Freemium is a pricing model wherein a product is offered in mostly two variants – free and premium.
The freemium pricing model is usually opted for by technology companies where in they are able to unbundle the product features and offer differential pricing policies.
Strength of the freemium model is that it offers a low barrier to entry for the customers and gives you the ability to scale up by attracting users to try the service/product. This helps that build a user base, a percentage of which will convert to the premium ‘paying’ tier.
It is customer friendly. Instead of customers getting time limited trials, they can continue using the product and can upgrade when they require more features.
Freemium can also be more effective that advertising spend. Advertising may get users to your but if the price is not right, they may not sign up. So instead, the same spend can be attributed to maintain free users on the product.
On the flipside, Freemium can be a failure too. It relies on getting free users converted to paid users, if that does not happen, or the conversion rate is lower that what the service can sustain, it may cause a company to spend more that they’re earning and eventually go out of business.
It also relies very heavily on a low cost base, e.g. if the cost of running a service is negligible regardless the number of users. E.g. 100 free users vs 10000 free users will not make the cost running the service 100x.
It can work well if the product has a high switching cost, e.g. moving your playlists from Spotify to Apple Music. It’s possible not but easy and that’s what keeps users there.
In the long run, freemium can be a successful pricing model if the product or service on offer has these attributes –
- It has a low cost of running, replicating the product doesn’t mean replicating costs same fold.
- The product has a very large potential market
- An increasing number of users see value in upgrading to the paid model
- Can monetise free users by collecting user insights or displaying advertisement.
This however holds true for digital products and services. A physical product cannot sustain a freemium model as the cost of production and giving the product away for free is prohibitive. Even with product samples, the business will have to limit the amount that a customer can get access to.