Is The Freemium Business Model Right for Your Product or App?

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Freemium gets my vote for being the ugliest portmanteau in existence. But despite the unlovely combination of the words free and premium, the freemium business model, which gives away a core product, app, or service, but charges for upgrades, features, and additional space, is hugely popular. When the model works, it can be wildly successful: Think Gaming estimates that the addictive game Candy Crush is raking in $975,000 in revenue a day. But what works well for one product, doesn’t necessarily always lead to success–discover some of the key characteristics of profit-making freemium apps and products to help determine if freemium makes sense for your idea.

What is freemium?

A freemium product is available completely for free, in a useable format. For extra features, space, or perks, users need to upgrade to the paid version. Freemium is a great way to grow a user base — which is helpful for products that depend on users to provide content for the product — and it’s also a great way to allow users to try before they buy. Persuading users to pay for the premium features, however, can be a significant challenge.

Keep in mind that freemium is not the same as a free trial. When it comes to freemium, there’s no time limit that how long a product can be used without payment. Unlike a 30-day trial of Adobe, your access to Dropbox stretches on through eternity. The reason to upgrade to the paid version is not time, but rather that the premium extras–in Dropbox’s case, additional storage–is worth it to you as a user.

What are some attributes of great freemium products?

Freemium can easily seem like the perfect fit: After all, your product is amazing. Why wouldn’t people want to pay for it? In reality, the conversation rate of users upgrading to premium is generally quite low–David Cohen, founder and CEO of TechStars, estimates the conversation rate as being just one to two percent of all users. So what are the characteristics of a product, app, or game that would help edge that conversation rate higher?

Clarity:

Users should easily understand both what they get for free, and the advantages of upgrading. Think of a service like Spotify: If you join, you can listen to music, build playlists, and share playlists with your social network. It’s a simple and easy premise. Opting into the paid version gives you certain perks: ad-free listening, the ability to create new playlists on your phone, higher quality audio, and a way to listen to any song on-demand. It’s easy to understand both what Spotify allows you to do, and the advantages of paying for premium. Heavy users will appreciate the ability to kill ads and listen to any song on-demand.

Users are necessary for the product’s success:

Imagine if you had to pay to join LinkedIn. As Uzi Shmilovici, the CEO of Future Simple, wrote in a post for TechCrunch, “You wouldn’t want to be the only user of LinkedIn. You derive value from other people using it.” For LinkedIn, offering the product for free is essential; it allowed the company to build a huge portfolio of workers. Then, they just had to convince some percentage of users that the extra features were worth payment. While it may just be the unemployed and power users, like HR professionals, who are premium members, it’s enough.

Giving away a Goldilocks amount for free:

If the free version of your product provides too much, you’ll never convince users to upgrade. But, if the free version is too limited, users may shy away from signing up, or not see the value while using the free version. Think of services with a paywall, like the New York Times; determining how many articles can be read before hitting the paywall, and which articles, has been a tricky, frequently-changing, proposition. Recall that originally, before the ten-article-a-month limit, the Times put only op-eds behind the paywall.

Users provide more than they cost:

When it comes to a freemium product, the majority of people won’t be paying. So will these users be providing something you need? For instance, will additional users share socially, in a way that helps you market your product? Do you require a large user base to make your product function?

The more your product is used, the more users need it:

Some products become even more essential with increased usage. Any product that allows you to store and organize content becomes more useful over time as it begins to house more and more of a user’s content. Flickr is one example: Once you have all your photos uploaded and neatly organized, the idea of starting that project over is deeply unappealing. Easier to pay a set amount per year to keep your storage space, and your photos, intact. Dropbox users will find something similar: Even if another service came out that offered a larger amount of storage space for free, the hassle of transferring all your stored files over to the new service makes it easier to stick with Dropbox.

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