How Effective is the Freemium Model?
Understanding the working of the Freemium Model of Marketing.
We’ve all had experiences with apps and services on the internet which are free for a few basic services, and to get more exclusive access with premium features, ad-free games, and extra rewards, we have to pay a certain fee. This is simply called the Freemium Business Model.
What is the Freemium Model of Marketing?
By definition, freemium, which is a mixture of “free” and “premium” is a business model where users get basic features at no cost and can access richer functionality for a subscription fee. The freemium strategy is different from the premium with free samples strategy as you don’t pay anything to utilize the free services provided under the freemium business model. It has become the go-to way of marketing for new-age startups and even smartphone app developers.
A few popular examples include Mailchimp’s email marketing software that allows you to collect email list subscribers, send regular email updates, create autoresponder series, and automate your marketing. Another one is the most famous storage software, Dropbox. This the popular cloud storage platform offers a free plan for up to 2GB of space for backups and simple file sharing. The Pro plan for a significantly larger amount of space (1TB) is only $9.99 per month.
Origin of this model
The Freemium business model was brought into existence by the software industry in the 1980s as a time-limited or feature-limited strategy, commonly known as the shareware strategy where a free (limited) version of the product was made available to everyone in a hope that some users will upgrade to the better premium version. The business model was drafted in such a way so as to bring on as many potential customers as possible to try the product for free and convert into premium members after paying a certain subscription fee. The recent advent of in-app purchases on IOS and Google Play has upgraded the shareware strategy and named it as freemium which is characterized by free software/game/application but with paid add-on features.
The freemium model capitalizes on the zero price point paradox which states that to maximize participation, a zero price point can’t be a beat. However, people don’t value things they get for free. Therefore, to get people to value the product, they should pay something for it. This gave rise to the characteristic feature of freemium services — micropayments. A micropayment is a very small amount of payment you pay to buy specific services provided in the freemium business model.
The psychology behind the model
Free can mean many things, and that meaning has changed over the years. It raises suspicions, yet has the power to grab attention like almost nothing else. It is almost never as simple as it seems, yet it is the most natural transaction of all.”
— Chris Anderson in his book Free, The future of radical price
Since the cost of having an additional user is almost nothing, a price tag of zero can very effectively spread awareness of a product and attract a large user base. This has a huge appeal in the grow or die environment of Silicon Valley, and some of those customers will pay for premium features. Free trials follow a similar logic.
But freemium has another factor going in its favor: Once people start using a freemium service, the mere fact that they’re using it will lead them to value it more than an identical service. And once it comes time to pay, that can be a big deal.
This is the result of something academics refer to as the endowment effect — one of many fun examples of how we all fail to live up to the perfectly rational expectations economists set for us. Economics classicly takes as given that the price that someone would pay for a good is the same as the price they would accept as compensation for that good. If you’re willing to pay up to $450 for a television, you should be willing to accept $450 for that same television when you’re the one selling it.
But as economists and psychologists have repeatedly noted, people fail to live up to their economic models by overvaluing their own possessions. One study on Duke students found that their willingness to pay for basketball tickets was 14 times less than what students would demand in compensation to sell their own tickets. A famous study that set up simple marketplaces for items like mugs and pens also claimed that sellers valued their items much higher than buyers — despite having just received them. This is the endowment effect.
People in general like to have possession of their belongings rather than the concept of losing it after a given period of time. The Freemium model takes advantage of this human behavior and puts it into use for marketing the company’s products. Once a user gets a taste of the service, they are more likely to stick around to explore the premium content as well.
Does it really work?
The Freemium model is the go-to marketing strategy for many companies, and it has worked wonders as well, and it is quite different for many other companies. Let me explain with examples.
LinkedIn is one of the best examples of a company that uses the Freemium Marketing Model. The core features of LinkedIn, like posting content, connecting with your network, following recruiters and companies directly are provided free of cost for the user. The user in turn gets accustomed to the wonderful networking and career-related opportunities provided by the website. Once they get used to it, LinkedIn advertises the premium features available, exclusive to those who pay a subscription fee. The premium features include being able to see the profiles of those who have viewed your content, connecting directly with the recruiters using InMail credits, seeing where you rank in terms of your skillset compared to your peers and learning from the unlimited courses offered.
A case where the Freemium model has not worked so well for a company is Chargify. When Chargify initially launched in 2009, it offered a free plan for companies with less than 50 paying customers. A year later they had to reevaluate and concluded that the model wasn’t viable long term. With increasing support costs and less than ideal free to paid conversions, the company made the difficult decision to move away from their initial free offering to premium.
Reasons why Freemium Fails
According to the Medium article by Myk Pono, Freemium fails for the following reasons-
- When you provide little or no incentive for free customers to convert.
- When you don’t provide features with value for users to stick around.
- When you don’t create a sense of urgency, which results in the user not feeling the immediate need to extend the usage of the product or service.
- When the company doesn't nurture and engage continuously with prospects, resulting in a lower free-to-paid conversion rate.
- When you don’t research and analyze insights on how and why customers convert.
- When you don’t provide enough product or service information in the free version, the user won’t be motivated enough to convert to the premium version.
- When you don’t properly consider the costs to support customers using free services.
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