Product-Led Growth

 

By Gennaro Cuofano 

Product-Led Growth (PLG) is a growth strategy that relies on the product to drive customer acquisition and retention. It emphasizes user satisfaction, data-driven optimization, and viral growth. Key metrics include MAU, NPS, and CAC. Successful examples include Slack and Dropbox, showcasing the power of PLG in today’s tech-driven markets.

Characteristics:

• User-Centric: At the core of PLG is a user-centric approach. The product is designed to address the specific needs and pain points of users, ensuring a positive user experience.
• Data-Driven: PLG relies heavily on data analytics to gain insights into user behavior. This data-driven approach helps in understanding how users interact with the product and what features or improvements are most valuable to them.
• Self-Service Onboarding: PLG emphasizes self-service onboarding, making it easy for users to sign up and start using the product without the need for extensive training or assistance. This reduces friction in the user adoption process.
• Virality: PLG encourages virality, where satisfied users become advocates and invite others to use the product. Features like referral programs and social sharing mechanisms promote organic growth.

Significance of Product-Led Growth

Product-Led Growth has gained significant importance in today’s business landscape for several reasons:

1. User-Centric Approach:
   • It aligns businesses with user preferences and demands, resulting in products that users genuinely want and love.
2. Cost-Efficiency:
   • PLG reduces the reliance on costly sales and marketing efforts by leveraging product value to attract and retain customers.
3. Organic Expansion:
   • By fostering viral loops and word-of-mouth referrals, PLG drives organic growth, reducing the need for traditional advertising.
4. Sustainability:
   • Companies that prioritize user satisfaction tend to build more sustainable, long-term customer relationships.
5. Competitive Advantage:
   • In today’s crowded market, a user-centric approach can set businesses apart from competitors and establish brand loyalty.

Key Principles of Product-Led Growth

Successful implementation of Product-Led Growth relies on several key principles:

1. User Onboarding:
   • Streamline the onboarding process to help users understand and experience the product’s value quickly.
2. In-App Education:
   • Use in-app tutorials, tooltips, and guides to educate users about product features and benefits.
3. Product Virality:
   • Incorporate features that encourage users to invite others, creating a viral effect.
4. Feedback Loops:
   • Actively seek and incorporate user feedback to continuously improve the product.
5. Freemium Model:
   • Offer a free version of the product with limited features, enticing users to upgrade for additional value.
6. Customer Advocacy:
   • Encourage satisfied users to become advocates, sharing their positive experiences with others.

Implementing Product-Led Growth

Successful implementation of Product-Led Growth requires a strategic approach:

1. Understand Your Users:
   • Gain deep insights into your target audience, their pain points, and what drives them to use your product.
2. User Onboarding Optimization:
   • Simplify onboarding to guide users towards realizing the product’s value quickly.
3. In-Product Marketing:
   • Use the product itself to educate and convert users, minimizing the need for external marketing channels.
4. Product Analytics:
   • Leverage data and analytics to track user behavior, identify bottlenecks, and make data-driven improvements.
5. Feedback Mechanisms:
   • Establish feedback loops for users to share their thoughts and suggestions, and actively address their concerns.
6. Viral Loops:
   • Build features that incentivize users to refer others, creating a self-sustaining growth cycle.
7. Iterative Improvement:
   • Continuously iterate and improve the product based on user feedback and data insights.

Key Metrics:

• Monthly Active Users (MAU): MAU measures the number of unique users who actively engage with the product on a monthly basis. It provides insights into user retention and product usage trends.
• Net Promoter Score (NPS): NPS assesses user satisfaction and loyalty. It gauges the likelihood of users recommending the product to others. A high NPS indicates strong user advocacy.
• Customer Acquisition Cost (CAC): CAC calculates the cost incurred to acquire a new customer compared to the revenue generated from that customer over their lifetime. Lower CAC is desirable for efficient growth.

Benefits:

• User-Centric Focus: PLG’s user-centric approach leads to better alignment with user needs and preferences, resulting in improved product-market fit.
• Efficient Scaling: PLG allows for efficient and cost-effective scaling. Satisfied users become natural advocates, reducing the need for expensive marketing campaigns.
• Data-Driven Optimization: Continuously analyzing user data enables ongoing optimization of the product. It helps in identifying areas for improvement and innovation.

