Are you a freemium victim?
Many companies struggling with growth at some point in their evolution or considering trying a new, maybe even bold strategy, end up giving the freemium model a chance. The freemium pricing strategy has been around since the 80s, picking up great speed starting with 2010. While it succeeded in heavily boosting certain software products (particularly in the gaming industry), it has also had its fair share of failings and critics.
Adopting the freemium model can prove to be a tricky move, which may cause a serious blow to the company’s sales. Keep reading to figure out if this model is the right choice for your business and what the mindset which leads to making a freemium mistake is.
From my experience, there are 3 basic assumptions which convince future freemium-victims that this model is the right choice for them:
- Distribution: It will be much easier and a helluva lot cheaper to distribute a freemium product and you’ll quickly gain more market share.
- Investment: You know it might take a bit longer to see the return, but you can feel it a mile away: it’s a very good long term investment!
- Premium vs Freemium: You will still keep our Premium paid version, so the revenue won’t even know we’re testing freemium.
Distribution
Ok, this is a certainty: it is, indeed, cheaper to distribute a freemium version of your product. Taken with a grain of salt, however, because cheaper doesn’t mean free.
Add the fact that the freemium model has one of the lowest conversion rates in the software industry, averaging 1–2% for SaaS companies. Meanwhile, free trials aim for an average of 10% conversion rate, “just” 5 to 10 times higher.
ROI rates for freemium software reach, best-case scenario, a value of 55–60%, while the vast majority of products barely scrape for a 25–30% ROI. If you factor in the generally low prices practised for freemium upgrades, you get an idea of how “profitable” it all actually is.
My point here is that you should put the customer acquisition cost in balance with the probable conversion rate, before making any decision about adopting freemium. You might be surprised. And if you are, it’s better to be surprised now than later, when it might get too expensive for your own good.
Long-term investment
Yes, freemium is a good long-term investment IF it works out for your product. The downside is that there’s a high chance of long-term bleeding IF it turns out to be the wrong kind of decision. Operating with too many IFs (especially of the critical type) is not a wise business perspective and you can try to reduce some of these IFs by testing & calculating a few key factors:
- What would be the average time between the moment a user downloads the freemium and the same user makes a purchase?
- How much do you expect the customer’s LTV (Lifetime Value) to be?
- How big would your operational costs with free users be? This refers to both customer support and the backend resources you will allocate.
Would these costs still make freemium a profitable business decision? After all, you could end up with 99% free users and a microscopic 1% of paying ones.
Read the full story on PayPro Global’s blog.
