Freemium business model: benefits and pitfalls to avoid

The freemium business model is relatively new, but at the moment we can see a huge number of businesses embracing it. So, what is the freemium model and what makes it successful? Let’s try to clear this out.

Generally, Freemiums are segmented in the following categories:

– Value-based — The most successful type of Freemium strategy. The more a customer uses the product, the more value it derives. At some point, the user will hit a usage limit and convert to a paying customer. Mailchimp, Balsamiq, Dropbox and Evernote are great examples of this.

– Characteristic-based — For example, offering the product for free to one user (so it is based on company size for instance). Let’s think about a B2B application. If I’m a freelancer, I will use the application forever and I will never have to upgrade. If I’m a 3-person company, I can’t add more users and try the application for real and so, I might not get to the point where I see the value in using it.

– Free Product for a Cross Subsidy — Give one product for free and charge for complimentary products.

Lower Cost of Sales

The freemium business model has its advantages when it comes to user acquisition, and reduced cost of sales is one of the main ones. This is achieved by offering a self-service product to the users, giving them a chance to try the product. From that point on, they have a chance to figure out the product’s value on their own, instead of spending tons of money on an army of salespeople who will be explaining and persuading the value to the prospects. In the good old days, software companies would spend half of their revenue on sales, passing these costs onto customers. It didn’t take long before they figured out that they were paying twice as much as they needed for something that had little value once the product was installed. The software companies have been striving to reduce the cost of sales ever since. When this is achieved, the software companies can direct the saved energy and resources into delivering that awesome product they originally had in mind.

Read the full story on PayPro Global’s blog.