Challenges:

• User Acquisition: Acquiring the initial user base can be challenging in PLG, especially if the product is relatively unknown. Strategies for attracting early adopters are crucial.
• Monetization: Balancing the provision of free or freemium services with revenue generation strategies can be complex. PLG companies often experiment with pricing models to find the right balance.

Real-World Examples:

• Slack: Slack’s user-friendly interface, self-service onboarding, and collaboration features led to rapid adoption in workplaces. Its virality, with users inviting colleagues, contributed to its success.
• Dropbox: Dropbox’s referral program, offering additional storage for referring friends, encouraged users to spread the word. Its focus on simplicity and usability made it a widely adopted file-sharing solution.

Case Studies

• Slack: Slack revolutionized workplace communication by offering a user-friendly collaboration platform. Its self-service onboarding and the ability for users to invite colleagues led to rapid adoption in organizations worldwide.
• Dropbox: Dropbox’s file-sharing service became popular through a referral program that rewarded users with additional storage for inviting friends. Its simple and intuitive interface appealed to a wide audience.
• Zoom: Zoom’s video conferencing platform gained widespread adoption due to its ease of use and virality. Users could invite others to meetings with a simple link, contributing to its exponential growth.
• Trello: Trello’s visual project management tool attracted users with a straightforward and intuitive interface. It spread through teams and organizations as users shared boards and invited collaborators.
• Canva: Canva, a graphic design platform, allows users to create professional-looking designs with ease. Its user-friendly interface and collaboration features made it popular among individuals and teams.
• HubSpot: HubSpot’s inbound marketing and sales platform offers a free CRM and tools for content creation. Users can start with free features and upgrade as needed, driving user adoption.
• Notion: Notion’s all-in-one workspace platform gained popularity through its flexible structure and user-friendly interface. Users could create custom workspaces, fostering collaboration.
• Intercom: Intercom’s customer messaging platform focuses on user engagement and support. It offers a free trial, encouraging users to explore its features and eventually subscribe.
• Figma: Figma’s collaborative design tool enables teams to work together on design projects in real-time. Its cloud-based approach simplifies collaboration and attracts users.
• Airtable: Airtable’s flexible database tool combines the simplicity of spreadsheets with the complexity of databases. Users can create custom solutions for various tasks, making it widely used.

Key highlights of Product-Led Growth (PLG):

• User-Centric Approach: PLG prioritizes users’ needs and satisfaction, ensuring that the product aligns closely with user preferences and pain points.
• Data-Driven Optimization: Data analytics plays a central role in PLG, enabling organizations to make informed decisions based on user behavior and usage patterns.
• Self-Service Onboarding: PLG simplifies the onboarding process, allowing users to sign up and start using the product with minimal friction, reducing barriers to entry.
• Virality and Organic Growth: PLG encourages users to become advocates by inviting others to use the product. This viral growth can significantly reduce customer acquisition costs.
• Key Metrics for Evaluation: PLG relies on metrics like Monthly Active Users (MAU), Net Promoter Score (NPS), and Customer Acquisition Cost (CAC) to assess growth and user satisfaction.
• Efficient Scaling: Successful PLG models can efficiently scale as satisfied users naturally refer others, reducing the need for extensive marketing efforts.
• Continuous Improvement: PLG promotes a culture of continuous improvement, with data-driven insights guiding ongoing optimization and innovation.
• Challenges in User Acquisition: Acquiring the initial user base can be a challenge, especially for new products or startups, requiring creative strategies.
• Monetization Strategies: Balancing free offerings with revenue generation strategies is a delicate task, with PLG companies often experimenting with pricing models.
• Real-World Success Stories: Companies like Slack and Dropbox have demonstrated the effectiveness of PLG in achieving rapid adoption and growth through user-centric design and viral features.

https://tinyurl.com/yewmbp5w

The New Rules of Customer Acquisition

 

What you’ll find in this report

Since 2015, customer acquisition costs have surged, increasing by more than half, and the recent Internet Trends report from Mary Meeker suggests there are areas where these costs may be rising to unsustainable levels. 

In this extremely crowded market, competition for the attention of new customers and rising costs are not the only challenge marketers face. New privacy regulations, such as the GDPR in Europe and the CCPA in the US, have depleted databases and changed the rules around how marketers can identify consumers via personal data. 

So how are marketers responding to these challenges with customer acquisition? We sought to find out.

