The last few years have seen a boom in free offerings, especially on the Internet. This begs the question, how can you make your business model sustainable and capable of generating revenue? The Freemium business model addresses this need by accompanying an offering of basic free products and services with additional premium paid services. Read on to discover the features and benefits it can bring.
What is a Freemium business model?
‘Freemium’ refers to a business model that provides both free basic services and paid premium services. The word ‘Freemium’ comes from the combination of “Free”, and “Premium”. In essence, the Brand provides a basic version of its product or service totally free of charge and one or more paid versions that provide additional features.
In the Freemium model, the user base that benefits from a free, no-strings-attached offering is very large, which allows for economies of scale and lower costs. Who covers these costs? The small group of customers who pay to have the premium version.
It should be noted that most users who choose the free version will never subscribe to the paid premium services. Less than 10% will eventually subscribe! This small group of people must be able to subsidise the users who use the free services. Therefore, to make such a model sustainable, it is essential to pay attention to two parameters: the average cost of the service for the non-paying customer and the conversion rate of users from free to premium tiers. It is essential to find that balance that allows costs to be fully covered and gains to be made.
The freemium model is mainly web-based. By now most platforms provide the user with several options to choose from, including a free level with basic functions. The examples are really endless. Take Spotify, the digital music and podcast playback service. With their free account you can listen to all songs without limit, but you cannot choose a particular song because the playback is random. In addition, it is constantly interrupted by adverts. To get around these annoying inconveniences, one can subscribe to the premium version.
Why the freemium model pays off
It may seem obvious, but receiving a product or service at no cost is always a very attractive value proposition for users. The demand generated by something free is far greater than that produced by even the lowest price of a penny.
A large pool of users, even non-paying users, can generate value. How? By talking about the Brand, through word of mouth, content sharing and reviews. Plus, very importantly, it allows the Brand to acquire data! Customer data is an invaluable resource, because knowing your target audience means being able to generate an offer in line with their needs and improve their Customer Journey.
Another benefit to the user, which reflects on the Brand, is the ability to “touch” the product or service before deciding whether to purchase the paid version. The customer needs reassurance and sometimes reviews from other customers are not enough, especially if it is an innovative offering.
Let’s look at this in a real life example. You run a physical store and want background music. You sign up for Spotify, but you are not sure you will like it, so you start trying it out at the free level. If it proves to live up to your expectations, then you will pay to upgrade. As a result, all you remove the advertising that would have annoyed both you and your customers. Perhaps, in the absence of the free plan, you would never have tried this service.
Freemium model turned upside down: the example of insurance companies
An interesting case is the model of insurance companies, which is called ‘Freemium flipped’. In the classic Freemium model there is a small segment of customers who, by paying, support a large pool of customers who do not pay. By contrast, in the flipped Freemium model, exactly the opposite happens.
In the case of insurance, in fact, we find a large pool of customers who regularly pay a small fee to protect themselves from unlikely (but not impossible) events. The slice of customers who actually benefit from insurance is much smaller, and we are fully aware of this. However, we still have an incentive to pay for insurance. If these unfortunate events were to occur, the expense to be incurred without insurance would be much higher. In this model each of the paying customers could join the group of beneficiaries at any time.
Example: if we make a lot of highway trips, it is likely that we will include windscreen wiper replacements in our car insurance in case it gets hit by a pebble. If this never happens, we would continue to be part of the large group of drivers who get nothing in return. But if it did happen, we would join the small group of beneficiaries.
Creating a sustainable Freemium model
We know that it is not possible to base a business model entirely on free products. In order to generate a profit, each company still has to find a way to monetise and earn solid revenues. If they don’t do this, the business won’t not be sustainable!
It is true that in recent years there has been a boom in free offerings, especially on the Internet. This is partly due to the reduction in costs of some services (the use of platforms, online storage spaces, and so on). But to make the business model viable, it is necessary to put optional paid services alongside the free offering. The Freemium business model meets this very need.
Does it always pay to use this model? It certainly depends from case to case, but in general it does not pay off when users can enjoy the premium product or service despite not having paid for it. If this happens, the economic viability of the model collapses, and the demand for payment becomes scarcely credible. To put it bluntly, if our premium offering consists entirely of pdfs and newsletters, there is a risk that this content will be forwarded to other users without paying anything. So, keep in mind that the Freemium model is feasible only if the user cannot avoid paying to get the additional service.