Freemium Business Model – The Benefits For Your Business

Freemium pricing strategies might already be ubiquitous in the smartphone and mobile gaming industry, but it’s starting to enter into the tech space more broadly as well. 

The best things in life are free, especially when it comes to implementing freemium models. It is a common adage in the business world that you have to spend money to make money, which is undoubtedly true.

However, utilizing the power of a freemium model can prove extremely beneficial for enticing and retaining new customers that could potentially turn into paying customers.

Companies are always on the lookout for new and creative ways to set themselves apart. And one key indicator in differentiating your brand is determining what additional features you can optimize or implement to entice new users so that they want to learn more.

In this article, we’ll cover: 

What Does “Freemium” Mean?

freemium meaning

The term freemium is a mashup of the words “free” and “premium.” It is a strategy that some companies use as an acquisition business model to entice already-existing and new users with either free or premium services for an additional cost.

The model typically involves companies providing users with a free trial, product, or service to integrate them into the first stages of their sales funnel, creating a relationship that will lead to future transactions. By providing these resources upfront for no cost,  free users receive the base level product or service and the basic features it possesses while also having the option to supplement with additional premium features for a fee, thereby turning them into paying customers.

Technology companies such as mobile apps, gaming, and online companies are frequent users of the freemium model as a leading drive for their digital PR strategy.

Understanding a sales funnel is vital in developing an effective marketing strategy. Learn more in What is a Sales Funnel – What it is And How it Works.”

 

 

What Are the Benefits of the Model?

The freemium model is an excellent method to cash in on customer loyalty and benefit from your already-existing users. It also provides potential new customers with the option to test out basic services via a freemium trial, learn about other offers, and opt to pay for supplemental features.

It creates a method of diversifying your user base while also facilitating extra opportunities to entice all customers with additional value outside of their free plan, thereby generating more revenue for your business.

The basis of the freemium model is driven by encouraging users to try new premium features. A bi-product of this lead generation technique is that it motivates companies to continuously optimize, update, and implement new products for customers to pay for, driving companies to innovate their freemium and paid offerings, increasing value to the business.

 

 

How to Use the Concept to Your Advantage

While creating new pay features is an effective way of generating revenue, it is crucial that the free plan you are already offering is appealing and provides enough value that potential customers are interested in signing up for the free trial.

Thus, it is vital to invest appropriate resources into developing user experience for the free plan before investing in additional features and utilizing the freemium model.

One of the critical challenges of using a freemium model is pricing. You want to earn enough from paying customers to be profitable for the company, but you don’t want the cost to pay to be so high that free plan users do not want to transition over to premium services.

The concept of freemium is all about creating a balance of desired value for the free plan while making whatever premium service you are offering so enticing that customers are willing to pay for the new product or feature. The financials surrounding offering a freemium model will vary from company to company, depending on what resources are available.

Many companies that successfully implement a freemium model do so by coupling their approach with a community marketing strategy to engage their current users and utilize that following to entice their target audience.

 

Community marketing allows businesses to engage with their users while acquiring new customers. Find out more about  Community Marketing – How Community Fuels Growth.”

 

 

Examples of Successful Freemium Models

Tinder
freemium tinder

One of the most popular dating apps globally, Tinder, has built its name based on a freemium offering. Since its launch back in 2012, the company has acquired millions of free users across all continents and has gradually transitioned into offering premium services to up the ante and provide users with supplemental features such as an ad-free experience, unlimited likes, and Passport.

Passport allows users to match and chat regardless of borders simply by searching a specific location or dropping a pin on a map.

Before the new additions, Tinder was able to survive solely based on its free users. However, once it had a large enough user base, it could branch out into freemium services to provide extra incentives that encouraged users to pay.

Thus, the subscription-based service Tinder Plus was born in March 2015, and customers can pay for premium options like those listed above.

Having seen a significant return from Tinder Plus, the company took things one step further by introducing Tinder Gold in 2017, which offered even more premium services for a price. This service features all the same perks that come with Tinder Plus, with additional incentives, including seeing which users like you before you even swipe right or left.

Tinder is one of the best examples of a company that took a free version of a product and transformed it into a multi-million dollar empire. And it is still expanding on its freemium model with testing currently taking place for the app’s new top-level subscription service, Tinder Platinum, which provides users with even more exclusive offers.

Spotify
freemium spotify

Music streaming service Spotify has seen significant growth since its launch in 2008, now possessing 299 million users, including 138 million subscribers.

Users can select from three different subscription services, the first being a free version that allows you to download the app (or listen in the web browser of your choosing) with access to unlimited streaming on an ad-supported structure. Users can indulge in their favourite music, podcasts or videos on-demand.

However, they can also opt to pay for either Spotify Premium or Premium Family should they wish to listen to content uninterrupted by ads. Additionally, to appeal to a younger demographic, the company also offers its Premium service at a lower cost for students, creating an incentive to sign up, diversifying their user base and opening themselves up for increased revenue.

Dropbox
freemium dropbox

Cloud storage service Dropbox has been supplying users with the ability to store, share, and backup their files from anywhere in the world since 2007

It successfully utilizes a freemium approach by tempting potential users with a free plan for up to two gigabytes of storage. However, it doesn’t take as long as you might thing to burn through two gigabytes, especially when storing images and video files.

From there, customers can opt to upgrade to the Pro plan for a monthly subscription fee should they require more space, which provides users with significantly more space, one terabyte.

Key Takeaways

Freemium services provide a low-cost, mutually beneficial option for a company to develop a relationship with its users while initiating a process that serves to entice and diversify its customer base with a free trial to test out a product or service, ultimately generating more revenue.

They also provide incentives outside of attracting new customers by motivating organizations to be as imaginative as possible to set themselves apart from the competition, which leads to more resources devoted to research and development.

In the end, it’s a win-win scenario!

Avatar

Written By Emily Rumball

A Content Writer at Advesa, Emily is a self-proclaimed tea addict (her favourite being a nice, strong English Breakfast), animal lover, and eager traveller. When she isn't jet-setting off to the next far off destination, she enjoys spending quality time at home in Vancouver.