Is Freemium the Right Business Model for your Company?

Phone screenshot of Spotify playlist Afoteou / Deposit Photos

Though you may not know the exact term used to describe it, you have likely come across 'freemium' business plans throughout your life. In fact, although eCommerce executive Jarid Lukin first coined the term in 2006, the concept has been around since the 1980s. What is freemium, though, and how does it work?

Combining the words' free' and 'premium,' freemium mostly refers to a business model in which customers have access to a company's basic services free of charge; they then have an opportunity to upgrade to a premium account for a fee (either one time, or ongoing). This, in turn, gives them access to an increased range of features and incentives. 

Whether you are an aspiring entrepreneur still formulating your business idea, or the CEO of an existing startup, you should carefully consider if freemium is the right type of business model for you. To help, we've compiled a list of pros and cons, including examples of the freemium model in action, to help you decide which is the best option for your organisation.

Pro: Consumers love free services.

Sometimes, a business must consider diversification from its current marketing strategy to propel its commerce forward. Taking a chance on adopting the freemium business model may be the best choice for your organisation.

Unsurprisingly, customers are likely to perceive that the benefits of the free product or service that they are being offered supersedes anything else; that is, when a service or product is of no cost to someone, they are more likely to engage with it, because they believe that they have nothing to lose. While that is true, it doesn't diminish the fact that freemium is also a great marketing tool for you, as let's face it: who doesn't love an opportunity to enjoy something without having to pay a single cent for it?

Pro: It's an excellent way for potential customers to decide if they want to invest in your services.

Now that you have a line up of potential clients within your grasp, you must act on their interest to seal the deal. By drawing in these future customers to try your service, you have an incredible opportunity to cement a lasting relationship with them. Make sure that you take full advantage of it and leave them wanting — and paying for — even more.

Whether you are offering a trial for a brilliant new Wordpress widget that you have developed and launched, or a breakthrough game that you want to share with the world, your free version should be almost like an audition for the main event; an example of this is Candy Crush Saga, a free-to-play puzzle game developed and released by King in 2012 for smartphones, internet browsers, and Facebook.

Although the game is free, players have the option to access additional in-game purchases; in 2018, these purchases accounted for an average revenue of around $2.6m per day, a staggering 63% of the company's App Store and Google Play product catalogue. This is an excellent example of a business that has utilised the freemium model to their benefit, becoming highly successful as a result. 

Con: Businesses might be giving away too much through their basic, free subscriptions.

Offering non-paying members an exceptional experience — one that will lead them to invest money in a premium subscription of your services — is undoubtedly a must, but making too much available is not a wise move, either. If you give potential clients indefinite access to everything that they need from your company - and provide it free of charge - they will have no reason or desire to pay for additional services.

To avoid this, be sure to limit the number of features offered to free subscribers. Not just with regards to the features provided, but also in terms of data capacity, licensing, and technical support provided. You might even consider placing a limit on the amount of time that a given user can access the free version without upgrading their account, although this is a step more towards a free trial business model (such as that practised by Netflix).

Con: If you are not offering enough services during your trial, consumers could potentially decide that your business is not for them.

Of course, the other side of this coin is that offering too little can be off-putting to potential customers. Patrons who are not given an ample amount of access to the potentially game-changing services that your company provides may be deterred from investing in a premium account and moving forward with you. Indeed, they may opt to subscribe to your competitor, instead.

This outcome can be avoided (or at the very least, become less likely) if they can understand what your company is about, and how, as a paying customer, they could benefit from utilising your full range of services.

Unfortunately, seeing a lack of public interest as well as a possible consequential decline in overall sales could also lead to a decrease in employee morale, too. Naturally, this can lead to further issues within your company, including high employee turnover and a drop in productivity.

The key to avoiding all of this is to decide the perfect balance of services available with a free membership, and ensure that it attracts enough paying customers to make your business profitable. This decision can be made in many ways, most notable of which is by researching similar industries that have successfully capitalised on the freemium business model in the modern era.

---

Though the benefits of the freemium business model can outweigh the drawbacks for many different company niches, the structure is not necessarily for everyone. You should consider all of the potential pros and cons before you commit to any decisions. However, examples of business that would benefit from the freemium model include blogging tools (for example, widgets and plugins), smartphone apps, videogames, cloud services (Apple's iCloud, Google Drive, or Dropbox as just three examples), and streaming services (such as Netflix or Spotify).

Though these are just a handful of examples, you must ultimately consider the framework of your own business and decide if the freemium business model has the potential for profitability within it. Numerous other models might be a better fit, such as one-for-one, cash conversion or subscription-based, so take the time to conduct your market research thoroughly.

What is your take on the freemium business model? Is it a solid strategy, or too generous? Let us know your thoughts in the comments below.