What is Freemium?
According to the freemium business model, a product or service is given away for free, but customers can pay more for a more advanced plan that includes extra benefits. Freemium plans are meant to give users access to a product’s basic features and functions while allowing them to pay more for more advanced features.
The freemium approach works well because it lets customers use a product before they can access its more advanced features. Unlike a free trial, a freemium pricing plan lets users use the product without telling them they need to pay.
In the last few years, this type of business plan has become more common in the software-as-a-service (SaaS) space as companies try to get more users and make more money.
Over half of app developers now use the freemium approach, and about a third make the most money.
Synonyms
- Freemium Plan: A pricing plan in which a product or service is offered for free with the option to upgrade to a premium plan.
- Freemium Pricing: The pricing strategy used for freemium plans.
- Freemium Business Model: One of the many different ways a company can price its products and services, including a free version with limited features,
Different kinds of freemium business plans
Businesses will choose which freemium strategy to use based on their goals and the people they want to reach. These are some of the most popular types of freemium models:
The Freemium Model Used Traditionally
The standard freemium model is what most people are used to. It’s when a product or service is free for life but has limited features.
In this simple strategy, the company and the customer usually know that the end user will never pay for the product.
Here are some examples:
- Google Suite
- Microsoft Office
- ChatGPT
- Dropbox
Customers usually think that they will get a free version of the product with enough features to use it since so many people use these apps. This plan usually only works for companies that are very young or have a lot of money.
Buy land and grow.
For new businesses whose primary goal is to attract people, Land and Expand is the best blueprint to follow. The groups that use and buy are the same in this case.
The company lets an organization use a certain number of users for free, and as the organization grows, it charges them for more users.
Since marketing happens at the organizational level, the business has time to get to know its customers and make them loyal to the brand before it starts making money.
Microsoft bought Yammer in 2012, and it’s a great example of this model. A certain number of people can use the service for free when a business signs up for a review. When businesses decide to add a set number of users, they are charged for those users.
Another example of this model is Amazon Web Services (AWS), but they use it differently. Businesses are more likely to invest in system integration when companies offer their advanced technologies as a freemium. This makes the cost of switching too high.
Free trial for life
Users can use the product for as long as they want without ever paying with this freemium approach. The seller is sure that their customers will become paying users in the end, but the customer thinks they can keep using it for free.
For example, Spotify’s free version changes to an ad-supported version after a few weeks, and Basecamp’s free plan is so restricted that customers have to pay more to get the whole experience.
Echosign, which has a free version that you can use as much as you want but has painfully low usage limits
The “unlimited free trial” is meant to get people interested in the product by making them think they can use it for as long as they want without paying for it. The user finally decides that the free version is insufficient because it has too many restrictions, ads, or a bad user experience (UX). They then pay for a premium plan.
Freeware 2.0
Free software 2.0 As the name suggests, freeware is a free product that lets you use all its features. This product may be their primary offering or a brand-new, separate series within a larger company.
Most people who use the site for free don’t plan to convert or buy something else. Instead, the business makes add-ons that they can sell for money.
For example, Skype is a free way to talk to people that lets them make calls, send texts and files, and hold video conferences. The company also offers paid services that work with the free software. For example, there is a choice between more cloud storage space or a calling plan for international calls.
Another excellent example of this model is Dropbox. Their primary product is free but offers paid plans with more storage space and extra benefits like automatic backups.
For iPhone users, iCloud is an excellent example of this type of service. Apple users can use it for free, but you must pay for more storage if needed.
A different product strategy
The idea behind this freemium model is to keep the main benefits free. Instead of making a direct offer to upgrade to a different model, the main idea is to cross-sell other goods from the same company.
It is sometimes a good (and helpful) approach for individual users. Business-to-business (B2B) companies usually charge organizations based on how much they use their product or a similar plan.
Many software companies, like ClickUp, HubSpot, Trello, and others, offer a robust free product that anyone can use. However, they charge extra for teams or specific goods.
If a freelancer wanted to grow into an agency, hire staff, or subcontract a few jobs, the free plan wouldn’t be able to support these changes. The customer does have to pay a little more for more team members, but they can use a tool they already know how to use.
In the same way, someone who uses HubSpot might also use CRM software and find that they need extra tools like marketing automation.
HubSpot couldn’t have known this would happen, so there isn’t a straightforward way to promote it. You can, however, pay extra to add things like marketing automation, email campaigns, or social media tracking.
The ecosystem
The Ecosystem freemium model is built on a base product that is free forever and makes money through add-ons from other companies.
Companies can make their products profitable by working with outside providers and sharing the profits. This is between free products and freemium 2.0 because users don’t have to pay extra for extra services or benefits.
The WordPress plugin ecosystem is a well-known example of this. It lets developers make and sell add-ons stored in the WordPress library.
