Freemium (a portmanteau of ‘free’ and ‘premium’) is a marketing model, where a business offers a basic service free of charge while providing advanced or additional features at extra cost, with the intention to convert free users to paying customers.

Companies employing a freemium model do so to expand their market size, educate potential consumers and win mindshare. Some businesses have achieved great success through freemium models and seen accelerated business growth as a result – where others have failed.

A freemium model works well when:

  1. The product appeals to a mass market
  2. Free distribution is a competitive advantage
  3. The product is intuitive and works as a ‘self-serve’ offering, and
  4. The marginal cost of production/cost to serve practically zero.

 

Even when all of these apply – a freemium model must be carefully architected to ensure that both the business and the end user benefits.

Your offering or product must be designed to work as a freemium product to be successful. A key consideration when implementing a freemium model is the structure of the offering – what exactly are you offering free versus your paid product? There are a few different ways to go about this:

1. True Freemium

Where a version of the product is offered for free and customers can pay to use other features. This can be implemented on a number of different levels, value/usage based or feature based.

a. Value or Usage Based

The more a customer uses a product, the more value they derive. The cost of switching to an alternative product also becomes higher. They will eventually reach a point where they have established a need for the product, however the free version no longer meets their needs – at which point they are likely to become paying customers. A good example of this is Dropbox, where users do not pay for their first 2GB of storage. Once they reach capacity, they have the option of finding an alternate storage solution, or paying to access more storage capacity. At this point pay for use is often considered the ‘easy option’.

b. Feature based

This is where you offer a select feature set for free, but additional features are paid. For example, many software products offer “lite” versions with limited functionality, or offer the product free for one user. Should the user wish to access full functionality, or implement for multiple users, they need to upgrade to the paid platform. The risk here is that they customer may never see the true value of your product as they have not been able to use your product to its full extent, and therefore may be less likely to upgrade.

2. Free Product for Cross-Subsidy

This is when a company will offer a product free of charge, but charge for the products that accompany or complement that product. An example of this is commercial printers and multi function devices – companies offering these products will often not require payment of the product outright, instead charging for usage and consumables.

Customer profiling and billing analytics can be invaluable sources of information to provide insight into the right balance of free versus paid offerings. Once launched, this data should be closely monitored to ensure the model is working, or if the offer needs to be tweaked or adjusted. Additionally, your billing system needs to have the flexibility to cater for different pricing strategies and the complexities of a multi-tiered pricing model.

So, how free is freemium? As the old adage goes, there is no such thing as a free lunch!

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