A Freemium Business Model - Is It Still Appealing?
A common question we are asked by B2B startups is “Should we use a freemium business model for our application?”. As it is a question we receive so often, we felt it worthy to create a dedicated blog discussing the subject of freemium business models.
In many ways, freemium has become synonymous with apps over the years, with 96.7% of apps being at least partly free on Google Play & 93.9% on Apple App Store according to latest data.
What is a freemium business model?
Jarid Lukin has summarized the freemium business model as “Giving 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.” And while it may seem counterintuitive to do this (You want to make money after all), the freemium business model does have many benefits. The remainder of this blog will look at some of these, as well as some of the common mistakes you should seek to avoid if you adopt a freemium strategy.
Freemium: Legitimate business model or another marketing tactic?
As we have already mentioned, freemium apps now make up more than 90% of app downloads, compared to just 50% a decade ago. This staggering statistic highlights the overwhelming growth and popularity of this model with many of the world's leading brands adopting such a model. From Spotify to DropBox and even LinkedIn, companies from various domains are utilizing freemium models.
But a question that must be answered - Is freemium a legit business model or just another ploy created by marketing departments. While the obvious answer is to scream business model, it deserves a little bit more in-depth discussion. Yes, freemium can be a successful model, but how many apps offer such a model, only to be used once and forgotten about? And while a certain percentage of people will upgrade to the paid version, the app must nonetheless pay for users that are unlikely to ever upgrade. For example, data from Databox shows that less than 10% of users ever convert to the premium version, leaving a 90% attrition rate.
Furthermore, a freemium business model is often accompanied by lengthy research into what aspects customers actually like, how much they would be willing to pay, and more. Despite these challenges, the fact remains that the model has become so commonplace in business, that many customers simply will not purchase without having access to either a free trial or a freemium product/service first. This means that with the tough competition on the market, it is almost impossible to get a consideration without offering a free version.
Getting freemium right: The DropBox example
And the examples of companies which thrive with such models are plentiful. Consider the DropBox business model, a company which received over $2 Billion in revenue in 2021. They offer a completely free version which users can avail of with no surprises. Once they build up trust, and highlight the value of the platform through lead nurturing, they seek to convert their free users to playing users. And they have been extremely successful at doing so, as evidenced by their financial performance.
Benefits of a freemium business model
Now, let’s take a look at some of the major benefits of adopting a freemium business model:
- Build up an initial user base: Today's app world is very much try before you buy, meaning customers are very unlikely to complete a purchase of an app/software without trying it first. This is true whether you are a B2C or B2B brand. By offering a freemium option, you can give customers a sneak peak of the service, before they need to commit to purchasing. And of course, the experience should be combined with effective lead nurturing efforts in order to supercharge its effectiveness.
- Word of mouth marketing: Whether you are a B2B or B2C business, offering a compelling free option is a great way to build trust with your audience. And when people have good experiences, they are much more likely to share those experiences with other people. This means, in essence, free advertising through word of mouth advertising. Provide a great experience and you will be rewarded many times over.
- Better solve audience needs… Aka market research: If your app is not converting people from the free to paid version, it may signal a bigger issue in the design of the app, or the way customers intend to use it. The statistics and data you can gather simply by building up a large free base will enable you to optimize your app to ensure it is meeting your audience's precise needs.
Drawback of a freemium business model
While there are countless benefits of a freemium business model, as already discussed, it must also be noted that there are a few downsides (or at least potential downsides) that should be considered before you jump in. These include:
- Burn cash reserves: The reality of a freemium business model is, despite any amount of optimization you may do and how relevant the offering is, that a significant number of people will simply not convert. This means you are spending money on people who will never become paying users.
- Need for a high conversion rate: While not necessarily a drawback, freemium models require a high conversion rate to offset the additional costs of new, non-paying users. If users are not becoming paid users, then you may quickly end up with depleted cash reserves.
Tips to kick-ass in the freemium business model world
All things considered, the freemium business model can be a great option for businesses, if done correctly. Here are some tips if you are looking to succeed with this model:
- Give users a compelling reason to upgrade: This is one of the biggest reasons why people don’t upgrade - They don’t see the value in the upgrade. By making it clear what the benefits of the paid over free version are, and by providing a great experience that leaves people wanting more, you can significantly increase the likelihood of boosting your number of conversions.
- Don’t make the free version “too” good: A less common problem we’ve encountered when it comes to freemium models is that the free version is so good that there is little incentive for the user to upgrade to the paid option. It’s crucial therefore that while you give a good experience with the free option, you always leave the user wanting more.
- Poor buyer journey: By not having a well oiled lead nurture sequence set up, you are leaving money on the table by not effectively guiding users down the marketing funnel. You need a very clear nurturing process from the moment they sign up or download - welcome emails and sending users ‘tips and guides’ for how to make the most out of your website/app are a must. Deliver high value customer service at all times and continuously advertise the option to upgrade to premium. These may seem like simple or obvious ideas but it’s important to think of strategies to get freemium customers through the funnel.
- Poor data tracking & no KPIs: KPIs and accurate data tracking are a crucial part of success when it comes to lead nurturing for freemium business models. If you do not have a list of KPIs (for example; no. of users after 6 months, % of users upgrading) then you have nothing to benchmark your actual performance against.
Freemium Business Models - Finding the balance
While it is not for us to say if freemium is or isn’t for you, we believe there are some compelling reasons to choose a freemium model, there are also some considerations that must be considered. The important thing is to ensure that your model matches your business ambitions, and be willing to adopt if the data suggests it. But a good rule for business in general is - Give your audience an amazing experience, and they will want more.