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вторник, 25 июня 2024 г.

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

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

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.

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

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


Skype freemium business model

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://tinyurl.com/4nny8n7k

понедельник, 28 августа 2023 г.

55 Business Model Patterns. #18. Freemium

 


The basic version of an offering is given away for free in the hope of eventually persuading the customers to pay for the premium version. The free offering is able to attract the highest volume of customers possible for the company. The generally smaller volume of paying ‘premium customers’ generate the revenue, which also cross-finances the free offering.

Examples: Iconic Cases

How they do it: Hotmails basic inbox and email service was offered to customers for free. However, the inboxes came with limited storage for messages. Users could upgrade their storage by paying a monthly or annual fee.


Below, the top industries for the pattern "Freemium" are displayed, in order to get insights into how this pattern is applied across different industries. We've collected data from 5 firms using this pattern.

Below, the pattern "Freemium" is analyzed based on co-occurrence, in order to get insights into how this business model pattern is applied in combination with other patterns within the firms we studied.



https://businessmodelnavigator.com/

среда, 26 июля 2023 г.

50 Business Models built on free

 


In his latest book Free: The Future of a Radical Price Chris Anderson lists fifty examples on free business models organized into three groups, Direct Cross-Subsidies, Two-sided markets, and Freemium. Below you have the list for free, that I hope Chris doesn't mind. Buy the book to get examples for each + the rest of the book (Freemium):

Free 1: Direct Cross-Subsidies - Any product that entices you to pay for something else
  • Give away services, sell products
  • Give away products, sell services
  • Give away software, sell hardware
  • Give away hardware, sell software
  • Give away cell phones, sell minutes of talk time
  • Give away talk time, sell cell phones
  • Give away the show, sell the drinks
  • Give away the drinks, sell the show
  • Free with purchase
  • Buy one, get one free
  • Free gift inside
  • Free shipping for orders over $25
  • Free samples
  • Free trials
  • Free parking
  • Free condiments
Free 2: Three-party markets - A third party pays to participate in a market created by a free exchange between the first two parties
  • Give away content, sell access to the audience
  • Give away credit cards without a fee, charge merchants a transaction fee
  • Give away scientific articles, charge authors to publish them
  • Give away document readers, sell document writers
  • Give woman free admission, charge men
  • Give children free admission, charge adults
  • Give away listings, sell premium search
  • Sell listings, give away search
  • Give away travel services, get a cut of rental car and hotel reservations
  • Charge sellers to be stocked in a store, let people shop for free
  • Charge buyers to shop in a store, stock seller merchandise for free
  • Give away house listings, sell mortgages
  • Give away content, sell information about the consumers
  • Give away content, make money by referring people to retailers
  • Give away content, sell stuff
  • Give away content, charge advertisers to be featured in it
  • Give away resume listings, charge for power search
  • Give away content and data to consumers, charge companies to access it through an API
  • Give away "green" house plans, charge builders and contractors to be listed as green resources
Free 3: Freemium - Anything that is matched with a Premium Paid Version
  • Give away basic information, sell richer information in easier-to-use form
  • Give away generic management advice, sell customized management advice
  • Give away federal tax software, sell state
  • Give away low-quality MP3s, sell high-quality box sets
  • Give away Web content, sell printed content
  • Give away online games, charge a subscription to do more in the game
  • Give away business directory listings, charge businesses to "claim" and enhance their own listings
  • Give away demo software, charge for the full version
  • Give away computer-to-computer calls, sell computer-to-phone calls
  • Give away free photo-sharing services, charge for additional storage space
  • Give away basic software, sell more features
  • Give away ad-supported service, sell the ability to remove the ads
  • Give away "snippets" sell books
  • Give away virtual tourism, sell virtual land
  • Give away a music game, sell music tracks
Free 4: In the book Chris also mentions a fourth type of Free that is not listed as it is not considered a business model: Nonmonetary Markets. An example that comes to my mind is to spend nights writing a blog without advertising to build a reputation, continuously develop ideas and concepts, keep yourself updated in a field, get feedback, and get into contact with smart individuals...

четверг, 27 октября 2022 г.

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

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.

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

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.

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