Freemium: Find out how this business model works

Have you, or someone you know, ever used the free version of a service and eventually decided to become a paying subscriber? If so, you’re already familiar with a business model widely adopted by many brands in today’s digital economy: freemium.

If you’d like to learn more about this concept and find out if it’s a good fit for your business, keep reading this article and you’ll learn how to implement the freemium model!

What is the freemium model and how does it work?

Freemium is a business model in which your strategy is based on providing a free product or service to new users.

As leads try out the platform and want to gain more advanced features, you offer them a paid subscription version of the same product or service.

You can also apply the freemium model when creating online courses and content! Creators may provide a few free lessons, materials or information products while offering access to the complete course through a purchase or periodic subscription.

To help you better understand this model, we’ve provided a few examples of well-known brands that use the freemium strategy on a regular basis.

Examples of freemium models on the market

A number of popular products and services benefit from the freemium model. Check them out:

Spotify

Spotify is a famous example of a service that uses the freemium model as a business strategy.

All users can create free accounts that let them listen to music and podcasts on the platform, but there are certain limitations. Ads are required, you can only use shuffle play, and only a limited number of songs may be skipped on the mobile app.

As people use Spotify frequently and find valuable content, it becomes increasingly appealing for them to switch from the free version to the paid edition and gain greater freedom within the music streaming app.

YouTube

YouTube contains completely free video content, but its Premium version lets you get rid of the ads that normally appear during videos.

Another benefit of YouTube Premium is access to the company’s music streaming service along with its exclusive movies and series.

Duolingo

Duolingo is a digital platform for learning languages through brief exercises.

The app promises to be free for life, but it offers a premium version with no advertising and a few other advantages.

Dropbox

Freemium can be applied to many types of services, such as the Dropbox cloud file storage and sharing tool.

Under the free plan, users can store files that occupy up to two gigabytes of space. Dropbox provides optional access to more space by offering a few different paid plans for individuals and businesses.

LinkedIn

LinkedIn is a free social network that brings together professionals from all over the world.

With great potential to help individuals find jobs, develop professional partnerships, and share valuable content, LinkedIn also offers a premium plan.

It provides four major options. Each plan is dedicated to a different goal or type of user: careers, business, sales, and hiring.

Free trial vs. freemium

At this point, you’re probably wondering why it’s not called a “free trial.” A free trial implies that the program or tool will have a specified end date. With freemium, the tool is free to use forever. The most suitable tactic depends on your core goals and target audience.

While both methods allow the product to speak for itself—one of the most important ways to generate conversions—the free trial model often allows customers to use the entire product. This lets people benefit from its full value, albeit for a limited time. This could lead to a high user conversion rate because they’re already using all the product or service’s features and have seen how it enhances their daily routines.

On the other hand, free trials typically require the user to enter a credit card number, so potential customers might be turned off by the additional pressure. Freemium sets up an environment where the user can utilize the product, albeit in a limited way, and get a sense of how it could help them without having to commit to anything. Additionally, freemium tools can be easily shared, and they increase the engagement users have with your overall brand. The number of possible users becomes larger which invariably increases the likelihood of a conversion.

What are the advantages of adopting the Freemium model?

You might be asking yourself, “Why should I make my service available for free and offer a subscription option? What are the advantages?”

It’s time to learn about all the benefits of embracing the freemium strategy for your business. Let’s get started…

More brand value

One notable benefit for businesses that implement freemium is an increase in brand value.

A free offer will attract a large number of users which will make your brand more popular, generate leads, and build a good relationship with your audience.

Your business will stand out among others in your niche, becoming an authority and generating brand awareness.

Increased user base reach

With a freemium model, it will be easier for users to interact with the service your brand offers. When you provide a free offer, potential customers will also feel more motivated to learn about your business.

You’ll boost the reach of your user base and have a better chance of making recurring sales, since users will already have had experience with your product or service.

It’s more efficient than the premium model

This business model allows for a closer relationship with your users while promoting greater confidence in your product.

After using a free service, your potential customers will feel much more motivated to subscribe.

Also, because it has a much larger user base and generates value for your brand, the freemium model is more efficient than merely offering premium plans to your audience.

Customer Loyalty

Everyone wants to build customer loyalty, right?

