Freemium is a customer acquisition strategy where basic features are offered for free and more advanced features are offered for a premium. It provides the users the ability to try out the product or the service for an unlimited period of time. It is an increasingly popular onboarding strategy for desktop and mobile softwares and applications. It reduces the barrier to entry to practically just the hardware required to run it. The user gets enormous flexibility from these features.

The Pricing Trilemma:|How Freemium Pricing increases market reach:|How Freemium model increases market reach:|How Freemium Business Model increases market reach:

For any business it is difficult to gain and maintain a substantial market share, while keeping the quality of the product or service high and the price competitive (low). It is generally understood that any business must choose between two of these.

Freemium Model

Quality-Price-Reach

 

If the offering is of a higher quality then it is usually reflected in the price tag. A high priced product or service has a monetary barrier to entry, which will restrict the reach.  

The Freemium Business strategy focuses on removing this monetary barrier to entry, by dropping the price to zero, thereby maximizing the reach from one of these parameters. 

Benefits of Freemium:

  • Low Acquisition Cost:

Freemium must be seen as a customer acquisition strategy and not a monetization strategy. It eliminates the monetary entry barrier and allows a diverse array of users to use the service which would otherwise have refrained.

Freemium services need neither a limited time onboarding, activation, nor the payment information. This creates an extremely low barrier to entry of new users. Freemium might push more users to try and use the product, which will offer the company a very low customer acquisition cost.

  • Growth:

Companies and startups alike prefer to use freemium pricing to quickly gain a broad customer/user base. Network effects, referrals and word of mouth marketing influence a lot of this early growth.

  • Revenue:

Data harvesting, metric calculations and advertisements can generate revenue for the companies, even from the free users. Advertisements (Banners, front/side display, pop-ups) may force the users to purchase the premium version, which are usually ad-free. Once at scale, these may prove to be valuable sources of revenue. Once the customer buys in, the periodic payments can be automated, with a subscription service.

  • User retention:

The longer an user uses the freemium service, the more reliant they will grow on it. Users are less likely to change the service providers after using the services for a long time. This creates a moat against the competitors.

  • Transferability:

Freemiums aim to meet customer needs. The new users and the free customers both find the quick and easy conversion to premium very attractive.

  • Freemium marketing model

➣ Freemium to build customer habits

Freemium helps the user get acquainted with the user interface of the program and its available functionalities. With prolonged use, the user is more likely to continue using product or service and make plans for the upgrade.

➣ Freemium for expansion

Since freemium is used as an advertising and a customer acquisition strategy, it aids the organization in expansion. 

Freemium Business Model

Users are prompted to upgrade by:

 1 . Limiting Functionalities:

➢ Feature limitation:

Certain features are reserved for paying customers. These features are beyond the basic functionalities offered in the free version. They offer an upgrade to the current features or introduce some new ones entirely.

➢ Usage limitations:

Some of the software providers make the service availability scarce. The product or service might be limited by time, number of units used, number of a specific sub-service and other such restrictions.  A premium version can promise to “Give total control” over the service to the user. The pricing can later be according to the service usage.

 2 . Advertisements: 

The Standard or Basic Version of the software may come with ads or other data collection methods. The premium version can be marketed as a decluttered and an ad-free experience. Revenue can still be generated from the free versions by running ads.

The Premium conversion

The conversion period from freemium users to paid or premium users can be longer than the traditional conversion cycle. As users may prefer to limit their usage to the available functionalities rather than upgrading to the premium version.

Companies must be careful in keeping the important functionalities behind a paywall, as to incentivise the users to make the switch on their own accord. The conversion must be presented to the user as an upgrade which they opt-into.

The costs that come with usage of the freemium services can be considered as the cost of acquisition. These can come in the form of server cost, computation cost, maintenance costs, licensing and compliance, copyrights and trademarks, legal costs, security and other updates to the software. 

The free version may be a previous version of the software that has been in use till date and has now been branched or upgraded. This will prevent the additional spending on setting up the  infrastructure.

With freemium services, companies need to convert a user that is already familiar with the product and its functionalities.  Timely reminders through noninvasive notifications must be made to facilitate this conversion. Constant reminders can hamper the user experience.

Valuable user data can still be collected from these users, which can be used to make important business decisions.

Spotify: A Freemium Success

Freemium business model

Spotfiy relied on a freemium offering and a product led growth strategy. A Product-led growth strategy subverts the traditional marketing cycle, but rather relies on a try-before-you-buy experience to target customer acquisition, market expansion and customer activation.

It does not have a learning curve, the product was very easy to use and did not require an extensive product-demo. Since the product operates on a self-serve/self-use model it could be maintained by a relatively small team. With fierce competition and a large addressable market, a free offering was the best customer acquisition strategy for Spotify. So in 2006, Spotify launched a free version of their product. 

Spotify collects very valuable use data from the listeners that they incorporate in their planning for the required infrastructure, general industry trend, pop culture, and genres of audio books, podcasts or songs their free and premium users alike would listen to in the future.

The largest expense Spotify has to account for is the royalties it has to pay to the recording companies, to be able to stream their songs. Spotify pays nearly 70% of its revenue to rights holders and retains the rest. 

Spotify restricts the features by lowering the audio quality, reducing sorting song order options and including advertisements every 15-20 minutes of listen time. These ads include a call to action for joining their premium version. The paid version offers additional value to the users by allowing them to download songs, podcasts, high quality audio, song/album insights, advanced queuing options, and listen parties  all of which are ad-free. 

They work on managing the customer retention and churn. The LTV(Life-time customer value)- how much a company can earn from a single user, increases the longer a company can retain the users.

These features and a strategic use of the freemium model, led to a 46% conversion rate into paying customers.

Overall, Freemium pricing model is very useful for companies that are looking to rapidly increase their user base, if they are comfortable in maintaining some additional infrastructure and work with a parallel service which will more often than not compete with their own paid offerings.

Related readings: 

👉 Customized Billing

👉 Enterprise Billing

👉 Flexible Billing