Freemium – Is it the Right Model for Your Business?

Picture by Alan O’Rourke via Flickr

As promised in my last post, we’ll examine the five key elements necessary to a successful freemium business model. As previously discussed, not all business ventures are ideal candidates for the freemium model. Optimum success occurs when one or more of the following elements are present in your enterprise:

  1. It has upgradable product or service
  2. It depends on subscribers for revenue
  3. It offers a product or service so innovative it must be experienced to be appreciated

A positive response to one or more of the above is not a guarantee the freemium model will work for your business. However, I can outline five critical steps you can take to enhance the probability of success.

Step One

The last thing you want to do is alienate paying customers. Accomplishing this requires a careful balancing act. You want to attract new customers to your product or service by offering freebies, but if you offer too much, paying customers will begin to question the wisdom of paying for what others are getting for nothing.

Don’t lose sight of the purpose and objective of the freemium model; provide potential customers the ‘risk and cost free” opportunity to experience an outstanding product or service, with the expectation that having experienced its value, they will upgrade to obtain the full benefit.

Be realistic about conversion rates. Less than 5 percent of free users will convert or upgrade to become paying customers. This is a critical statistic. The cost of offering something for nothing must be recovered or your business will not show a profit.

Step Two

Just as you need to balance what is being offered at no cost against what is being offered at cost, you also need to balance your promotional and marketing efforts. If your focus is strictly on acquiring paid users, you might as well skip the freemium model altogether. Equal attention must be given to cultivating both free and paid users. The free users are your target market and the objective is to convert them to paid users.

Step Three

The free users you have cultivated have value beyond their potential conversion to paid users. They are a valuable resource for recruiting both paid and free users. Too often, this opportunity is overlooked. By offering incentives, free users can be leveraged to become a low cost sales force for your product or service. Incentives can be monetary, free upgrades or time defined. Never ignore the fact that your customers, free and paying, can be invaluable in marketing your business.

Step Four

Politicians try to give voters a clear choice by differentiating themselves from their opponents in every conceivable way. This lesson is equally applicable to the freemium model for two reasons.

First, you avoid the trap of cannibalizing paying users by making the value of your product or service apparent to paid users.

Second, free users can readily see the benefits paying users have received by upgrading. This is of paramount importance in the freemium business model.

Step Five

Everyone understands the benefits of intuitive software. They appreciate the natural way it can be used. In the same way, a natural, yes even intuitive progression from free to paid features or services is the best tack when working within the freemium model.

For example, a free user runs out of free storage space on his/her free cloud storage service. The natural, the intuitive option would be the purchase of additional storage space.

Measuring Success

I was taught very early in my career to inspect what you expect. It is a good maxim to live by, but how do you measure the success of your freemium model?

There are arguably four metrics required to measure the effectiveness of the freemium business model and they are listed below.

  1. The cost associated with providing a free product or service
  2. The advertising/marketing expenses incurred in acquiring free users
  3. The rate of conversion (free users to paid users)
  4. The cost of acquiring paid users

This data, plugged into appropriate formulas can help you determine how successfully the freemium model is working in your business. We’ll pick up on this in the next installment and show you how to acquire this data, suggest formulas in which to plug the acquired data and help you define what the results actually say about the freemium model as it applies to your business.

Until then, have a great week!

  • Hi Jerome, I just discover your blog and I have already found something that interest me a lot. I’m thinking about creating a freemium model for my startup but my main concern is understanding what give for free and want don’t.
    What is for you the main point to have a freemium model? Have more users on your platform also if they’re not paying or use it to convince people to try it out and then buy?

    Have a nice day

  • Pingback: Measuring the Success of the Freemium Model in Your Business | VentureStab()

  • Ivan Koogle

    good insights. i’m an inveterate “free” user. getting me to buy anything is diffixult.

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