At the end of 2019, we surveyed over 200 UK and US marketers working in eCommerce*, to understand how customer acquisition strategies are evolving as we start the new decade.

Inside this guide, you’ll find the new rules of customer acquisition (and retention), backed by data, together with an in-depth look at industry (retail and travel) and market (US and UK) trends.

*Methodology: This research was conducted by Censuswide, an independent market research consultancy, with 207 UK and US ecommerce marketers who work in retail and travel: 100 in the UK and 107 in the US. Fieldwork was carried out between 11.09.2019 – 17.09.2019. Censuswide abide by and employ members of the Market Research Society. All survey panellists are double opted in, which is in line with MRS code of conduct and ESOMAR standards.

Rule #1: It’s all about balance…

In 2018, we asked 200 marketers where they focused the majority of their efforts when it came to balancing acquisition and retention, and the results were a little surprising.

Despite the oft-cited fact that acquiring new customers is getting more expensive, and can cost up to 5x more than retaining an existing customer, marketers were still focusing 60% or more of their time and effort on attracting new customers. Revisiting the same question in 2019 revealed a notable shift in approach:

As the data reveals, marketers are shifting toward a more holistic approach, balancing their acquisition and retention efforts much more equally. In 2019, nearly half of marketers (47%) were spending equal effort on both attracting and keeping customers, compared to just 11% who said the same in 2018. 

However, it can be said that acquisition is still king, with 45% still prioritizing this, and gains to the more balanced approach largely coming from those previously weighted toward a greater focus on acquisition.

Industry and market trend spotlight

• US (53%) marketers are much more focused on acquisition than the average (45%), and their UK counterparts (36%).
• Travel marketers were slightly more focused on acquisition than their Retail counterparts, perhaps given the more one-off nature of travel purchases. 
• UK marketers are the most balanced in their customer acquisition and retention strategy – 57% are equally focused on both aspects of the customer journey.

Rule #2: Privacy requires proactivity

In May 2018, the General Data Protection Regulation (GDPR) came into effect to protect the privacy of EU citizens, and in January 2020 a similar regulation came into effect in the US: the CCPA. The impact of the latter remains to be seen, but we do know how GDPR impacted UK marketers. 

With the average marketer losing 23% of their hard-acquired customers (i.e. email database) due to the regulation, we saw that survival in the new era of privacy requires a proactive approach to data capture. 

Businesses in retail achieved some of the best results, growing databases to 101% of their pre-GDPR size via a wide range of strategies, from loyalty programs to content optimization, as well as more traditional approaches such as competitions and incentivized newsletter sign-ups.

This shift toward a more proactive approach to acquiring customer data is also visible from the change in focus noted in the chart below:

Industry and market trend spotlight

• Interestingly the UK marketers were not as focused on acquisition as those in the US despite the advent of GDPR, suggesting many UK businesses have got their house in order when it comes to privacy and acquisition.
• Travel marketers shifted their focus less than retail, perhaps explaining the slower recovery from GDPR we saw in this sector.

Rule #3: Social media is king when it comes to channels

According to respondents, the top three acquisition channels marketers across verticals and markets are focusing on are: social media (66%), paid search (52%), and email (51%).

The high placement of social media is an interesting one, especially as social commerce finally seems to be gaining traction. In the next section, we’ll examine how these channels are perceived in terms of ROI to see if this focus is deserved.

It seems that marketers are still largely prioritizing paid channels such as paid search, display, and of course to some extent social, over strategies such as SEO. This approach remains despite rising acquisition costs, so it is worth noting that it may become unsustainable heading into the new decade – marketers will need to evaluate how they can switch up their strategies when it comes to acquisition channels.   

Industry and market trend spotlight

• The US is much more focused on paid activity than other markets, which makes sense given the greater focus on acquisition we’ve seen from this group so far. 
• After social, email was the biggest focus in the UK. Again this aligns with these segments’ greater focus on retention.
• Affiliate marketing was the channel that received the least focus. This channel was most popular with US marketers and in Retail.

Focus of different groups on key customer acquisition channels

Rule #4: Top focus doesn’t automatically mean ROI

Looking at the top channels for ROI, there weren’t too many changes, for example, social media still came out on top, with 52% of marketers ranking it within their best three channels for ROI. What was most interesting here was the discrepancy when comparing the focus or effort applied to particular channels, versus the ROI they were perceived as generating:

We see an interesting pattern emerge here, the top-ranked channels for focus, such as social media and paid search,  performed less well on ROI, while those who had been ranked lower, such as affiliates, actually performed better.

