traditional, labor intensive, sales team. The subscription fees usually charged are turning out to be a major sustainable source of revenue, compared to advertising, which dominated firms in the early 2000s.
Social media can drive sales as multiple services give incentives for introducing friends. Freemium has also proven more advantageous than a 30-day free trial because buyers have become leery of cumbersome cancellation methods. Besides, unlimited free entrance is more compelling.
Despite being popular and coming with distinct advantages, freemium is still misunderstood. It has difficulties as illustrated by the start-ups that have tried — but neglected — to make it operate.
There are questions that marketers contemplating a freemium model should take the time to ask.
What should be free?
One of the principal objectives of freemium is to collect new users. If your business isn't attracting new users, it could mean that your offerings just aren't compelling enough. More, or better, features need to be offered. If you're seeing lots of movement, but find few people are opening their wallets to upgrade, you could have the opposite problem. Your free offerings are too valuable, and it may be time to trim. The New York Times went through this fine-tuning. Following years of open access, the paper started, in 2011, to limit readers to twenty articles a month. If someone desired to read further, they had to subscribe. The newspaper watched the metrics closely and found it was giving away too much and was attracting too few subscribers. In 2012, it cut the number of monthly freebies to ten.
Start-ups should expect to do the same type of tweaking to find the sweet spot between traffic and paying customers. The balancing can be tricky as users may revolt when asked to pay for something they are used to getting for free.
Do customers understand the premium offer?
If clients don't clearly understand how they would benefit from upgrading, fewer will convert than if the benefit was explained clearly.
DropBox and LinkedIn live at opposite ends of the spectrum and serve as examples.
DropBox has attracted over 200 million prospects with one plan: everyone who enters a username and password gets two gigabytes of storage — free. If people run out of room, for $9.99 a month, they can get 100GB of storage. The freemium version is sufficient for most basic documents. Anyone that wants to back up photos — or other media will hit the limit quickly. The reasons to upgrade are easy to see.
LinkedIn users find the benefits of upgrading murkier. Users routinely receive emails urging them to upgrade — but the value of upgrading is not easy to see. LinkedIn is definitely strong and was one of the original freemium businesses to go public. It could convert more users if the differences between free and paid were clear.
Evangelical users?
It is important for marketers to recognize the real value of free users. Free users take two forms. Some become subscribers and draw in new members who, in turn, become patrons. A free user is usually worth 15% to over 20% as much as a premium subscriber. A significant part of that value stems from referrals. If considering a freemium model in marketing your product, pay attention to why and how satisfied users could help the product go viral.
Committed to innovation?
To view freemium marketing only as a customer acquisition tool is a mistake. Users who join late in the program cycle tend to be harder to convert. To keep increasing upgrades, the value of premium services needs to increase. Smart companies look at freemium not only as revenue but also a commitment to innovation.
DropBox is a prime example. Launched in 2008, DropBox was primarily a service for file storage and backup. Then, it began offering shared folders which turned the service into a collaboration tool. Newer features allow for syncing of smartphones and for automatic uploading of images. Over time, the user interface has improved, and each new feature has increased the value of the premium offering.
In today's digital climate, the marginal costs of many products are dropping. As the expenses fall, businesses will turn to the freemium model in greater numbers.
Companies can boost the odds of marketing success by considering the questions asked here. But beware of service costs that eat the revenue. The average monthly earnings from an active user need to exceed the costs of providing the service to make a profit. If the majority of developers are making 4-cents per-user, per-month, there's not much left for the developer if service costs are out-of-line.
