Freemium

Freemium is a customer acquisition model adopted by businesses to introduce basic products or services to users for free. It is a part of the pricing strategy to entice free users to upgrade to premium versions with more advanced features at a paid subscription. It is extremely popular with internet-based ventures that seek to attract a significant user base at a reduced operational cost.

While consumers try quality offerings at no cost, businesses acquire a large user base. As a result, companies create a pricing plan for their premium services based on the initial market response. This model aims at fostering the conversion rate of customers from being free users to paid subscribers.

• Freemium is a customer acquisition model in which businesses make their basic services available to consumers for free. However, to enjoy advanced features, users need to buy premium versions.
• The term stands for Free + Premium. It lets businesses decide on their pricing strategy and choose those that suit their products and services.
• Software businesses first introduced the idea in the 1980s by making free versions of their products available to users with limited features or limited periods. It was termed the shareware strategy.
• Start-ups adopt the freemium business model to acquire new customers and build a loyal user base by offering free basic services.

The term freemium is the merger of two words – Free + Premium. In the 1980s, many software businesses used freemium strategy to showcase their offerings with limited features or limited time to consumers free of cost. With this tactic, these companies wanted to ensure that consumers upgrade to premium versions of the same in the long run. At that time, this method got popularized as the shareware strategy.

In later years, it turned into the customer acquisition model for sellers and brands. They began adopting this model to offer basic services without charging anything. With that, they hoped free users would choose their paid versions with advanced features. Simply put, free basic services give consumers a glimpse of an offering and help them decide whether it is worth the monthly or annual subscription.

It is also a way to build relationships with potential users. When offering free basic services, the only thing a company needs to think about is ensuring premium products or services have additional features than free versions. Even though many consumers use free services, only a small number convert to paid services.

Media streaming services frequently use free basic services. Customers can open freemium accounts with these services and access digital media without paying anything. There is, however, a restriction to the number of music or movies or shows they can listen to or watch monthly or annually.

The service provider might ask users to subscribe to consume and download unlimited media on their devices for free. However, those who do not pay for the service get limited access and face interruptions, like advertisements. As a result, they consider taking paid subscriptions for ad-free and better services.

In short, freemium services compel free users to go for a paid subscription. Or in other words, it is all about converting free users into paid users.

In the modern world, new approaches to initiating business with target audiences have been on the rise and the freemium strategy has been one of the most successful ones. Let us discuss a couple of examples to understand the concept in depth.

Example #1

A gaming company developed a game for kids above 12 years. The development team was confident about the product and knew it would be interesting at play. So it began offering the game for free for 30 days. After the 30-day trial, it would ask gamers to subscribe to it. As the game was one of the freemium games,teens got excited and found it adventurous.

The game requires players to make calculations to proceed to the next level at every stage. Since it enhanced the cognitive skills of children and teens, the game influenced their parents as well. As a result, gamers decided to upgrade to the premium version by paying the monthly or annual fee per their suitability.

Example #2

The massive success of Netflix as a streaming service has allowed many ventures to explore this segment. As part of their efforts to acquire new customers, these companies introduced freemium digital media streaming services. Technology giants like Apple, Comcast, AT&T, and Verizon have rolled out free streaming plans for consumers.

For instance, Apple offered a free year of Apple TV to everyone who purchased a new iPhone, iPad, Mac, or Apple TV box. Likewise, Verizon gave its wireless customers a free year of Disney+, and AT&T said it would offer regular HBO subscribers HBO Max for free. Similarly, everyone could access an ad-supported version of Comcast’s Peacock streaming service.

The freemium strategy allows start-ups to launch their products and services and acquire customers by offering free basic features. Besides, it creates brand awareness among the potential users. However, every model has its own set of pros and cons. Therefore, before any business opts for this pricing strategy, it needs to know the advantages and disadvantages.

Pros

• Adding the word “free” to the model’s name makes it more appealing to buyers, who are always willing to try anything available for free of cost.
• It allows businesses to acquire new customers, build a loyal user base, and convince them to upgrade to advanced paid services.
• Customer acquisition becomes easy and cost-effective.
• Companies still make money by collecting user data and making products ad-supported with their free basic services.
• By offering products and services to customers for free, businesses grab more attention in the market. Thus, they get a chance to prove the worth of their paid offerings.

Cons

• Free users get limited access to features of products or services. They need to pay to enjoy advanced functionalities.
• A poor marketing strategy can result in the loss of potential premium customers.
• If the number of free users is more, a small percentage of them will convert into paid users.
• Companies adopting the freemium business model have to burn their cash flows to support those not paying for the services.
• The continuous desire to convert free users into paid ones makes businesses invest more time, monetary and non-monetary resources.
• A business needs to maintain a balance between expenditure and acquisition.

The internet era has witnessed a large volume of websites and applications that have provided means for their users to experience their products without paying for it for a certain period or for certain features. Therefore, there is common confusion between a freemium account and a free trial account.

Let us understand their differences through the comparison below.

Freemium

• Freemium is a market acquisition strategy where certain features of an application or a website are provided for free to the customers to lure or motivate them into purchasing the premium version.
• A few basic features are available for users’ perusal without any limitations of time.
• Offers limited functionalities to new users without a premium subscription.
• According to studies, 1-10% of users buy a premium subscription for companies using a freemium strategy.

Free Trial

• Free trial is allowing the user of a website or an application to experience the maximum ability of the features for no cost for a limited period.
• Complete functionality and features are made available for the users just as the paid version would function.
• The free trial version is usually made available for 15-30 days.
• More than 30% of users trying a free trial convert and purchase a premium version.

This has been a guide to What is Freemium and its meaning. Here we explain its examples, pros, and cons, and compared it with a free trial. You may also have a look at the following articles to learn more –

• Market Research
• Business Entity Concept
• Distribution Channel