So should marketers switch up their strategy to focus on these ROI-driving channels? Not necessarily. What it suggests to us is that the customer journey for channels like social media and paid search needs to be improved. 

Why? It all comes down to intent. If you think about a user visiting from an organic search or an affiliate, the intent to buy is likely to be much higher, and thus these visitors are more likely to convert, boosting ROI. For channels like social media, a visitor may be in ‘discovery’ rather than ‘buy’ mode, and so needs a helping hand to move down the funnel toward conversion. In 2020 it is essential that marketers improve the customer journey from click to conversion for social media, paid search and email.

Industry and market trend spotlight

• US and Travel marketers reported much higher ROI from display than other segments, suggesting they are doing a better job of continuing the customer journey post-click.
• Travel also reported a higher ROI from affiliates than other groups, perhaps due to the higher AOV seen in this industry or because these visitors are showing a strong intent to buy.

% of marketers reporting good ROI

#Rule 5: Better data collection is the foundation of success

Everything we’ve seen up to this point suggests that marketers need to evolve their approach to acquisition and retention, but how?

 The discrepancies between channel focus and ROI achieved point toward a need to improve the customer journey. The top strategies marketers plan to use to optimize the customer journey in 2020 include Marketing automation and website personalization, but neither of these are possible without a solid foundation of data.

Smart acquisition (and retention!) in 2020 will rely on:

• Effective data capture: careful targeting at the right moment in the customer journey to collect data and build a granular view of visitors
• Smart segmentation: based on available and collected data, segmenting visitors allows for scale and efficiency when it comes to both data collection and personalization, allowing you to target a new visitor and a loyal VIP differently.
• The ability to act on behavioral data: when you don’t have personal data, you need to recognize and act on intent. For example, personalizing your approach for visitors from high versus low intent channels.

https://bit.ly/3FL7baT

The Freemium Business Model

 

The Freemium Business Model is based on the concept of providing a version of something for free and one or several fee-based premium versions alongside. It is basically a way of versioning where the free version is provided to create the lowest possible barrier of adoption. The objective is to gain a large customer base, build loyalty and trust, and convert some of the customers to fee-based premium versions.

To be considered a Freemium Business Model what is provided in the free version has to be something that can be used in and of itself without necessary paying for something else (in comparison with for example the Razor-and-Blade Business Model). Also, the value provided should not be limited in time, in comparison to for example free expiring trial versions of a software.

Profitability

To be profitable, the Freemium Business Model must create a lifetime value of premium paying customers, greater than the cost to develop, produce, market and distribute what is beeing offered for free and fee. This requires that:

• the marginal cost of production, marketing and distribution of the free version must be very close to zero
• the free version must generate a large customer base
• there must be a conversion from free to fee-based premium versions
• there must be strong control mechanisms in place, to maintain the premium value from being reduced by competition

Low marginal cost of production, marketing and distribution

Value propositions with low or zero marginal costs have traditionally been limited to the transactions of rights. Long before the Internet it was possible for rights holders to provide free copyright or patent licenses at low marginal costs with the objective to gain adoption of a technology or software. With a free license, a licensee could use and sometimes further develop its own technology or software based on the free license, or chose to pay for another license to patents or code relating to improved features, better performance etc.

The primary use of The Freemium Business Model is however on the Internet where it has become very popular among start-ups. The Internet has become a low cost marketing and distribution channel for information and digital products such as software, ebooks, music, videos and virtual goods. Also, customers can be acquired using low cost search marketing, word of mouth and referral networks.

The free version must generate a large customer base

To generate a large customer base the free version must offer enough value so users become regular customers and tell their friends and colleagues to join. The more value provided the higher probability for word of mouth marketing and adoption of the free version. The main difficulty in The Freemium Business Model is to provide enough value to generate a large customer base, and at the same time leave room for incentives for customers to pay for premium versions. Value is subjective and people attach different value to different services so the challenge is to properly segment users and features such that enough value is provided to both free and paying users.

However, what customers find valuable might not be obvious until feedback is given from users of a free version and often the free version is launched long before there even is a fee-based premium version. The risk of launching an early version to test a product or service is of course that the free version is perceived as good enough and only a few customers choose to pay for additional features and services.

