Freemium- Does this Model Really Work?
May 24, 2022 Max 8min read
What Is Freemium?
Freemium pricing or customer acquisition model is one in which organizations provide basic services or features for free and levy a premium for additional features.
As business evolves, new business models are born every day. One such model that is gaining popularity is the freemium model.
The freemium model essentially combines the features of a free version and a premium version of a product.
Let’s understand what freemium is and whether the model works for you!
‘Freemium’ is a portmanteau of‘ free’ and ‘premium.’
Freemium refers to a pricing model where companies offer basic services or features free and charge a premium for advanced features.
The free version of the product is available for an unlimited period. However, the features offered are limited.
In the 1980s, the software industry pioneered the Freemium business model as a time-limited or feature-limited strategy.
The shareware strategy involves making a free (limited) version of a product available to everyone in the hopes that some users will upgrade to the better premium version.
The freemium model splits customer acquisition into two tiers. The first tier is the free tier, and the second is the premium tier.
Once they use your product successfully, free users will eventually reach the limits of their free usage. This attracts them to invest in a premium account to get full access to advanced features.
Let’s Understand How The Freemium Model Works
Freemium is a two-tiered user acquisition model that divides users into free and premium tiers based on whether or not they pay for an account.
Premium users have more access to product features, while free users have limited access.
The free account may be limited in the following ways:
Users on the free tier have limited access to features. When developers provide advanced features, functionality, or paid upgrades that users are likely to want, freemiums work well.
For example, Spotify offers the download feature only to premium users.
Freemium may apply a limited usage quota for free accounts. Storage quotas, recurring credits, and information dispensing quotas are all examples of usage quotas.
For example, you can only watch local TV shows with Disney+ Hotstar’s free account.
Freemiums can offer tiers of products, support features, and customer service with limited support.
For example, an online study platform may not offer 24/7 assistance with doubts for free account users.
Freemium vs. Free Trial
It is common to confuse freemium with the free trial pricing model.
However, there are a few key differences that exist. Freemium and the free trial strategy are two utterly different customer acquisition models.
One of the critical differentiators between freemium and free trial is the time component.
Freemiums offer their basic features to free users for an unlimited time. However, a free trial is time-bound and restricts access to the product entirely until you pay for it.
Users can get almost complete access to all of a product’s features during a free trial. Freemium is limited when allowing customers to use a product’s features.
Freemium allows users to try out a product in its most basic form for as long as they need to understand its value.
Try Chisel’s freemium offer and fall in love with product management forever!
Why Should Entrepreneurs Implement a Freemium Model?
Well, the freemium model isn’t gaining popularity for nothing. The freemium model does have some great benefits, especially for start-ups.
The following benefits may help you decide why you should implement the freemium model:
- The free product allows you to conduct direct user experiments with new features and get valuable feedback. All this without upsetting your premium customers.
- It enhances your brand value when you start attracting more customers through referrals from your existing customers. I mean, who wouldn’t use a free product, right?
- It provides you with a significant competitive advantage and helps you acquire a considerable market share in no time.
- You can monetize your free tier by using ads. These generate revenue and serve as a motivation for users to upgrade to the paid version of the product.
- The freemium model is famous for exponentially reducing customer acquisition costs by reducing your spending and letting your product do the magic.
- It follows the hook model to get your customers hooked on your product and eventually pay you for the whole package.
A free-trial strategy may have more immediate conversions. But, freemiums are a better customer acquisition strategy that generates revenue in the long run.
Let’s Understand the Freemium Conversion Rates
Freemium conversion rates should ideally be between 2-5%. However, the freemium conversion rate is typically around 1%.
These figures may not appear to be as high, but a high freemium conversion rate can be just as problematic as a low rate.
A higher-than-average conversion rate could signal something other than success-
A high conversion rate does, in fact, reflect the quality and success of your product. But if there is a significant increase, you most likely over-promised customers during the free period.
These users will convert if your free version is not satisfying enough. But they will also churn quickly if they cannot find what you promised them in the premium version.
A low conversion rate for your freemium offer can indicate a few things-
To begin with, it’s possible that the product you’re marketing isn’t the one you’re selling.
Second, you may be providing too many features, and users opt for the freemium version instead.
Third, you may be failing to properly onboard users and direct them toward discovering your product’s benefits.
