Freemium Business Model – Explained With Pros And Cons

Freemium business model is a pricing strategy that came after the advent of the internet. Many software companies have operated this internet-based model since 1980, however, the term “freemium” is coined later in 2006.

After that it became famous in the world because of the word free -version, then many startups realized the significance of the freemium model and adopted it to expand their business. Most famous brands in the world like Spotify, YouTube, Skype, and LinkedIn use the freemium model to increase revenue with micropayments.

As a new entrepreneur, you might need to know some features, and ingredients to successfully implement the freemium model.

Let’s explore, how the freemium business model works, and how it will benefit you, in this detailed article.

Freemium Business Model – Definition

Freemium is a combination of free and premium services.

Freemium business model offers a service with basic features for free and additional features at a nominal price. There will be various sets of plans available at different costs, and it all depends on the functions it offers.

It is also called the internet-based business model, which offers a basic service to the customer for a limited time and then it makes the user purchase the premium (paid) version after the time exceeds.

How Does A Freemium Business Model Work

Freemium business is operated either in B2B or B2C business model. Primarily if a company offers a service that is made up of 10 features, out of that 10, only 4 or 5 features are offered with free of cost. After that, it provides support to the users and builds a good relationship with them.

Freemium business model work

This gains trust and interest among the users. After a certain period of usage, it prompts the user to buy its special features, thereby the user will pay some money to access it.

When the customer gets satisfied with the service and support provided by the company, it further attracts them to upgrade the service by delivering sophisticated plans. In this way, the company retains its customers as long-time users. This is one side of the game.

One critical aspect of the Freemium business model is – not all users will buy a premium plan. Only a few will purchase it, while others limit themselves enjoying the free essentials, which impacts the conversion rate of premium users. But the question is – Is that viable to make a profit from free users?

The other option to make money from the free users is via displaying advertisements. Since the free plan attracts many people towards the brand, it increases the user base. If the number of users is increased it seemingly increases the profit-making potential.

Freemium model – when it is implemented with an appropriate business strategy, it puts word-of-mouth in the place that makes the brand viral and gives a high conversion rate. This cuts down the extra cost to reach the target audience.

Advantages Of Freemium Business Model

Some of the benefits of a successful freemium business model are as follows.

  • Brand awareness: When something is offered for free in the market, it grabs the people’s attention towards the product, thereby creating brand awareness. It is beneficial for first-time entrepreneurs and startup company entering with a new product.
  • Less Marketing effort: If the product or service enters a new market, only fewer marketing efforts are required to get free users. Without any flaws, it reaches more people when they recommend the product to others.
  • Viral Growth: With an extensive reach of your brand, it increases the number of free subscribers, the user base will be increased. This leads to the viral growth of your business firm.
  • Low Acquisition cost: Upselling your premium version to the free users would be a cakewalk for you. It decreases the customer acquisition cost.
  • Earnings from Advertisement: Not to worry about giving services to the free users. You can earn money from the free users by displaying advertisements and partnering with the ad networks.
  • Free beta testing: you can cut the extra burden to test your beta version. Trying out the different set of plans with the free users help you to check the usability of the product and getting customer feedback helps to fine-tuning.

Disadvantages Of Freemium Business Model

  • Low Conversion Rate: The conversion from free user to paid user is quite hard for this freemium model. Unless you limit the features for the free users, you’ll never make them buy a premium plan.
  • Limited features of the free version will make the user feel exhausted and hang back, which reduces their interest in upgrading the premium plan.
  • Long time: You cannot expect an easy return from the users. It will take a long time to convert the free users, which delays making a profit.
  • Supporting the free user would increase the operational cost. It is not good to make maximum profit out of it.
  • The churn rate is high in the freemium model, as the subscriber will discontinue their subscription in a short time after purchase.

Reader’s Insight

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