6 Pillars (And Traps) Of a Freemium Business Model

Freemium drives successful businesses on the internet, especially software as a service (Saas).  In simple terms, freemium services offer their app or software for free, allowing users access to a range of essential features. Then, users have tiered options to pay for additional features. For Saas businesses, in particular, freemium has become very popular because it is a common sense way to do product marketing. Of course, other products can take advantage of this as well. Applying freemium is where the challenge comes in. Many marketers make mistakes when they adopt freemium. So let’s make it clearer. 

For starters, freemium is not for every business. Freemium can be a double-edged sword for startups. Startups need the exposure that comes with the freemium model, but startups are less likely to understand their place in the market and what customers want from them. In a similar vein, they may not have figured out all the ways to convert their software as a service into a revenue stream. Without these things, freemium can fail, sometimes spectacularly. 

When a business makes access to the app or software free, the expectation is that more users will be tempted to try it out. And then, in time, they will be ready to pay for premium service. The trick is offering just enough that users are happy to use the product and try it out without providing so much that they never feel the need to purchase more. And more than that, messaging their potential customers effectively about why they should pay for a premium upgrade. 

Freemium has been successful for online gaming. One example is the highly popular League of Legends. Even learning apps like Duolingo have taken advantage of the freemium model to achieve success. Games are an excellent example of software as a service because they are easy to adapt to tiered services. Tiering service for freemium products could be confused for the free trial model. But there is a critical difference. 

Both methods of marketing draw in customers with low barriers of entry. However, in free trials, the customer has the whole product, but only for a limited time. Freemium is the opposite. A potential customer can go on using the service (or app) forever if they choose to with freemium, but they have access to only basic features. The question is how to strike the right balance between the two? Here we have some pillars and traps that you should find enlightening.

Auto User Onboarding

The easier it is for customers to onboard themselves – the better. A well-designed app or service should take care of this by making the process as easy as possible.  The process should be automated and user-friendly as much as possible. Time wasted onboarding users is time not spent doing what you are good at. Saved time and resources can be used to secure other areas of your business. 

Why is good onboarding so important? It is the first impression your customers will get of your product. If onboarding is too complicated or difficult, customers will not stick around to see your product or find out why they would want to pay for additional features. The onboarding period is critical. It is your chance to show hypothetical paying customers that you have a legitimate business worthy of their dollars. Provide a good welcome mat in the form of an email or notification with helpful information. Doing this well will ensure you keep the traffic coming in. The more visitors, the better.

A poorly executed onboarding process can sour customer expectations or turn them off completely. Customers can be scared off if they are spammed with emails or have too much trouble getting started with the product. 

Stellar User Experience

People have to love the low tier, entry-level version of a product or they will not be willing to pay for premium. But, they can not all love it so much they never even consider buying premium. It is important to know that freemium conversion rates are low, between 2-5%. So you should not expect to convert large numbers of your free users into paying customers. Free trials perform a lot better in terms of conversion rates.  But free trial users are usually required to provide a credit card to start the trial. The benefit of freemium for the customer is that this barrier to entry is eliminated. The benefit for freemium practitioners is more traffic. More traffic means more customers get to try the product without being scared off by having to pay from the beginning. 

For companies that are just getting started or need to build a strong customer base, this is an important advantage. It also helps the company market itself as customers begin to do some of that marketing themselves. That is provided, of course, that they enjoyed using the product.  If the user experience is no good, marketing is going to have a hard time changing that impression. 

A Product That Creates Habits

Users should be accessing the product regularly. By doing so, they become accustomed to or ritualized into engaging with it. Over time, they can find all of the special features, hooks, or tier-doors that might entice them to pay for more service. Using gaming apps as an example, it is easy to see how tiers or special features would work. Making a service habit-forming is more tricky. 