The impact of networks
“If you aren’t paying for the product, you are the product” is an old proverb.
This is what the Network Effect freemium approach is based on: businesses offer free services to build a network of users.
In this method, a product makes money by exchanging data and showing focused ads. For instance, Facebook’s social media site is free, but it collects user information to show them more relevant ads and make money from marketers.
It’s the same with Google, its search engine, Amazon, and its Kindle app. Companies use the Network Effect approach to build a digital ecosystem where they can make money by trading customer data.
Compare Free Trial and Freemium
The main difference between a free trial and a freemium is that a free trial lets users use a product or service for a set amount of time before paying for an update.
Paid users, on the other hand, can use the basic features without any limits or constraints.
A free trial and a freemium model are sometimes used together. This lets customers try the entire product or service and then switch back to the free version if they don’t need all the benefits.
By showing the usefulness of their premium features, businesses can turn people with free accounts into paying customers.
Good and Bad Things About Freemium Pricing
The freemium approach is one of the most common ways to set product prices in the software business. It helps businesses get new users quickly and cheaply, and the more expensive plans still bring in money.
Some good things about the freemium approach are:
- Lower customer acquisition cost (CAC): Under a pressure-free pricing model, potential customers are likelier to try out the product or service and convert it into paying customers.
- Increased customer satisfaction: Users can test the product for free and upgrade when ready. This makes them feel their needs are met before committing to a paid plan.
- A larger pool of potential customers: A free tier can help businesses attract more users and expand their customer bases.
- Brand awareness building: When more users can access a product, the organization can build brand awareness and credibility through word-of-mouth marketing.
- Fast way to grow user base: For startups trying to scale quickly, a freemium model can effectively attract new customers.
There are some problems with the freemium model, though. For example, competition can make it hard for companies to profit from paid services.
Some problems with freemium goods are:
- It makes people think that expensive plans are less valuable. If you have a free version, getting people to switch to a paid version might be problematic because they might not need the extra benefits.
- The risk of lost trust: If a customer doesn’t like the freebie version of a product, they might think they were tricked into paying for a better plan.
- Less money made from each customer: It can be challenging for businesses to grow their income if they don’t have enough users to cover the costs of offering free services or the right technology to sell their data.
For a freemium business model to work best, companies should give their free plan just the right features to get people to sign up, but not so many that people don’t need the paid plans.
They should also focus on keeping people interested and giving them services that add value so that they become paying customers.
How can companies get more people to sign up for their free services?
Some businesses don’t need many conversions, but most need paid customers to stay in business. To get more people to buy, businesses should do the things listed below to improve the freemium plan.
More features have been added to the free trial.
An expanded free trial is an excellent way to give people a free tier while still letting them try out the full version of the product or service. These features will let them try out all of them and decide if they need them before they sign up for a paid plan.
To make this work, you must show them how powerful the product is and give them helpful information to help them maximize their free trial.
When something is taken away or changed, it’s more likely to move up.
Tell people to upgrade again.
As simple as it sounds, reminding people to switch can help boost conversion rates. Even if a customer has already decided to buy, a simple warning could be all they need.
It’s a good idea for businesses to remind users of the benefits of upgrading through email ads, automated messages, and other means.
These messages should tell them about any new features that have been added and how the premium features will save them time or money.
Don’t send too many texts to your customers, though. There is evidence that up to four rounds are most likely to work.
Based on analytics, business intelligence is vital in figuring out how people use your product or service.
You can find out which features people use most and which parts of the free plan can be improved by looking at how they use it.
Analytics should be used to:
- Find out more about customer paths;
- Figure out which groups of users are more likely to convert;
- Figure out why some users leave;
- Make price and feature changes based on this information.
Based on this data, companies can make their freemium model more appealing to potential customers by giving them more value and improving the customer experience.
In-App Coupon Codes
By offering a discount for switching to the premium version, you can really help boost conversions.
Several types of deals work, including:
- Discounts that last: Give a discount that doesn’t end, like 10% off, to a specific group of customers.
- Discounts that only last for a certain amount: Offer an incentive to improve within a certain amount of time, like 15% off for the next two weeks.
- Discounts for first-time users: This is helpful for new buyers who haven’t used your product or service yet.
Use these in-app alerts and other strategies to get the most out of each promo code.
Policy on Refunds
Customers will trust a business more if it has a good return policy because they know they won’t be stuck with something they don’t like.
You can make people feel safe and get them to commit to your product by giving them a money-back promise within a certain amount of time after they buy it.
It can be challenging for B2B companies to figure out how to handle refunds, especially if they charge for things through subscriptions.
Many businesses let annual users quit within a certain number of months and get their money back. They can still use the product until the end of the period.
People who pay every month generally don’t get refunds, but they can use the product until the end of their current billing cycle.
Customers should understand these rules easily and know what they agree to before buying.