How to calculate the Freemium Conversion Rate?
It’s easy to figure out the freemium conversion rate.
To begin, divide the total number of freemium users by the total number of converted active subscribers over a given period.
Suppose you have 500 people using your freemium product, and only 100 of them convert to paying users in a particular month.
Then for that month, your freemium conversion rate is 20%.
How Can the Freemium Model Be Implemented?
Success with freemium models comes in tiers. Customers can choose between a basic, advanced, and premium product based on their needs.
If you want to implement a freemium model, you first want to check if your product or service is divisible into proper tiers.
Start small, with just one significant difference between your free and premium products, and gradually expand the premium features as your company grows.
As time passes, your company should prepare to alter or innovate the features you offer with each product.
A lot of traffic, for example, is a positive sign. If it doesn’t result in conversions, however, you’ll have to limit the available features to free users.
You can run these iterations based on the product’s performance.
You’ll eventually find the perfect balance of traffic and conversions with enough research and development.
Keep these three steps in mind when you want to implement a freemium model-
- Provide free features but give users a reason to upgrade.
- Help users understand the product’s value proposition with a smooth onboarding process.
- Collect feedback and improvise regularly.
Who Can Implement the Freemium Model?
Every SaaS company is attracted to the freemium model today. However, it’s not meant for all.
Your company’s goals determine whether or not the freemium model is meant for you.
A freemium model could be beneficial if you’re just getting started and want to raise brand awareness or gain new customers.
On the other hand, other viable business models can assist you in achieving your primary goals of generating revenue and increasing conversion rates.
Here’s how you may assess who can implement the freemium model-
Is there a massive market for your product or service?
If the product doesn’t have a large Total Addressable Market (TAM), you shouldn’t give it away for free. Most free users will never become paying customers, putting additional strain on your current resources.
For example, music, gaming, and entertainment apps cater to worldwide audiences. Thus, the freemium model works well for them.
Is self-service possible with your product?
A product that needs constant hand-holding, back-end or sales assistance, and human intervention for its onboarding process may not be the best fit for a freemium model.
Is there enough reason for users to upgrade?
As we mentioned before, if you plan on implementing the freemium model, ensure your product is capable of splitting into tiers.
If people don’t have enough reason to use advanced features, you will leave with no revenue generation forever.
It is vital to understand your customer and the market before you decide on your pricing strategy.
Examples of Successful Freemium Businesses
Here are some of the most successful freemium businesses’ examples:
This one, we all know. Spotify is one of the most-used music apps globally. It offers essential music streaming services through its app with an internet connection.
However, Spotify floods itself with ads and interruptions. It also does not allow offline downloads or unlimited skips in its free version.
This drove users to upgrade to Spotify Premium. Spotify has a freemium conversion rate of almost 26.6%!
LinkedIn is one of the most popular apps for networking professionally.
While the free LinkedIn account allows users to post on their feed and chat via direct messages, the premium account offers even more!
LinkedIn’s premium features include the famous InMail, running digital ads, tracking who views your profile, and more!
With such good use of the freemium model, LinkedIn has become one of the best apps for finding a job.
Chisel is the #1 Agile product management software. It integrates various product management tools such as Jira and kanban boards into one software.
However, users upgrade to get complete access to all its features with its exemplary performance. These include Azure DevOps, customer surveys with free responses, onboarding and training sessions, and premium customer support.
Learn more about how Chisel soared in its pre-seed round here!
Other examples of successful freemium businesses include:
- One Drive
- Slack and
Q: Why is freemium so successful?
A: Freemium is successful because it satisfies the needs and expectations of users by allowing them to try out your product and decide if it is right for them. Content subscriptions, for example, are another way to monetize your freemium model.
Q: Is freemium a good business model?
A: If your business goals align with the freemium model, it’s a good fit. When the lifetime value of your paying customers exceeds the sum of your acquisition and production costs, a freemium model is profitable and sustainable. The conversion rate from free to premium is ideally 2-5% for most businesses.
Q: How to convert freemium to paid?
A: Because freemium revenue depends on conversions, you must understand how to persuade free users to upgrade to premium products. You can convert freemium to paid when you set the proper limitations, offer attractive upgrades and incentives, and regularly work on user plus competitive research.