The digital era is transforming how people run their businesses. The coming of the internet forced businesses to digitize their operations. Today, people are selling and buying items virtually. This aspect is making it easy to run businesses and lower operational costs. However, digitization did not change the way people do business. It also gave birth to new business models. You do not have to use the old B2B or B2C concepts of running a venture.
Rather, you have a wide range of models that you can customize your business to use in its operations. The Freemium business model is one of them. Here, we help you understand what this model entails, as well as its benefits and shortfalls. So let’s keep reading to get to know more!
What is the Freemium Business Model?
The term freemium comes from two words, “free” and “premium.” this means that it involves a free and premium package. In the free package, the users get basic features that they can use to test the effectiveness and usability of the services offered. If they find the product useful, they can upgrade to the premium package.
The premium package comes with advanced features at a cost. The freemium model is different from the free trial. Unlike the free trial that offers full features for a given period, the free package is free forever. Also, it does not offer premium features unless when you upgrade to a paid plan. The other name for a freemium model is the internet business model.
How Does Freemium Business Model Work?
As the name suggests, freemium combines two packages. You offer your basic services or features free and use the aspect as a strategy for winning premium users. The idea behind this model is that customers will buy or pay up a product when they test it. The free plan offers the opportunity for the customers to test your services and make informed decisions. In other words, this model features a two-tier customer acquisition process.
The first tier is for the free users who enjoy limited features. The second tier is of the premium users who upgrade to advanced plans to enjoy additional features and add-ons. In essence, the first tier helps you to bring in the customers. They start using your product or services up to the given limits. With the desire to get more benefits from your product, they opt on investing their coins in it by upgrading to the premium plan.
However, you must be conscious when using this model. Your limitation approaches should inspire the users to upgrade. Hence, the free plan should provide value to the users, making them find it worth spending their money on the premium plan.
Examples of Freemium Business Model
As noted above, freemium is also known as the business model of the internet. The reason for this name is because it is a common approach for many online businesses. Many companies that over virtual tools apply freemium as their main business model. For this reason, there are countless examples of businesses operating on this model.
Spotify is a good example that employs the freemium approach. This app allows users to listen to their favorite music. Under the free plan, users can only listen to music online and cannot skip to the next track. These limitations cause friction to the users forcing them to move to the premium plan. The premium plan comes with additional features like listening to music offline, ad-free, unlimited skips, and others.
Evernote is another business applying this freemium model. This organizing and note-taking app use a number of devices you can sync, maximum note size, uploads, and customer support to encourage upgrades. For instance, the basic free plan offers limited customer support only available at online forums. Other premium plans have online chats and email support options.
Pros and Cons of the Freemium Business Model
Like every business model, freemium is not immune. It comes with a share of pros and cons. Here they are:
Pros
Offers your business a competitive advantage
Modern customers want to test your products before they make a purchase decision. They do not want to spend their money on products that won’t serve their purpose. The freemium model steps in to fulfill this desire. It allows customers to use the tool for free and upgrade to enjoy additional features. By allowing them to do this, you win a competitive edge offer other businesses that do not have such options.
Perfect marketing option
No doubt, marketing is not a walk in the park. You need to invest your money in advertising to convince customers that what you are offering is the best. As you know, customers believe in touching and testing. This aspect is hard when dealing with digital products.
With the freemium model, you overcome this challenge. You allow them to use the product and decide their next course of action. So, when they enjoy the free version, they are likely to upgrade to the paid one, making your marketing easy.
Powerful lead generation
In the current era, your business success depends on your customer database. A business with a strong and solid database will be ahead of one with limited customer information. Freemium is a good way of accessing customer information and expanding your database. As the customers subscribe to the free plan, you get essential data that you can use to generate leads in the future.
Cons
Low conversion rate
Many people love free things. This aspect is not different in the freemium model. While you will attract many users to the free plan, only a small percentage will upgrade. The conversation rate ranges between 2% to 4%. For this reason, you need to attract a large audience to generate an adequate return on your investment.
Require intensive investment
Developing a digital product is a time-consuming task. You need to invest both time and money. When using the freemium model, you need to aware of the possible low return on investment. Hence, if you do not have other sources of funds, it can be a costly model to operate.
Conclusion
In a word, the freemium model combines free and premium packages. The model helps you to attract customers and offer a competitive advantage. Also, it enables you to get useful information about the users that you can use in future lead generation. However, it has low conversion rates. So, you need to be conscious of these aspects before considering them.
