What is Freemium Model? Definition of Freemium Model, Freemium Model Meaning and Concept
The freemium model is a business model in which most of the services are offered for free (freemium), although there is a small package of paid services (premium) for some clients who want it.
The freemium model is becoming more common every day and used in startups and new applications that are emerging. The main objective that is intended to be achieved with the freemium or free part is to attract a large number of users, carry out a massive capture of the database and that a small percentage of these users pay for the premium services, and these will be the ones that make them profitable the business. Premium accounts do not usually have high prices, they are micropayments that, applied to a large mass of users, achieve large billing volumes.
That is, through this strategy, users are captured by first granting them a type of free service. Thus, since it is such a large group, a low percentage that is interested in obtaining specialized services is enough to easily maintain users who do not pay anything. In this way, you can have a highly profitable business model.
From this system the name “free” is formed, which includes the group of users who obtain the services completely free of charge. These beneficiaries could even add figures of up to 90% of consumers who do not contribute to the company. But in parallel, there would be the premium customers who, although they represent a low percentage, sometimes no more than 10% can maintain the consumption of those who do not pay and even more allow the business to be managed efficiently and profitably.
How are freemium accounts limited?
There are several ways to limit the free part to get the user to pay for the premium account, for example:
- Functionality or capacity limit: The most advanced functions are associated with a payment.
- Time limit: They offer you a free account for a first period of time and if you like it you will pay for it.
- Limit per use: A free license is offered, but if more are needed, they will have to be paid for. This usually happens in the licenses of some software for companies.
- For advertising: If you do not want to see and/or listen to advertising while you enjoy the service, you must pay the premium account.
What is needed for this model to be successful
For this business model to work, you need:
- Give the user something valuable: This means that not only because something is free will it attract users. But, if we give the customer something that is interesting and creates value, he will be attracted to pay more for something that exceeds his expectations. That is, the free must be interesting enough.
- That the price you pay is less than what the client is going to receive : If the client truly finds that what he receives is worth more than the price he pays, he will be fascinated with the service and will even help us to speak well of our service and recommend us, attracting more potential customers who are willing to pay this price.
- The markets must be massive: This business model cannot work in small market niches, but on the contrary they have to be markets large enough to be able to make profits.
- Work must be done to seek to reduce costs: In this type of business, success is achieved by trying to work with costs as close to zero, and it is a permanent effort that the company must seek.
Advantages of the freemium model
Among the advantages of the freemium model are:
- Being able to offer a free and valuable service to people and organizations that can benefit from it.
- Doing a free trial always attracts more users, which allows a greater scope of awareness of the new service, greater diffusion or virality, and then those who like it more will pay for a higher quality service (the premium package).
- There are options to improve the product. For example, by launching free versions we will be applying the lean startup method and we will see what users like and what they don't like, what parts they value the most in order to be able to pay for them. This is an optimal way to validate the product in the market.
Disadvantages of the freemium model
However, there are also some disadvantages:
- For the business to become profitable, a huge user base is needed and it is very difficult to achieve. Many of the companies that have opted for this model are not viable today despite their fame and turnover.
- Offering totally free services leads to associating the idea of a price greater than zero as unfair and the price-value association is not adequate among many of the users, so it will be difficult to get them to access the premium package.
- The competition or the service is distorted. In other words, they make it so that often the one who wins or who positions their professional profile best is not the most skilled, but the one who has put the most money into the application.
There are many cases of successful companies through the freemium model. We highlight some of the best known such as:
- Whatsapp: APP that allows you to send and receive messages in real time between users. A free chat that already exceeds 1,000 million users worldwide and with a great dependence on the application. When they decided to charge a symbolic price of €0.89/year for their use, most users agreed to pay before losing their use.
- Spotify: Allows you to listen to all kinds of music for free, but with limitations such as, for example, advertisements, necessary Internet connection, limit of daily songs, among others, which are eliminated with the premium package.
- Linkedin: Professional social network to search for a job. Its use is free, but with the premium account you can highlight your candidacy against the rest, send direct messages to headhunters, or have access to more professional profiles than the rest of the network users.
- Dropbox: Cloud data storage and sharing application. Its use is free and to attract more users they have set a strategy that consists of inviting friends to the application you receive free storage space. This strategy has managed to viralize the service and achieve a very high user reach.
- Candy crush and other games: These are free online games, but there are some resources that require a micropayment to access them and thus be able to have an advantage over other players and advance faster.
When a freemium business model succeeds, its scalability is very high and its growth is exponential, as we have seen in some of the previous examples. The key is to offer a sufficiently useful value to the service so that the percentage of conversion to premium users is high.
Freemium model example
Let's say a person expects to earn $40,000 per month using this model and expects to charge $4 per month for the premium services it will offer.
This tells us that you have to offer the service to 10,000 customers which comes out to 40,000/4 = 10,000. But since only premium clients are counted, let's consider that those 10,000 clients constitute 1%. So you will need to have at least 1,000,000 customers if you want to achieve that result.
This turns out like this:
X —————- 100%
10,000 ————– 1%
Applying the rule of three we multiply 10,000 x 100%, which gives us a result of 10,000; then divide this by 1% and we get that 1,000,000 users are needed.
In short, the most important thing in this type of business is the volume of users handled, because success depends on the mass market that we manage to captivate. For that reason, businesses such as WhatsApp, LinkedIn, iCloud, among others, are successful.