With in-depth knowledge of what your business offers, and direct contact with your brand, people will not only invest in the premium version, but they will also remain customers for longer periods of time. This in turn makes your brand more stable.

What are the risks of the freemium model?

Despite being a model that has become quite popular and delivered great benefits, freemium requires a certain amount of care. You need to study your business carefully and develop good marketing strategies. Below are the main risks:

It might compromise your business’ profitability

If you don’t outline effective strategies when building your premium plan, your business will face major difficulties when selling the paid version.

You might end up paying to offer a free experience and not getting any return on the investment, which is dangerous to your business’ survival.

Attracting customers without the desired profile

With a wide reach and a significant user base, poorly designed communication strategies and user acquisition plans might attract customers who aren’t part of your brand’s buyer persona.

This is harmful because these people aren’t aligned with the brand’s communication style and don’t have the needs or desires of those who will invest in the premium plan. This will make it harder to sell and generate income.

Implementing the freemium model

To implement the freemium business model, a lot of research and planning must be done in advance.

First, study what your buyer persona’s needs and wants are. List and map out what users want in a free plan, but understand what features could lure them into a premium plan.

You need to develop quality services for both your free and paid options. Offering a free service that doesn’t provide value for your audience will not motivate new conversions.

And offering a premium service that doesn’t meet customer expectations will increase the number of cancellations and reduce your brand’s value.

Another key point is pricing. Correctly identify the prices and payment frequency that best suit your audience.

Keep expectations realistic by building a good value proposition and a communication strategy that precisely explains what the user’s experiences will be under the freemium plan as well as the premium option.

Finally, measure metrics and observe customer satisfaction with the services offered, making improvements and adaptations whenever necessary.

Freemium conversion funnel

Getting users to upgrade from the free plan to the paid membership is all about how you execute the conversion funnel. It is a slow-drip freemium revenue model that ultimately wins over new users through a combination of feature set, personalization, and persistence.

It may take days, months or years to convince a person to upgrade. Some services use website advertising revenue to cover their expenses in the meantime.

Let’s take a closer look at the factors that help determine if free users can be converted into paying customers…

Feature set

If you offer too many free features, the individual’s incentive to purchase the product will not be very high. On the other hand, provide too few, and they won’t come back to your product.

You have to strike the right balance by figuring out what tools are important to which audiences and why they would want to pay to upgrade those tools.

Invest in individual customer success 

Not every customer is the same, and many will have needs that vastly differ from one another. You can focus your energies on each customer by making the product customizable according to their specific desires. Additionally, your promotional efforts can be tailored to separate segments with drip email campaigns that are oriented toward certain audiences.

This strategy has the added benefit of letting you see what customers interact with what content. It will help you hone in on what material is likely to produce conversions.

Patience is key

You might not get conversions right away. That’s OK, but it is important for you to constantly remind your users to upgrade from the limited plan.

Email reminders, support messages, and application notifications are great “real estate” from which you can distribute your messaging that encourages people to upgrade to the next tier of your product.

Analyzing your conversion targets

Deciding how you want to execute a funnel strategy means nothing unless you know exactly what your own goals are.

If you see that your conversion rate is too low—meaning that not enough free users are paying for access to the entire program—it may mean that you are giving your members too little incentive or reason to make the full purchase.

It could also mean that you haven’t properly educated your users about the benefits of the premium version of the product.

Alternatively, if your conversion rate is very high, your free product may only be worth the time for a small number of individuals.

A 30 percent conversion rate might seem great at the outset. However, if it’s only 30 percent of 100,000 individuals, it is not nearly as lucrative as converting five percent of 2 million people.

Pick the model that’s best suited to your business

Meeting the needs and desires of your audience is essential if you want solid business results. As it does not require a credit card commitment like free trials, the freemium model is a great opportunity to please your customers and gain greater market share.

However, you have to be strategic, since this business model has a major impact on audience behavior.

Research and learn how your brand can implement a freemium model, and know how to split up the features present in the free category and the paid membership without creating false expectations.

Be sure to carefully plan how this selection of features will be put in place to attract customers, so you don’t run the risk of driving them away.

Adopt a well-thought-out conversion strategy, and you will be well on your way to a subscription service that provides a reliable income for your business. Find out more by reading our post about membership programs.