When it comes to pricing products and services, many strategies are available depending on the type of business selling them. However, one model has gained has gained significant popularity in businesses dealing with software and technology – the freemium model.
We’ve prepared a few of the best freemium strategies to get your target audience interested in becoming regular customers. But first, let’s take a closer look at how we define freemium and why it is such a crucial business model for today’s companies.
What Is Freemium?
Freemium is a business model in which a limited version of a complete product or service is offered for free, with the option to upgrade to the full version.
As you may have guessed, freemium was created by combining the words free and premium. While the free plan may offer specific basic functionalities, the premium program is supposed to provide a complete service package.
The key to success with a freemium pricing strategy is offering enough value in the free version to attract users while providing enough incentive to upgrade to the paid version.
The free content given to consumers in the freemium business model varies from company to company. However, offering enough value to motivate prospects to purchase the premium upgrade is generally considered a good idea.
Key Takeaways
Freemium is a unique business model and pricing strategy that entails a part of a product or service. The initial access is given to users for free with the option to acquire the complete offering after payment;
Freemium is especially popular in the area of software as a service (SaaS), as applications can be effectively fitted with this pricing model;
Assessing how much of the whole product or service to give in the free version varies from business to business, and each company establishes its unique rules and pricing options.
How to Define Freemium?
The freemium model is a business model where a product or service is provided free of charge, but customers can pay for premium features or enhancements.
The freemium model is often used in the software industry, where customers can operate a basic version of the software for free but must pay for a more feature-rich version or support and maintenance.
The main advantage of the freemium model is that it allows businesses to generate revenue from customers who would not otherwise pay for their service. On the other hand, the main disadvantage of such an offering is that it can be challenging to convert free users into paying customers.
The freemium model has been successful for many businesses, but it is only suitable for some business models.
For example, it works well for software companies like Spotify, where users can enjoy a basic version of the service for free but pay for premium features like ad-free listening and offline downloads.
Conversely, it might not be ideal for high-end luxury goods companies, as their products rely on exclusivity and premium pricing, making a free version impractical and potentially damaging to the brand’s perceived value.
If you are considering employing freemium features in your business model, carefully weigh the pros and cons before deciding.
Why Is Freemium Important?
The freemium model has become increasingly popular in recent years as companies look for ways to attract and retain customers. Many popular services, like Dropbox and Spotify, use a freemium business model. Here are three key benefits of the freemium model:
1. Attracts new customers
The freemium model allows companies to reach a larger audience with their product or service by offering a basic version for free. This broadens the customer base and increases brand exposure.
2. Incentivizes upgrades
The freemium business model incentivizes customers to upgrade to the premium version of a product or service. By experiencing the benefits of the basic version, customers are more likely to see the value in paying for additional features.
3. Generates revenue
Freemium can generate revenue from customers willing to pay for premium features. Customers who may have never considered paying for a product or service before could become curious and more likely to convert after experiencing the benefits of the limited version.
What Are The Best Freemium Strategies?
There is no one-size-fits-all answer when it comes to the best freemium strategies. However, there are some critical best practices to remember when developing a freemium plan.
1. Define the value proposition
First and foremost, clearly defining what value your product or service offers is crucial. What is the unique selling proposition that will entice users to upgrade to a paid subscription? The UVP (unique value proposition) is a key starting point when developing your freemium pricing model.
2. Assess the free content
It’s important to consider what features to offer for free and what features to reserve for paid users.
More free content can cannibalize paid subscriptions and make paid users feel like they need to get their money’s worth. If the premium version is not much better than the free version, users will not be incentivized to upgrade to the premium.
3. Categorize paid subscriptions
Finally, it is good to have a plan for how to convert free users to paid subscribers. What is the pricing structure for paid subscriptions? What sort of discounts or promotions can be offered to incentivize free users to upgrade? Developing a solid freemium strategy requires careful consideration of these and other factors.
4. Optimise user onboarding
A smooth and engaging onboarding process can significantly increase the likelihood of users sticking around long enough to see the value of the premium features. Provide tutorials, guides, and customer support to help new users understand how to use your product effectively. Ensuring that users quickly see the benefits of your service can encourage them to explore the premium options.
5. Implement usage limits
One effective strategy is to set limits on the usage of key features for free users. This could mean limiting the number of times a feature can be used, the amount of storage available, or the level of access to premium content.
As users become more dependent on your product, they may find these limitations restrictive and be more inclined to upgrade to the paid version for full access.
Additional Tips & Tricks
- The net revenue retention rate is 15% higher for companies that apply freemeum business model;
- An additional structure can be added to the premium version pricing of most products. Offering different levels of premium can entice customers to pick the one that suits their needs best;
- Any user that gains value from the free version of an application or service will feel like the premium version is even better. Ensure that the free version is good enough to attract and keep users interested;
- It’s a good idea to think ahead about each premium feature and how it fits into the pricing model of your product. If a premium feature does not appeal to many paid users, it could be offered as a part of the free version to provide more value to free users.
The Bottom Line
Freemium is a pricing strategy that offers a basic level of service for free, with the option of paying for premium features. The freemium model is often used in the software industry but can also be applied to other products and services.
In this article, we described what freemium is, why it can be a good business model for companies, and think through a few strategies for freemium plans. It’s up to you now to determine if freemium is the pricing approach you need to take for your product or service.
Freemium FAQs
A freemium application is any app that offers certain functionalities free of charge but includes the ability to upgrade to the complete service package. Many applications have adopted the freemium model as it nurtures potential leads into valued customers.
Freemium is a good strategy since it relies on basic human psychology. A free sample has been proven to increase the likelihood of prospects returning for more.
To put it simply, yes. Spotify utilizes the premium pricing strategy, and the results speak for themselves. In addition to specific features it only offers paid users, Spotify profits from the ads shown to free users.
A free trial generally offers complete access to a product’s services or functionalities, all of which expire after a certain period. With freemium, free users are not given full access but only a fraction of the functionalities that premium users might enjoy.
