Why Marketers Should Consider the Freemium Business Model

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Your business needs to acquire new customers. Yet you also need to keep an eye on customer acquisition costs. All of this is happening while customers seem to shrug off many traditional marketing strategies.

These days, customers often want to know what they're getting before committing to a new product. They read reviews, check out demonstration videos and ask their friends for recommendations.

That’s where the freemium business model comes in. The freemium model has gained a lot of traction in the last decade because it meets customers' needs, allowing them to understand a product or service upfront. It also meets company needs since it shifts the cost of education away from the business and onto the customer.

By letting users engage with their service for free, companies and apps as disparate as Skype, LinkedIn, Hulu, Evernote, Spotify and even Candy Crush Saga have grown their customer bases exponentially.

Let’s take a look at how the freemium business model works, its pros and cons and how to tell whether it will work for your brand.

What Is the Freemium Business Model?

With the freemium business model, users can enjoy a service’s basic features for free. If they want greater functionality, they can subscribe.

The subscription fees gained from premium customers typically provide a reliable income stream for companies. At the same time, the free userbase helps spread the word to a greater pool of potential customers.

The freemium model is attractive because it brings in users without the huge spending required by advertising and marketing campaigns. Customers like freemium because, let's face it, everyone likes getting something for free.

The term "freemium" has only been around since 2006 when Jarid Lukin coined the word. Since then, the model has exploded in popularity, particularly with gaming companies and internet-based services.

By 2019, according to data from Statista, the freemium model was the second most popular monetization strategy for mobile apps — and creeping up on the no. 1 strategy: the subscription model.

The freemium model works exceptionally well for internet-based companies whose customers represent a high lifetime value. Computer software companies also find the model useful, as customers can try out programs but have to upgrade to access all features.

How Does a Freemium Model Work?

In the freemium model, customers are ranked into two tiers. In the free tier, they have limited access to the product's features. Premium users, who pay for their service, get a full-featured version of the product.

New users like the freemium model because the bar to entry is lowered as far as it can go: it's free. This setup establishes a relationship with the customer in the hopes that they will eventually pay to level up to the premium tier.

Typically, users can stick with the free version of the product as long as they want. Businesses using the freemium model know that not all customers will upgrade. That means you have to choose the limitations of the free product carefully.

You don't want to drive a customer away because of frustration with those limitations. However, you also don't want them to stick with the free version forever. To strike this balance, businesses must understand their customers' needs intimately.

Freemium vs. Free Trial

The freemium model may seem similar to offering a free trial. However, the two approaches are quite different.

Free trials last a limited time, typically a week to a month. During this period, the customer has full access to all product or service features. At the end of this period, the customer has to decide: will they pay for the product or drop it?

Free trials can result in solid conversion numbers, according to a study from Totango, with the conversion rate as high as 50% in trials where customers must opt out at the end (and a 15% rate when customers must opt in at the end).

In many cases, though, especially in the case of opt-out trials, customers can be scared off by the trial’s expiration date. That doesn't happen with freemium offerings since customers can stick around indefinitely.

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