Conversion from free to fee-based premium versions

The premium versions have to be so compelling that a portion of the customer base will convert to the paid versions to cover the cost of developing and providing the service. Even though Internet has enabled one click conversions, paying for something that is already provided in one version for free is somewhat counter intuitive. Examples of premium value propositions are:

• Exclusive content
• A version free from advertising
• Decreased delivery time or delay
• New or improved:
• features
• user interface
• convenience
• performance
• flexibility
• service and support
• rights

According to venture capitalist Fred Wilson, the best examples of The Freemium Business Model are when the customer implicitly understands why the premium versions have to cost money, to cover direct expenses for the service provider. An example Wilson mentions on his great blog is Skype and its termination costs on other carriers networks when using its premium services to call out of network.

Lack of control mechanisms

Control mechanisms are rarely mentioned in literature about business models. As I see it creating strong control mechanisms is crucial for The Freemium Business Model to be sustainable. Without control mechanisms, each competitor will offer more free features to win over users until there is nothing premium left for the fee-based version. Examples of control mechanisms relating to The Freemium Business Model are implemented standards such as Real Player and Adobe pdf or having real or perceived switching costs such as Skype, Facebook, or LinkedIn.

The word Freemium

The business model of combining free and premium has been around for some time foremost within the software industry. But the term Freemium was first articulated by Jarid Lukin of Alacra in March 2006, as a response to Fred Wilson's blog post My Favorite Business Model in which he asks for a name on the business model of giving away a version for free.

"Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base."

http://tbmdb.blogspot.com

Freemium Business Model – Why Companies Fail & 5 Examples

The freemium business model was born out of a blog post created by venture capitalist Fred Wilson.

In his article, he wrote advised startups to give away their service for free.

At the time of writing the article, the concept of freemium was new and many new startups were Software As A Service (SaaS) startups looking to rapidly grow.

According to Fred Wilson, the advantages of offering a free option was the ability to rapidly acquire customers. The goal of using it was to “eliminate all barriers to the initial customer acquisition“.

The Birth of the Freemium Business Model

Fred Wilson didn’t have a name for the concept of using a free level to acquire customers, and so he asked his audience to come up with a name.

A commenter, Jarid Lukin, then suggested the name Freemium model. The Freemium model then evolved and became known as the Freemium business model.

In a nutshell, the freemium business model involves providing a basic version of a product or service for free, with the intention of persuading sufficient numbers of customers to pay for a more advanced version.

The Freemium business model is a revenue model and a marketing strategy, not a business model.

Services like Dropbox, Skype, LinkedIn or Spotify have successfully implemented the freemium business model and offer both free and premium-priced versions.

But, A large number of other online digital companies have experienced freemium as a costly trap.

However, entrepreneurs and senior managers in organizations still have a limited understanding of why some freemium business models become successful and sustainable while others do not.

The Power of Free

The Freemium Business 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

Chris Anderson

The Freemium business model isn’t new. It started in the 1980s as a strategy to get customers to try software.

Back then it was more commonly known as shareware. The free (limited) version of the product was offered out to people with the hope that they would then upgrade to the paid version.

Fast-forward to today and companies like Linkedin use it as a core part of their business model. Another example is the Spotify business model, where users can listen to music for free, in exchange though they are exposed to adverts.

Spotify offers a freemium business model

For Spotify, these adverts are a way of offsetting the costs, but also providing a significant value difference and reason to upgrade (listen to music ad free).

Why A Freemium Model Is Not a Business Model

A business model is a systematic way of designing how a business works and involves defining its activities, resources and how these go onto to create value for customers.

A revenue model is a method of capturing value from how you market and sell your products – in other words how you make money.

A freemium pricing strategy is often used as a startup financial model to accelerate growth, particularly for software businesses.

A customer is only a click away and if you can convert them without forcing them into a price/value decision you can build a customer base fairly rapidly and efficiently.  It is important that you require as little as possible in the initial customer acquisition process.  Asking for a credit card even though you won’t charge anything to it is not a good idea. Even forced registration is a bad idea.  You’ll want to do some of this sort of thing once you’ve acquired the customer but not in the initial interaction.

