Freemium: The Ultimate Guide Through the Free to Try Business Model

Many startups are struggling with choosing the right business model for their services and deciding how to get customers and profits. If you set the prices too low, you won’t hit your profit margin, and if you set them too high, you might lose (or never get) customers. It would be great if you could offer your customers a free trial, while making money from those who are willing to pay for your service. Let’s take a closer look at a business model that got its name five years ago and is very popular these days – the freemium business model.

People Love Free Stuff

Freemium has a simple logic: give away your service or product for free and make money in some other way on that service. For example, you might have a cloud file sharing service. Create a plan where users can use specified amount of bandwidth or storage they can use every month for free. Also, create a plan that will have a small monthly fee, but in return, users will have unlimited data traffic. And there you have it – freemium.

What It’s All About?

It’s actually about creating prospects, users that will use your product for free, but with some restrictions. If that’s all they need, great! Because you have little or no actual cost for providing them those few gigabytes of storage on your cloud hosting service. Drive traffic first, then monetize. But if they need something more, they’ll pay and get an upgraded version of your service with more storage, priority in support, desktop app instead of web app and more features in general.

Pay To Upgrade

The key thing you as a provider must know is how to balance out which features should be in a free version and which of them should be a part of a paid upgrade. Don’t make the mistake of crippling your free version – you’ll never get paying customers that way! The main idea of the freemium model is to have functional free version, something that users can use for life if they want to.

Dropbox uses freemium model based on upgrades

A great example of this upgrade sub-model of freemium is Dropbox, a popular cloud storage service. You have all the features you need for free, including a desktop client, web access, 2 GBs of storage and even a 30-day file history. But if you choose to upgrade, you’ll get 50 or 100 GB’s of storage and an unlimited file history.

Ongoing Service

Another way to have software in a freemium model is to create it as an ongoing service. Meaning, you have a service which is free up to some limit – storage, bandwidth, number of photos.

Gmail is an ongoing service

Gmail is a service that comes to mind right now; have you ever paid for it? Of course you haven’t, unless you’ve hit the storage limit. If you want to use Gmail after that, you’ll either have to delete your archive or get some extra storage.

Premium Services

Similar to upgrades, you can let your users have a fully functional service, but in exchange for some money you can get them even more features. An upgrade, well, could upgrade you from 10 to 100 GBs of storage, but a premium service would be when you get your files delivered on a DVD disc. If you’re using HootSuite for your social media activities, you’ve seen an interesting example of a freemium model. You have a functional social media tool, but if you want to hide promoted tweets, have more than five social accounts and stuff like that, you’ll have to pay a monthly fee.

HootSuite has some nice premium features

Many iPhone games today use the in-app purchasing system as a premium service. You can play the game for free, but if you want to have better performance, you can buy some items and therefore get better results.

Future Buyers

OK, this one might be reserved for the big boys like Microsoft or Apple, but it should be mentioned. Microsoft has a something called the MSDN Academic Alliance program, which gives schools and universities all of their software for free so the students can use it during their years at school.

MSDN Academic Alliance

The result is obvious: once a student leaves the school, he’ll be proficient with MS tools only and here is where the money comes in. It’s a long-term investment, but if you can pull it through, use it.

Downsides of Freemium Model

There are some downsides in using a freemium model as well. First of all, you can’t apply it to every industry or service. There are some services where free version could simply be too much of a loss for you. If you want to use freemium model make sure you can handle it or cover it with paying customers. If you put too much features into the free version, nobody will have the need to upgrade, resulting in low or no conversion from free to paid users.

One example of this would be Grooveshark, an online music streaming service. Free users have access to every song in the library and for most of them that’s all they need. Paid users get desktop application (which becomes obsolete with browsers Pin as App functionality) and no commercials in the interface (which also has no effect because you’ll surf the web while the music plays in the background). There is simply no reason to upgrade.

If you don't need a mobile app, there's no need to upgrade

So, what are your thoughts on the freemium business model? How did you implement it into your service? Title image credit: Rocrastination


Nikola Krajacic

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