Freemium is a customer acquisition model adopted by businesses to introduce basic products or services to users for free. It is a part of the pricing strategy to entice free users to upgrade to premium versions with more advanced features at a paid subscription.
While it lets consumers try quality offerings at no cost, businesses acquire a large user base. Based on the initial market response, companies create a pricing plan for their premium services. This model aims at fostering the conversion rate of customers from being free users to paid subscribers. It is extremely popular with Internet-based ventures that seek to attract a significant user base at a reduced operational cost.
- Freemium is a customer acquisition model in which businesses make their basic services available to consumers for free. However, to enjoy advanced features, users need to buy premium versions of the same.
- The term stands for Free + Premium. It lets businesses decide on their pricing strategy and choose the one that suits their products and services.
- Software businesses first introduced the idea in the 1980s by making free versions of their products available to users with limited features or limited periods. It was termed the shareware strategy.
- Start-ups adopt the freemium business model to acquire new customers and build a loyal user base by offering free basic services.
How Does Freemium Business Model Work?
The term freemium is the merger of two words – Free + Premium. In the 1980s, many software businesses used this model to showcase their offerings with limited features or limited time to consumers free of cost. With this tactic, these companies wanted to ensure that consumers upgrade to premium versions of the same in the long run. At that time, this method got popularized as the shareware strategy.
In later years, it turned into the customer acquisition model for sellers and brands. They began adopting this model to offer basic services without charging anything. With that, they hoped free users would choose their paid versions with advanced features. Simply put, free basic services give consumers a glimpse of an offering and help them decide whether it is worth the monthly or annual subscription.
It is also a way to build relationships with potential users. When offering free basic services, the only thing a company needs to think about is ensuring premium products or services have additional features than free versions. Even though many consumers use free services, only a small number of them convert to paid services.
Freemium And Media Streaming
Media streaming services frequently use free basic services. Customers can open freemium accounts with these services and access digital media without having to pay anything. There is, however, a restriction to the number of music or movies or shows they can listen to or watch monthly or annually.
The service provider might ask users to subscribe to consume and download unlimited media on their devices for free. Those who do not pay for the service get limited access and face interruptions, like advertisements. As a result, they consider taking paid subscriptions for ad-free and better services.
In short, freemium services compel free users to go for a paid subscription. Or in other words, it is all about converting free users into paid users.
Examples of Freemium Business Model
To understand the concept more deeply, let us consider the following examples:
A gaming company developed a game for kids above 12 years. The development team was confident about the product and knew it would be interesting at play. It began offering the game for free for 30 days. After the 30-day trial was over, it would ask gamers to subscribe to it. As the game was one of the freemium games, teens got excited and found it adventurous.
The game required players to make calculations at every stage to proceed to the next level. Since it enhanced the cognitive skills of children and teens, the game influenced their parents as well. As a result, gamers decided to upgrade to the premium version by paying the monthly or annual fee per their suitability.
The massive success of Netflix as a streaming service has allowed many ventures to explore this segment. As part of their efforts to acquire new customers, these companies introduced freemium digital media streaming services. Technology giants like Apple, Comcast, AT&T, and Verizon have rolled out free streaming plans for consumers.
For instance, Apple offered a free year of Apple TV+ to everyone who purchased a new iPhone, iPad, Mac, or Apple TV box. Likewise, Verizon gave its wireless customers a free year of Disney+, and AT&T said it would offer regular HBO subscribers HBO Max for free. Similarly, everyone could access an ad-supported version of Comcast’s Peacock streaming service.
Pros And Cons
The freemium model allows start-ups to launch their products and services and acquire customers by offering free basic features. Besides, it creates brand awareness among the potential users. However, every model has its own set of pros and cons. Before any business opts for this type of pricing strategy, it needs to know the advantages and disadvantages.
- Adding the word “free” to the model’s name makes it more appealing to buyers, who are always willing to try anything available for free of cost.
- It allows businesses to acquire new customers, build a loyal user base, and convince them to upgrade to advanced paid services.
- Customer acquisition becomes easy and cost-effective.
- With their free basic services, companies still make money by collecting user data and making products ad-supported.
- By offering products and services to customers for free, businesses grab more attention in the market. Thus, they get a chance to prove the worth of their paid offerings.
- Free users get limited access to features of products or services. They need to pay to enjoy advanced functionalities.
- A poor marketing strategy can result in the loss of potential premium customers.
- If the number of free users is more, there will be a small percentage of them to convert into paid users.
- The companies that adopt the freemium business model have to burn their cash flows to support those not paying for the services.
- The continuous desire to convert free users into paid ones makes businesses invest more time, monetary and non-monetary resources.
- A business needs to maintain a balance between expenditure and acquisitionAcquisitionAn acquisition is defined as the act of taking over or gaining control of all or most of another entity's stocks by purchasing at least fifty percent of the target company's stock and other corporate assets. .
Frequently Asked Questions (FAQs)
Freemium is a customer acquisition model or pricing strategy to introduce basic services with limited access for free. After the free trial ends, users/consumers can upgrade to more advanced features at a paid subscription.
Internet-based ventures, including online media streaming, gaming, cloud storage, etc., actively follow the free basic services formula. For example, world-renowned businesses, such as Tinder, Spotify, Skype, Dropbox, WordPress, and Netflix.
The Freemium model is considered successful as it helps businesses create brand awareness and establish brand recognition. It enables start-ups to penetrate the already dominated market by allowing consumers to use their basic services for free first. Once users start liking the products, they pay for additional features.
This has been a guide to What is Freemium and its Definition. Here we discuss How does freemium business model work and examples along with pros and cons. You may also have a look at the following articles to learn more –