How the Freemium Model Works

How the Freemium Model Works

Freemium is a business model that allows companies to provide free goods or services with minimal features and the choice to pay for more features. This marketing tactic enables businesses to expand their customer base at a low cost.


Freemium: What Is It?

The term "freemium" refers to a business strategy where companies offer a product or service with basic features for free and charge for a premium version with more sophisticated functionality. Startups and SaaS (Software as a Service) businesses use the freemium strategy to quickly increase their customer base. The term "freemium" is a portmanteau of the terms "free" and "premium." Converting free users into paying customers may be accomplished through the use of this pricing strategy.


How Freemium Works

The freemium business model attracts customers by offering a free version of the product. Users can keep using the free product, but businesses will use various tactics to entice them to buy the premium version. In order to encourage free users to convert to paying customers, there is typically a big jump between the free tier and the premium tier.


5 Advantages of Freemium

The freemium model has a number of benefits. Because it provides the following advantages, this business model is becoming more and more well-liked among software developers and mobile app developers:

1. Acquisition: There is a low barrier to entry for new users because freemium products and services do not require a credit card or a time-limited free trial for onboarding or activation. Additionally, this could encourage more users to try a product, which lowers the cost of customer acquisition for the business.

2. Expansion: SaaS businesses and startups frequently use freemium pricing models to quickly build up a large customer base. Early growth can be influenced by word-of-mouth advertising, referrals, and network effects for well-liked freemium goods and services.

3. Retention: The longer a user uses a freemium product or service, the more dependent they will be on it. This dependence promotes retention and acts as a safeguard against the competition because long-term users are less likely to switch to competing offerings.

4. Income: Although freemium items are available, many collect user information and metrics and display advertisements to free users. The ad-free option can be used to encourage free users to make the purchase. If businesses grow to the right size, these monetization methods may be worthwhile.

5. Flexibility: A lot of freemiums satisfy customer needs. However, some free users will quickly upgrade to premium users. This versatility appeals to both new customers and the free user base.


3 Disadvantages of Freemium

There are some drawbacks to the freemium model. Consider the following pricing strategy disadvantages:

1. The churn rate: Well-designed freemium products can keep users interested for a long time, but many will grow tired of not being able to access the premium version's advanced features and functionalities. Rather than upgrading, users frequently churn out, which means they stop using the product entirely. A high churn rate may indicate that a company's customer experience needs to be improved.

2. Customer Lifecycle: The customer lifecycle of freemium products and services can be brief. Most freemium products have a disproportionate number of free users, making it difficult to convert these users to paying customers (known as increasing the conversion rate). Users can rely on free use indefinitely, so there is little reason to upgrade from the free plan to the paid version.

3. Desirability: Ideally, the freemium model perfectly balances the usability of free services and the desirability of premium features. In practice, this is difficult to achieve because many potential users have diverse needs and interests. Some people will want the extra features, while others will not.