A combination of ‘free’ and ‘premium’, the freemium business model offers basic features of a product or service to users at no cost and charges a premium for supplemental or advanced features and functionality. One of the most popular digital business models and used extensively by software as a service (SaaS) organizations, it enables companies to quickly attract a large pool of users. With the popularity of it, let’s discuss the pros and cons of freemium model pricing.
Dating back to the 1980’s, this business model has continued to grow in popularity – and with good reason. At its core is ‘free’ and the draw of that 4-letter word holds an immense attraction to buyers. From the company’s perspective, the large user base provides a foundation to entice (upsell) users to take advantage of premium features and advanced functionality.
Freemium vs. Free Trial: What’s the Difference?
While both freemium and free trial contain the same sought after word – free, there are some differences. Both allow users to ‘test’ the product or service free of charge, however free trials have an end date, whereas the freemium model allows users to access the product or service indefinitely.
The other significant difference is in what is made available to users. Free trials typically allow access to most, if not all, of the features and functionality. Freemium, on the other hand, provides access to limited features and functionality.
The Pros and Cons of Freemium Model Pricing
Although a popular business model, freemium has its share of both benefits and challenges.
Benefits
- As already touched upon, the freemium business model enables organizations to quickly grow their user base, which ultimately can lead to significant market penetration and brand recognition.
- How does the freemium model affect customer acquisition cost (CAC)? The large user base can lead to higher conversion rates to paid plans, accelerating business growth and lowering CAC.
- Users can use the product or service before committing financially, helping to build brand trust.
- Although the product or service isn’t generating revenue, revenue can still be obtained by running ads.
- Many subscription-based businesses leverage a freemium pricing tier, which enables the business to rely less on costly marketing and advertising investments.
- Are you wondering how to use data analytics to improve freemium conversion rates? The business model provides a gateway for the organization to gather valuable data on user behavior and preferences, which can be used to personalize the user experience and grow customer loyalty.
- By offering a free version of the product or service, the business can establish itself as an industry leader, enabling them to build brand reputation and credibility.
- The freemium business model typically encourages innovation and continuous product/service improvements, which helps entice customers to upgrade to a paying tier, as well as provides a competitive advantage.
- As the user base grows, the business model can effectively scale.
What are the common pitfalls in the freemium model?
- Since there’s no guarantee that free users will convert, theoretically, the business can lose revenue and profitability.
- If conversion rates are low, revenue generation can be negatively affected.
- Higher than normal operational expenses can occur due to investments in infrastructure, marketing, and advertising, which can make it difficult to maintain profitability.
- Finding the right balance between free and premium offerings can be challenging. Adequate value needs to be offered to engage and retain users, but not so much value that freemium users don’t have an incentive to upgrade to a premium tier.
- Continuous engagement and value are essential to reduce churn of both free and paying users.
While the freemium model has both advantages and disadvantages, it’s easy to see that the benefits clearly outweigh the challenges. Although the benefits are bountiful, freemium is not right for all businesses or industries.
Is Freemium Right for Your Business?
While there’s no right or wrong answer to whether freemium is right for your business, there are some questions you need to consider.
- Are you in a hyper-competitive market?
- Are your products or services trending?
- Is your business focused on rapid expansion?
- Is freemium an already established standard in your market?
- Does the value of your product or service increase with the number of users?
- Do your products or services lend themselves to multi-year subscriptions or add-on revenue streams?
- Do the bulk of your product/service expenses occur upfront rather than ongoing?
- Is the cost to serve freemium users low?
- Can you easily monetize non-paying users?
- Is the freemium model scalable?
If you answered yes to most of these questions, freemium may be right for your business.
How to Successfully Implement a Freemium Business Model
Successful implementation of the freemium business model takes forethought and careful consideration. For instance, consider how to price a freemium model effectively. You need to determine the core features/functionality that will be made available for free. Next you need to identify the premium features/functionality that will be offered to paying customers. Frequently, paying options are offered in a tiered structure, which enables customers to purchase best-fit packages.
Going hand-in-hand with offering tiers is establishing a pricing structure. Pricing needs to take into consideration a compelling value proposition that will encourage freemium users to upgrade to a paying tier. Additionally, set pricing at a level that not only justifies the upgrade but also remains competitive to avoid churn. Finally, it’s important that the business has a good understanding of the customer lifetime value (CLV). In doing so, the business can set pricing structures that not only will generate revenue but provide profitability.
What are effective upselling techniques in freemium pricing?
Undoubtedly this is one of the most critical elements in your ability to convert free users to paying customers. To help you achieve desired conversation rates, here’s some proven conversion optimization techniques. To start, set clear goals around the percentage of users expected to convert. Used individually or in combination, the following will help you turn freemium users into paying customers.
- Limit the features and functionality to free users, however, to pique their interest provide access to a few premium features/functionality for a limited time.
- Onboard new freemium users with a welcome email, access to product knowledge bases, and tips that will quickly turn them into savvy users.
- In conjunction with the limited features/functionality of freemium, offer new freemium users a full-featured free-trial for a limited time.
- Offer heavy freemium users limited time access to features/functionality that complement their usage patterns/functionality used.
- Provide exceptional customer support, as well as personalized services.
- Collect and analyze data and use the insights to create lead-nurturing campaigns that highlight the increased value of premium features/functionality over the basic freemium offering.
- Use freemium usage to your advantage through:
- In-app messaging, prompts, and sale signage to highlight how premium features/functionality eliminates freemium limitations.
- Calls-to-action during support calls, highlighting the benefits of premium plans.
- Be sure it’s easy for freemium users to upgrade to paid plans.
- Monitor conversion rates and if they drop below set targets add new techniques and/or mix up the incentives.
Unleash the Power of Freemium
While keeping freemium users engaged is key to converting them into paying customers, that’s only half of the puzzle. To successfully deploy a freemium business model, you need the right operational systems. Central to these systems is your billing platform.
For your freemium business model to yield the desired revenue and profitability, your billing system must have the following 4 essential capabilities.
- Customization: Offering a variety of product/pricing tiers requires a billing solution that is not only highly configurable, but powerful enough to support large volumes of users and numerous tiers.
- Data Management: Data management is essential to measure conversation rates against goals, as well as industry benchmarks.
- Flexibility: Billing platforms require the flexibility to change and adapt to incorporate new features/functionality at any product/pricing tier.
- Fluidity: The billing system must provide a smooth transition between freemium and premium models in order to immediately kick-off the revenue cycle for freemium users that become paying customers.
BillingPlatform supports the above and more, enabling companies to quickly and easily deploy freemium business models. With our comprehensive and agile solution, you get everything needed to address even the most unique freemium models, deliver exceptional customer service, and boost revenue and profitability.
Are you ready to unlock growth and create a path to long-term freemium success? BillingPlatform is ready to help.
