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Home » Freemium Business Model: The Secret To Getting New Users

Freemium Business Model: The Secret To Getting New Users

    A freemium business model works by asking users to sign up for the basic version of your offers for free.

    The basic must not be too limited else they walk away. And it must not be too complete that they see no need to upgrade.

    But the questions are:

    • How do you make profit when you are offering something for free?
    • How do you persuade enough free users to pay for the premium package?

    At the end of this article, you will learn:

    • Why is the freemium business model innovative and what are its success factors?
    • What makes this model the best to start with when you are entering a new market.
    • Examples of businesses who got massive users in no time and how they did it.

    This article explores the freemium business model meaning and how you can apply it to your business.


    Freemium Business Model Meaning

    In 2006, Fred Wilson gave the first definition of the freemium business model in his blog:

    “Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value-added services or an enhanced version of your service to your customer base.”

    Let’s make an analysis of Fred’s definition.

    Give your service away for free, possibly ad supported but maybe not…

    Give something away for free and display ads as an extra source of income.

    We see this with developers creating free mobile apps but forces you to watch their ads.

    … acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc,…

    The entire essence of giving your products or services for free is to win more users.

    Users are quick to getting free offers and would inform their family and friends about it.

    …then offer premium-priced value-added services or an enhanced version of your service to your customer base.

    The premium service does not differ from the free service. It’s advanced of the free.

    When users pay for the premium package, they get more features not accessible to the basic users.

    What is freemium model?

    “In the freemium business model, you give away the basic version of your products or services for free, hoping to convert enough users to pay for the premium version.”


    Best Freemium Business Model Strategies

    1. Time-Limited

    This is a model type where you offer a user your service or products for free for a limited time period.

    Once the time elapsed, the user will either pay for a premium version or stop using your service.

    Advantage: It is a straightforward way to separate users seriously with business and those who are not.

    Also, users don’t have to stay long before you delete their contents to save storage space.

    Disadvantage: Many users will be reluctant to try the service since they know you will kick them out after the time trial.

    I called this the free trial model. It’s more of a sales strategy than a freemium business model type.

    Freemium Business Model Examples:: Linkedin Premium free trial


    2. Feature-Limited

    In this model type, you offer the basic version of your service and the advanced one as a premium version.

    You limit access to pro features you know will be most important to enhance their use of your service.

    Advantage: You will attract a lot of new customers, of which a certain percentage may convert later.

    Customers will engage more and become loyal to your business since they will have the service forever free.

    Disadvantage: Your expenses (website storage space) will increase quickly because of the growing number of new free users.

    Again, how will you know you are not giving too little or too much of your service for free?

    If it’s too little, users will go away. And if you give too much, users will not upgrade.

    Freemium Model Examples: Jiji


    3. Seat-Limited

    The seat-limited freemium model type operates on the volume capacity.

    E.g. Here you limit the number of users or uploads or storage space.

    Advantage: You have control over the number of items a user can access. This may prompt those who need more to pay for the premium version to unlock more space or users.

    Disadvantage: User can open multiple accounts which can still make up for the space needed.

    Freemium Business Model Examples: Dropbox, Google Drive.


    4. Customer Type Limited

    This is a freemium business model where you offer services based on categories of customers.

    You offer free to low-income earners, students, or charity groups.

    And charge others outside these groups for the premium version.

    Advantage: Those who cannot afford your service will accept your offer, but later to paying customers.

    Disadvantage: It’s difficult to know the financial status of the customer. An unemployed person using your free service can still claim to used to be unemployed seven years after.

    Freemium Model Examples: Example: Liquid Web Hosting, Canva.


    How To Apply The Freemium Pricing Strategy To Your Business

    1. Leave Your Branding On

    Nothing irritates a user more than the text, “Powered by …” in the products.

    Or a visible watermark on the product’s output.

    Here, they are still getting all they want, but your branding is still on it.

    And this is good for SEO as you will get lots of backlinks.

    For paid users, give them the option to not only remove the branding but also place theirs.

    2. Let Them Have A Taste

    Another great way to maximise the freemium business model is to give them full premium trial.

    Let them experience what the premium version of products before returning to free.

    And once the user is almost exhausting the limit of the free version, give two weeks premium trial.

    This is most common to Saas businesses.

    3. Give A Gentle Reminder

    Don’t make a mistake of removing the premium option from view.

    Place it in a position where every free user can glance at once.

    This way, you are reminding the free users that there is a better option that what they are using.

    It then becomes easy for a user who sees value with your product to upgrade.

    4. Use The Penny Gap Strategy

    Penny gap is that price you charge that is close to free.

    Example is with Etsy charging $0.25 to list on their website.

    That’s a small price for someone serious about selling.

    Even though some research claim a lower fee still had the same effect as the actual upgraded fee.

    Try the methods above to know what work best for you.


    Success Factors Of The Freemium Pricing Strategy

    1. Zero Marginal Cost

    In cases of digital products, the marginal cost is almost zero.

    What is marginal cost?

    It is the total cost of production that comes from producing extra of a product.

    So, producing another eBook after the original is free – only needs to copy or download.

    2. Many For One

    This means that someone else payment for one covers for what many are enjoying for free.

    This happens when you receive a free sim card and you pay with your constant recharge.

    Another is when ladies enters a club for free but guys have to pay, thereby covering the ladies’ free entry.

    3. Effect On Consumers

    FREE speeds up the buying process, giving you a vast database of consumers’ profile.

    Also, while FREE maximizes your reach, it can reduce customers’ commitment towards your products.

    The major cause of this effect is the penny gap – more on this later.


    Freemium Business Model FAQ

    Is free trial the same as the freemium business model?

    No, it’s not. Free trials offer a 7, 14, or 30 days access to their products.

    Users are always reluctant to use such products since they know you will deny them access after the trial period.

    This is what Fred Wilson has to say about free-trial.

    And make sure that whatever the customer gets day one for free, they are always going to get for free. Nothing is more irritating to a potential customer than a “bait and switch” or a retrade of the value proposition

    What is the difference between freeware and freemium?

    Freeware is a lower quality service a company offers to gain a large user base and then offer the commercial (actual) products for a normal or even higher price.

    Freemium is offering a basic version (high quality) of your service with the hope to get many customers to pay for the addons (premium version).

    At 100 times, I will choose freemium over freeware.


    Freemium Business Model Conclusion

    While the fremium business model works best with Software as a Service (Saas) businesses, it favours all.

    Below are reasons you should embrace this model.

    • It gives you access to unique data for market research.
    • Your product value increases as the number of users increases. I call this Network Externalities.
    • Free users lower their value expectations since they are not paying for it. Only premium users will expect more.
    • You can reduce the cost of customer service by creating forums where users can post questions and assist one another. Example is the WordPress community.

    Many business have embraced the freemium model as it profits the two sides of the transaction – owners and customers.