One thing to remember, it is fair to look at your competition and see what they are doing. Maybe your competitors send out an email after so many days without logging in. A customer who disengages from the service can be brought back in with a reminder that additional services are available. Ancestry.com has perfected this with previous customers by triggering their curiosity.  They receive an email which teases information about newly discovered documents or connections. Ancestry users are brought back in by their personal interest and can be persuaded again to sign up for premium service to ‘know more’. Users who have disengaged from the service can be persuaded to come back. 

Whatever your product or service, it pays to include or connect it to social media. Social media has a natural and effective way of keeping users active and participating. The psychology behind this phenomenon is simple. Social interactions, particularly positive ones, cause the brain to release dopamine. Users who get positive feedback and social connection will feel good about coming back to your product or service when this occurs. However, capitalizing on this process is more challenging the more removed the product is from social media. 

There is a work around. Just remember that it is easy to create chat rooms, discussion boards, or ‘meet-ups’ that might allow your users to connect and share what they have been up to on the app or with your software. And of course, your company should also have a dedicated social media person to make the most out of your social media presence. 

In a similar vein, once you have a lot of users, selling them on your primary product should become less of a concern. For one, the product should start to sell itself, and secondly, your users themselves could become an asset. It may also be advantageous to upsell your clientele on products and services similar to your primary product. But, none of that happens if your customers do not have a reason to come back in the first place. It is really important to be able to draw them in and keep them engaged. 

Large Market

The larger the number of users that you have, the larger your market. The larger your market, the more likely advertisers are going to want access to your users. Again, this is the great thing about the freemium model. Even though these users are not paying outright, the more that you have, the more you have to monetize. Think of companies like Spotify or YouTube. Users have access to all sorts of content. But, they ‘pay’ by watching ads. For many services these days, paying for premium means that you get to skip the ads which is a value-added for which users are willing to pay a premium. 

YouTube has made over $10 billion in revenue worldwide from advertising since 2018. It is perhaps no coincidence that YouTube Premium officially launched in 2018. YouTube launched premium as distinct from the older music premium service. As a result, YouTube capitalizes on many of the ‘positives’ to freemium previously mentioned. It is a social media system, free to use or access, and easy for users to onboard. No wonder YouTube now has a global audience.   

Of course, having a large number of users who become paying customers could also have a downside. Do you have the capacity to serve them? Have you miscalculated the price point? It is much better to have 10 million users with 1% converted to premium than 10,000 customers and half of them using premium. 

Automatic Conversions

Once you have a variety of online users, converting them to premium or paying customers is the next hurdle. And just like onboarding, conversion of new users should be as easy and automatic as possible. Performing this is largely a question of your software design and communication features. But enticement is also a factor. Users should not run into any barriers when they wish to become paying users. Access points should be in prominent locations. For example, after logging in to LinkedIn, users can easily find the link to sign up for premium at the top of the page. LinkedIn, a freemium professional networking site, offers users the opportunity to test their premium service with a free trial period. There are plenty of examples out there for companies new to freemium to follow.

There is nothing wrong with checking out the competition. Innovation does not remain innovative very long and can quickly become standard operating procedure. Some of the biggest companies in the world are still trying to figure out their approach to freemium because it takes time to get to know your customer base. This is also why many companies fail at freemium. For success, companies must take the time to figure out their own unique monetization plan.

Micro-branding

In essence, freemium can be an essential part of a broader marketing strategy. Like all other marketing strategies, it is all about communicating the value of your product to potential customers. But your product still needs to be something that customers desire. Enter micro-branding. One way to best capitalize on the power of freemium is to target your advertising dollars and messaging to a niche group. Users and potential users need to be able to identify themselves with your product if they are going to stick around. Compelling storytelling will make reaching your customers all the easier. 

Conclusion

When it comes to the freemium model, there are many points at which to fail when using it as a marketing strategy. However, when done correctly, it can be hugely profitable. Part of knowing whether or not freemium is suitable for your company depends on many factors, but most importantly, on who your customers are and how well you know them. Putting freemium to work as part of a broader marketing campaign is essential to getting the most out of it. 

Mateus Oliveira

Mateus Oliveira

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