Freemium is a business model by which a product or service (typically a digital offering such as software, media, games or web services) is provided free of charge, but a premium is charged for advanced features, functionality, or virtual goods. A good example of this is LinkedIn. Anyone can sign up for their free service however often it will not allow you to view certain individual’s profiles / email certain individuals unless you have the paid premium service. The model is generally suited to businesses such as software companies where the cost is negligible, meaning there is little cost to the business in giving it away for free.
An article by Fred Wilson (2011) states that “the best freemium models allow anyone to use the service for free and then convert the most serious/frequent/power users to paying customers”. Many newspapers are currently now swapping over to such a model as the print industry continues to die. Other good examples of the freemium model are Flickr, Vimeo and more recently Hootsuite (a social media management online tool). When signing up for Hootsuite all customers get a free 30-day trial option for the service’s Pro Plans, which offers a variety of premium features. Individuals are then encouraged to upgrade after their trial has ended. HootSuite however have stated that they will continue to offer their free service as based on surveys they have conducted, the company predicts around 95% of their user base will continue to use the free option.
Whilst companies like Dropbox and Evernote have been the poster kids for the Freemium model with billion dollar valuations, an article by Dmitri Leonov (Mashable, 2012) states that there are really only three main cases where a freemium model works:
- Paywall: The way the product is designed will encourage many users to jump over to the paid version. The longer you use the product the more value you get out of it. Example, Evernote.
- Network and viral lift: Dropbox has inherent virality and its value increases with more users (in order for you to share a folder the other person needs to be using it to)
- Ads: From a business point of view making money on ads is a lot less leveraged as it requires a huge scale to generate any significant revenue. You are better off charging $5 per month. Five bucks a month is a small price to pay to avoid hearing the same commercial every three minutes. Example, Spotify.
The gaming industry has also adopted the Freemium model which has proved to be very successful for games such as Angry Birds and Farmville. An article by Mashable (2011) states that the obvious benefit of this business model is the ability to attract more users with zero cost-of-entry, while generating potentially limitless revenue via consumable items. However, freemium games are controversial because they entice players to spend money. Many games, for example, create absurdly long wait times unless the user forks over some credits. This model however is proving successful with a sustainable and popular approach, especially in the gaming market, where in-app purchases account for 72% of App Store revenue.
Whilst Freemium appears to be a good way for online businesses like these to generate revenue, there are also some significant disadvantages to this model. Web users have been conditioned to think that most of the online services and content we love so much should be accessible for free. Furthermore it’s common for people to spend $5 on a vanilla latte but to agonize over paying $5 a month for a web service. That’s because a psychological barrier to paying for online services remains, and it’s hurting both consumers and businesses. Another area which has raised concerns is by having a free option in your offering consumers begin to anchor this value with the service. It therefore makes it very hard for businesses to then introduce paid options. This can lead to frustration, lower levels of brand loyalty and switching to competitors that offer the same service for free.
So what are your views on the Freemium business model? Do you see it as a good revenue stream for online companies? Or do you look elsewhere when you are asked to upgrade to a premium service? Keen to hear your views..