Fred Wilson

Freemium vs Free Business Models Using Advertising

freemium business model vs free

Many digital platforms such as YouTube, Netflix, Tencent Video, and Qiyi, to name a few, generate profits from advertisers. These are two-sided platforms. This is not the same and not to be confused with a Freemium model.

A platform is often a two-sided that facilitates transactions between the participants on both sides. In a classic two-sided market, the agents on one side of a platform can obtain value from interacting with agents on the other side. This is termed network effects.

In order to attract online users to a website, freemium services are often introduced, such as online auctions (e.g. eBay), eCommerce (e.g. Amazon), social networks (e.g. Facebook), online video (e.g. YouTube), online job bank, online games, etc.

In these models, they offer free services to load one side of the two-sided market, a platform. In turn, this attracts advertisers, firms, stores, and buyers (another sided market) that are willing to pay.

Conversely, a freemium model offers a set of features for free and then provides a paid upgrade path.

What are the problems with the Freemium Model?

Giving your product or service away for free doesn’t guarantee customers will then convert to premium.

If the value proposition isn’t strong and customers do not see the added value in moving to premium services a startup might acquire a lot of customers but will rapidly run out of cash.

Offering free, even with digital business models, still requires a lot of resources to service the product and the associated overheads. An example of this is Ahrefs, an SEO platform that allows people to search for keywords, analyse a site for traffic, keywords and much more.

Ahrefs doesn’t offer a free version for a good reason. The cost, increase in bandwidth and the sheer volume of queries would outweigh any benefits in terms of conversions. Also, Ahrefs is a high priced service. This premium pricing allows it to reinvest in the development of its platform. Essentially, Ahrefs business model relies on the revenue of long terms subscriptions from SEO professionals.

A further consideration is how a freemium offer affects your overall pricing strategy. Pricing and value are inevitably intertwined and need to be carefully considered. Low-cost items are often not perceived as being low value.

Ratios, Costs And Financials Of Freemium Users

freemium business model metrics

According to Anderson (2009), many websites using the freemium models work on a ratio of premium cstomers to freemium customers.

He called this the “5% principle,” meaning that providing one out of 20 people pay for value-added service, it can cover the cost of free use of the remaining 19 people. Of course this ratio is not a fixed one and depends on the service/product being offered.

However, the ratio affects many other parts of the business and ultimately optimizing the ratio has implicit implications for the profit and cash flow of the business.

• The average cost of serving a free user.
• Free to Premium Ratio for customers.
• DAU (Daily Active Users) is used to show the number of people who engage with the product, service on a daily basis. For some platforms, monthly active users (MAU) might be more appropriate.
• ARPU: Average Revenue Per User.
• ARPDAU: Average Revenue Per Daily Active Use.
• ARPPU: Average Revenue Per Paying User.
• LTV: Lifetime Value.
• Daily Sessions: The number of play sessions a user engages each day.
• CPA: Cost Per Acquisition or Cost.

The Perfect Marriage Subscriptions and Freemium

The subscription business model is a perfect marriage with using the freemium model. Moving potential customers from free to a subscription is the most common business model associated with freemium.

Examples of this can be seen with Spotify, Linkedin, Dropbox and many others.

However, despite its immediate appeal, it isn’t a one-size-fits-all approach. Where Freemium works well is when it is supported by other revenue models e.g. Spotify where the cost (and pain to be relieved) is advertising.

The concept also works well when the first level of any premium plan offers a significant benefit but at a lower cost. The crucial and more comprehensive premium features are then locked out for much higher prices.

It is this balance of understanding which features to offer for free and which to offer as a premium that is the difference between success and failure.

Freemium Business Model Examples

Google Drive

Google Drive freemium business model

Google Drive offers a fixed level of cloud storage for free and then incrementally larger amounts of storage based on a subscription.

Dropbox

Dropbox – an example of a freemium business model

Dropbox offers 2 GB of free storage capacity in the cloud, which is generally adequate for text documents. However, if users exceed that storage limit, they have the option to upgrade to 1 TB (i.e., 1,000 GB) by paying a monthly subscription fee of $9.99 or an annual subscription fee of $99.

Linkedin

LinkedIn Inc. was founded in 2002. It runs a professional networking site allowing the members to create business connections and search for jobs and potential clients. As of 2019, the network had more than 310 Monthly Active Users (MAU)’s in over 200 countries and territories.

