Freemium - Free & Premium

Freemium, as you’ve might guess, is a combination of the words free and premium. Catchy name aside, Freemium has become a dominant business model among software providers, app makers, content providers and online gaming companies. The Freemium business model uses a basic, no-cost product to attract a high number of users in the hope that many of those users will ultimately convert to the paid, premium version of the product. Freemium solves several critical sales & marketing issues, making it an extremely powerful business model. A few examples of successful companies using the Freemium business model include Skype (web based calling), Evernote (organizational software), Harvard Business Review (business content), Mailchimp (email campaigns) and Zynga (games).

Value Drivers
A Freemium business model reduces the need for professional selling, eliminates price as a barrier to user acquisition and provides multiple opportunities for product monetization. First, Freemium businesses create a virtuous marketing cycle by recruiting users to the free product. Once these users are productively using the free product, they become ideal candidates for the upgraded, premium product and thereby eliminating the need for a traditional sales team. The Freemium business model also eliminates price as a barrier to user acquisition. While both software and content providers have long utilized temporary free trials as a way to overcome the initial price barrier, only Freemium allows for the evergreen use of basic products and content. Finally, the Freemium business model provides multiple monetization opportunities. Whether making several upgrade pitches to basic users over the course of months and years, adding new features to the premium product or tiering the premium offering, businesses get multiple “decision points” instead of the single purchase opportunity afforded most traditional software and content providers.

Challenges in Building a Freemium Business
As with the multi-sided platform, which was the first business model we explored in this series, the Freemium business model is not without challenges. Three of the most significant include:

         • Attracting users to the basic product – you build it, price it at $0, but users still don’t come
         • Low conversion rates – not enough basic users upgrade to the premium product
         • Providing value to sustain the model – ensuring features/content retain users, both free and paid

Freemium businesses that fail typically do so because they never build the virtuous marketing cycle that is fundamental to success.

Taking Action
If you are building a business based on the Freemium business model, your chances of success will be greatly enhanced by executing these critical actions.

1. Build a product that provides layered user value – For Freemium to work well, the solution must provide layers of user value that can be divided into basic and premium versions. This “layered value” typically comes in two forms---added features or more volume. Evernote, which provides web based productivity software, offers many of their most valuable features only in the premium product. Harvard Business Review online, utilizing the “more volume” approach to layered value, offers anyone web access to up to five free articles a month but restricts unlimited HBR content access to paid subscribers. Some companies have figured out how to layer both additional features and increased volume into their premium offerings. Mailchimp, providers of mass email marketing software, allows premium users more product features and higher volume.

2. Implement an effective conversion strategy – Having layered value is important because without conversion, Freemium turns into free which is obviously unsustainable. Many people have debated what an ideal conversion rate looks like. In a fantastic article called Making Freemium Work, Vineet Kumar argues that balancing your conversion rate is a tightrope that must be walked carefully. He writes, “Recall that one of the chief purposes of freemium is to attract new users. If you’re not succeeding with that goal, it probably means that your free offerings are not compelling enough…if you’re generating lots of traffic but few people are paying to upgrade, you may have the opposite problem…the best long-term strategy is to aim for a moderate conversion rate…most companies’ range from 2% to 5%.” Implementing a conversion strategy where the core metrics work is essential to long term success.

3. Meticulously manage your metrics – Managing metrics is important to all businesses, but it is absolutely essential for Freemium businesses. While impossible to share all specific metrics that might be important for your Freemium business, concentrating your efforts on acquisition costs, conversion metrics and user retention will give you a solid framework from which to work. These three categories of metrics will help you understand and optimize your client pipeline and should guide your client acquisition strategy.

Successfully layering value to attract users, converting those users to paying clients and optimizing the entire marketing cycle with the meticulous management of your metrics can lead to Freemium success. Build your virtuous cycle, and you will build a great company.