Using the Freemium Business Model: Try Before you Buy

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Parag Utekar
Student (MBA), India

Using the Freemium Business Model: Try Before you Buy

🔥NEW Freemium - a combination of "Free" and "Premium" - has become a dominant business model amongst multiple internet start-ups and smartphone applications. The Freemium model's idea is that the users get the basic product or service for free and must pay for additional services. In other words, it is a "try before you buy" business model and experience to the users.

Dropbox is one such company that has mastered this model. The company has more than 500 million registered users who use the two-gigabyte data of free storage. Once the user consumes the data, they can subscribe to a premium version of the service by giving a monthly or a yearly subscription fee. With this model in place, Dropbox generated roughly $ 1 Billion in revenues in 2017 from its 11 million paying individuals and business users and continues to grow its user base.

Multiple factors contribute to the Freemium strategy's success. The company can attract a user base without spending on marketing campaigns or the traditional sales force model because of the available free services. Freemium models are often more successful than the other limited-term offers because of the cumbersome cancellation processes or users find unlimited free access more appealing.

After studying various offerings, researcher Vineet Kumar asks important questions that companies offering Freemium models should consider:
  1. WHAT CAN BE FREE?
    The primary purpose of a freemium service is to attract new users. If the company is not succeeding in this goal, then the offerings are not good enough. If the company gets a lot of users and not a lot of them are upgrading, then the company must cut some features since the offering is too rich. The company must learn how to balance these two acts, the offerings, and the generated traffic.
  2. DO CUSTOMERS UNDERSTAND YOUR PREMIUM OFFER?
    Communicating multiple benefits might complicate marketing efforts. If the customers don't understand what they are would gain after upgrading then, the company will monetize fewer users than they otherwise might.
  3. WHAT IS THE TARGET CONVERSION RATE?
    The conversion rate (% of free users upgrading) can vary depending on several factors. For example, a 1 % conversion rate is meagre, especially when a company relies on a subscription model only. But, a very high conversion rate (e.g., 50 %) might limit the potential acquisition. A more suited long-term strategy would be to have a moderate conversion rate (e.g., 5%) along with a high traffic volume. Also, if the market is smaller, then the conversion rate could be higher.
  4. IS YOUR COMPANY COMMITTED TO INNOVATION?
    A company must never stop working towards increasing upgrades, i.e., increasing the value offered to the users. Freemium models cannot just be a revenue-making tool but a commitment to innovation.
Examples of successful Freemium Firms
  • ZAPIER is a service which will help the users automate task within a particular service or between services. Its freemium account lets users use five zaps (automation) that can run up to 100 tasks per month. Zapier's approach is to get users at their door to try out a few zaps. Once a few things in your business are automated, it will be hard not to automate even more things. Thus, increasing the chances of an upgrade.
  • FRESHBOOKS is an online invoicing software, especially for freelancers and small businesses. Its freemium model allows users to use their software for one client and provides basic features. For more clients, users can use the premium plan. Their freemium plan works as freelancers, and small businesses might not have enough time to switch platforms, and if the software works for one client, it will work for others.
  • HOOTSUITE is a social media management tool. Its freemium model allows users to know the benefits of the platform to access their premium plans. Social media users can use HootSuite's offers, even individuals, having more than three profiles to handle. Also, their plans are relatively cheaper, making it easier to upgrade.
  • And of course 12MANAGE, the learning and discussion platform about management. Its Freemium model allows Basic members to access the core summaries of management methods and participate in the discussion forums (for free). While Premium members get additional access to professional sources like best practices, expert tips, powerpoints, videos, etc.
⇒ What are your thoughts on the Freemium Model?
Sources:
Xian Gu et al., (2019), "How Companies Can Get the Most Out of a Freemium Business Model," Harvard Business Review
Vineet Kumar, (2014), "Making Freemium Work," Harvard Business Review
Sujan Patel, (2015), "7 Examples of Freemium Products Done Right", Forbes

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