Linkedin provides a free service for people to upload their details and create a digital cv. However, if they want to improve visibility with recruiters and gain access to insights about jobs they need to upgrade to a premium version.

Skype

Free for as many as six users; however Skype charges for out-of-Skype connectivity.

Mailchimp

Mailchimp freemium business model

Mailchimp is an email marketing platform that offers limited service for free up to when a user acquires a 1000 subscribers. The more advanced features such as automation and tag-based triggers are part of the premium pricing.

Spotify

Spotify AB was founded in 2006. It is a digital music service providing users with access to millions of songs. Spotify is available on computers, smartphones and other devices. Users can listen to music for free but are exposed to regular adverts. The premium version offers listeners an ad-free experience and the ability to download the music and listen offline.

EventBrite

Eventbrite Freemium Business Model

Eventbrite Inc. was founded in 2006. It runs a self-service ticketing platform. The technology allows anyone to create, share, find and attend new events. The online service is used in 187 countries by over 60,000 event organizers. It books over 3 million tickets per week.

Eventbrite allows people to set up events for events that do not charge for tickets. If users want to charge for tickets Eventbrite then charges different levels of commission based on the level of features you need.

How To Create and Sustain A Freemium Model

1. Sustain the high value of free and premium offerings. To succeed with freemium, companies need to sustain the value offer relative to other offers in the market. Also, the free and premium value offer needs to refined and improved to reinforce the value proposition, e.g. a better user interface, additional new features, further compatibility with other systems and solutions and more free space.
2. Optimize the balance between free and premium offerings. Reaching the right balance between free and premium offerings is crucial for a freemium business. There is a danger of offering too much for free, thus eliminating the incentive for users to upgrade to the paid version.
3. Extract value from free users. Free users should be treated as a valuable resource and as a marketing tool rather than as operational costs. They provide opportunities for testing and ideating the freemium portfolio and provide invaluable feedback when it comes to product usability and features. In companies, free users can also serve as a gateway to potentially lucrative cooperation as they can suggest the product to their employers, as well as peers and co-workers.
4. Learn continuously from user behaviour. Understanding the users’ behaviour is a key competitive advantage for a freemium business. Successful companies spend a lot of resources in building their data analytics capacity. They harness this knowledge to optimize user-management and tailor their premium offers.
5. Targeting using product bundling and integration. To reach a broader scope of potential users, it is useful to test product bundling and expand integration with other market players. As an example, to expand the distribution of its service and mobile app, Spotify signed partnership agreements with mobile operators.
6. Minimise costs of free-user management. Costs are an important aspect for any company, yet are an especially important aspect for freemium companies since free users generate costs related to service and maintenance, data usage and cloud computing, but no direct income is earned from them. Therefore, successful freemium businesses work hard on reducing user-servicing costs by implementing automated and mass-customised customer relationship platforms.
7. Aggressively internationalize. Once the freemium company is established in the local market, it should consider internationalisation. For instance, LinkedIn focused on growing its presence in China, which in 2015 became the company’s second-largest market for new signups behind the USA.
8. Access new technologies and users through mergers and acquisitions. Freemium managers should consider mergers and acquisitions to add new technologies or to reach new users and customers. The successful freemium companies are constantly searching for complementary and supplementary capabilities that are aligned with their strategic orientation.

Summary – Advantages and Disadvantages of Freemium Business Model

Choosing the freemium business model for online digital business means choosing to compete in a particular way.

Offering a service for free does not guarantee success.

First of all, the free offer must appeal to the target market, and it must satisfy an existing or a latent need of potential users. More importantly, this target market must include individual users with buying potential.

Before choosing to compete on a freemium business model basis, evaluate if your business can pursue the innovation and growth strategies needed. If this strategy is not an option in the long run, then it is worth considering other business model configurations.

The logic of the freemium business model requires not only a constant new user acquisition, but also persistent user retention. The perceived customer value should inherently increase to keep users loyal and increase their switching costs.

Running the freemium business model in online markets requires a deeper knowledge of users and consumers that goes beyond traditional market research.

Big data and web analytics are relevant and necessary capabilities needed.

Carefully testing and identifying the most effective cut-off between free and premium offerings is crucial for profits.

Altogether, the business strategy, the business model configuration and the Freemium business model require strategic choices need to be aligned and continuously reviewed to build a sustainable business.

https://www.garyfox.co/