To Free or not to free… that is the question.

Freemium Business Model is a customer acquisition strategy where basic features are offered for free and more advanced features are offered at a premium. Users try out the product, usually for an unlimited period before making a purchase decision for the premium version. 

With the rapid rise of SaaS companies, freemium has been in the limelight for quite some time now. There are several acquisition strategies that are suited for a business to achieve their desired growth, then what is so special about the Freemium Business model?

What does Freemium Business Model do for companies?

Freemium, being an excellent customer acquisition model, helps a business in many aspects and provides the opportunities for:

 

  • Market testing:

New features on the service can be tested to gather user feedback and behavior data without any major investments or hindrance.

  • Reduces customer acquisition cost (CAC):

Since the entry point to the service is free, the barrier is significantly lowered. As a result, new users can be acquired at a much lower cost overall.

  • Revenue generation:

Even though the basic version is free, companies can monetize the service through premium features, advertisements, subscriptions and in-app purchases.

  • Sales Conversion:

The free users can be converted into paying customers by providing additional value to them. Freemium business model allows for a very wide top of the funnel, within the sales flow.

  • Easy product adoption:

Freemium business model enjoys a higher product adoption rate, compared to the paid alternatives, due to the low commitment required to use it.

  • Flexible Pricing Strategy:

Businesses can experiment with different pricing tiers, with different features and premium services to increase their broaden their offerings to a large user base and maximize their reach.

Why is the Freemium Business Model necessary?

Branding

Users who have been using the free version, who may or may not have switched to the premium version, have developed a kind of brand loyalty that will lead to higher brand advocacy due to the long-term relationship with the service.

Competitive advantage

Offering a free version of the product allows for a competitive edge over the other market players, as the users who might be hesitant to make a monetary commitment up front, can also be attracted and blocked from going towards the competitors.

Scalability

Freemiums do not come with proportional increase in cost as new users are added. The marginal cost of adding new users is exceptionally low, making the service very scalable.

User Trust

Users are more likely to convert to paying customers later as they have been experiencing the product’s value without any financial risk.

Increasing customer engagement

Freemiums lead to higher user retention and satisfaction as they encourage the users to explore its features and engage with the product.

Who is the Freemium Business Model for?

Freemium model is used by companies within a mature/saturated market, as an attempt at increasing brand awareness, market share or to attract a large user base relatively quickly. Users are attracted to the service because it is free of charge. Companies that can offer a service that is easily replicable, can easily be offered at the scale which is necessary to cater to the vast user base.

Below are some companies that can operate a freemium business model:  

    • Social networks and media operators: These services operate on network effects which benefit from a large user base. The user experience is enhanced by the premium features.
    • SaaS companies: In companies like Dropbox Netflix and Spotify the marginal cost of adding new users to the existing infrastructure is very low.
    • Start-ups: Companies that want to add new users rapidly, allowing it to build a foothold in the market.
    • Gaming companies: These keep the base game free, but add many in-game purchases like skins, loot boxes and upgrades.
    • Educational platforms: Coursera and Edx offer their online courses for free, with the option to purchase the completion certificate.
    • Tiered service based companies: A lot of companies offer a free tier for basic service and a premium tier for the enhanced features.

These companies are experienced in maintaining an infrastructure necessary for the continuous expansion, additions to the offered services and user conversions among other capabilities.

How do companies decide which features to offer for free?

Deciding to operate a freemium business model is a huge decision. It takes a lot of planning and careful thinking to make the commitment. 

Below are some of the factors that can be taken into consideration when choosing which features to offer for free and which ones to charge for:

  • Competition:

    Companies may choose to offer part or whole of their services as a differentiating strategy or to match their competitors offerings. The features may be further differentiated by being unique than their competitors.

 

  • Value proposition:Companies need to evaluate the value each of their features provide the users. Basic features are often offered in the basic version for free. Features that are critical or enhance the utility of the product are placed in the premium tier.

 

  • User needs and Market Research:Companies need to conduct significant market research to know the customer needs and competitor offerings. The one’s which are critical/ essential for the users or are not offered by the competitors are placed in the premium tier.

 

  • Scalability:If certain features require significant resources like training & support and customer support, they need to be placed in the premium tier. Basic features that are widely used, don’t strain resources and are easily scalable are often free.

 

  • Monetization strategy:Some companies may prioritize rapid user acquisition enabled by the free versions and some may prioritize the superior revenue generation through promoting the premium versions, depending on their strategies.

 

  • User feedback:Depending on the user feedback and behavior, companies may adjust their feature offerings over time, adding and removing them routinely, based on user satisfaction.

 

  • Conversion funnel:To get the users to sign-up for the premium version, user behavior is tracked and users are encouraged to upgrade using strategic placements of trial periods and limited access to the services, within the conversion funnel.
  1. Companies that operate the freemium business model aim to maintain a balance between attracting new customers and generating revenue from the existing customers.

The Freemium Business Model is exceptional in building brand awareness, providing exponential growth, reducing marketing costs and the time to market. Companies need to make this decision after careful considerations and through strategic thinking, as this will lead to them making changes to their entire operating model.

More Blogs

Complex Billing System for SaaS

Understand Best Complex Billing System for SaaS Business in 2024

Introduction of Complex Billing system for SAAS businesses:Software as a Service is essential to any business, big or small, in the digital information age…
Read More…

Freemium Vs Free Trial

Freemium Vs Free Trials: Find your Best Strategy

“Freemium Vs Free Trials?” is a question a lot of companies will have to consider at some point. Freemium and Free trials are some of the most popular acquisition strategies, which are…
Read More…

Freemium Model

10 Incredible Benefits of Freemium Model for Growth

Freemium model is a customer acquisition strategy where basic features are offered for free and more advanced features are offered for a premium…
Read More…