Freemium model pros and cons: A brief discussion about the pros and cons of a freemium business model. In a product led company, it is similar to the product led growth model. The premise of these freemium models is value based selling. In this article, we will talk about the benefits and disadvantages of a freemium model for business.
Why freemium models exist?
Freemium is a combination of Free+Premium indicating a model where basic service/product is provided free of cost. Additional services or product features are available at a premium price thus explaining the meaning of a freemium business model.
The most important value in a freemium model is that the product/service speaks for itself. In other words, it is a model that thrives on real value addition for a user. It might seem like a marketing/pricing strategy, but the central tenet is value based. Hence the freemium model is most attractive for an end user. (Source: Wiki about freemium)
Freemium Model Pros and Cons – Advantages of Freemium Model
The most valuable aspect while evaluating freemium pros and cons is its value based selling. A user can try the product/service to assess its use. If it doesn’t prove valuable, the user has no strings attached to stay committed to the product. Traditional business models argue that it makes switching too easy for customers. However, if your product is continually offering value, this shouldn’t be a concern for your company. (Read more about USP and value in a startup)
Here are a few advantages of Freemium model for a startup:
Advantages of Freemium for startup
Customer Engagement
As long as you’re visible, it is easy to get real feedback from customers. This is one of the easiest ways to reach out to a customer and gather their input. It even acts as a strong indicator of value for your investors based on churn and retention metrics.
Free Marketing
Some companies offer free premium services for a referral helping you gain and onboard new users. Instead of incurring high sales or marketing costs, it helps spread word of mouth easily, thus attracting more users
Continuous Improvement and Feedback
If your product/service aims for continual value for a user, this is the perfect model. A good freemium service provides basic value for the customer while offering more in a premium model. It helps to maintain your existing clientele while trying to sell additional value. You can easily monitor how your product is being used and improve based on feedback.
If you can offer a free tier that provides a lot of value, it will naturally help your product to spread much more rapidly.
-Melanie Perkins, Co-founder of Canva
Freemium Examples
Some of the most popular freemium examples are:
- Dropbox/Google Drive – They offer free storage services along with ability to collaborate in a shared space. Dropbox has premium tiers after 2Gb of space whereas google extends to 15Gb. Google mail even offers a free tier for personal e-mails whereas the business ones are on a premium model.
- Canva: It offers free services to design presentations, social media posts etc. The premium model is based on buying additional media or images that are copyrighted
- WordPress: Free service to create websites and blogs. You can easily launch a blog and a website with their free tiers. The premium model involves buying additional themes or plugins from their ecosystem.
There are plenty other examples but I’ll leave you with these three to engage thoughts about starting a freemium model.
Freemium Model Pros and Cons – Disadvantages of a Freemium Model
In this section, we will capture a few disadvantages of the freemium model. The first guess is of course the cost element associated with free services. In addition, you’ll notice some additional challenges in a freemium model as shown below.
As soon as I think of these advantages, my concerns are operations and cost :
Operational overhead
You’d have to serve both paying and non paying customers. A lot of these free users might not end up adding any direct value to sales at all. Some investors might not be happy offering services that incur costs with the hope that someday these might convert into a business sale.
Statistical overhead
Yes you have more users and the stats show glorious numbers. But you’ll have to segregate the paying and non paying ones so that you get the complete commercial picture and derive value out of it. Also, you must develop a financial model based on a conversion rate in reference to similar businesses.
Feedback Overload:
If you are trying to use the free tiers as a pilot for product development, it is a great idea. However you need to be very careful to segregate the noise from business benefit. Make sure that you define a clear model to identify and vet the feedback effectively.
Costs :
You may start with the thought that it doesn’t cost money. But we all know that account maintenance and cloud storage takes us space and you’d invariably bear direct costs. Unfortunately, the freemium model implies that you’ll be bearing these costs for customers who might not convert at all.
Summary: Advantages and disadvantages of a Freemium Model
The freemium model is fascinating because it provides value for the end user. It is also easy for the end user to stop services when they don’t see its purpose. Although it might sound as a loss to the company, if you focus on customer loyalty, this is a positive feedback.
From a purely commercial perspective, the freemium model will result in initial losses. However, if you’re able to manage your startup through the initial phases and continue to offer value, you’ll be able to see the true growth curve of a startup. It’s never easy while managing operating costs, but the freemium model can be one of the strongest supporters for your exponential growth in a startup.
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That’s a quite relevant topic you have touched upon, especially in today’s context where almost every service providing company has incorporated this “Freemium” strategy to lure more customers. Not just that but also heavy discounts through “flash sales” and “coupon codes” etc.. done to maximise sales, and expand customer base. I often question this approach because in some competitive markets, it might sometimes result in “price slashing” competition, which is quite evident especially in the food delivery industry… Yes, by offering a part of services for free gives a chance for customers to try out your product, but it’s the quality of service/product that converts them and generates long-term value.
As you said, it’s very important to maintain that balance the cost of acquiring customers and generating actual “value” out of them.
I myself grapple with such strategies when i try to market my Vocabulary App. Well, we are new to the market (with lots of competition) so there’s quite a bit of road to cover in terms of “breaking even”. But, we’re confident that what we are offering is something unique and are working to deliver a product that is actually useful for our customers.
Thanks Jayasurya – it is very nice to hear from you. I’m very curious about this strategy. You’re absolutely right – there’s so much of free competition out there . I often wondered how people can actually make money off this and the type of added pressures in maintaining the free services.
I’ve recently been reading about a marketing funnel called invisible funnel . I’ll make a post on it after research is complete. I’m very curious to know how you’re using your strategy. I can appreciate that a lot of it would be trade secret, but it there’s anything you can share, that would be fascinating 👌
Hey Vinay, It’s always nice to read about new things that could help businesses grow!!
Coming to what i’m doing right now, first you need to understand that “App for English Vocabulary” market is overcrowded, with a few big players too. Of course, each one of them have their own uniqueness (good or bad) and are trying to capture a chunk of the total market.
Entering such a market, my current strategy is pretty much straightforward – “Spend on generating that inital buzz and then depend on word of mouth”. Of course, to my understanding the prerequisite to implementing any strategy is building a “unique product that addresses pains of the customer” . According One entrepreneur cum professor , “Marketing should be inbuilt in the product”, meaning the product should speak for itself. Building such a product that is not just useful for the customer but is also simple and fun to use, has been my motto. Word of mouth and Organic marketing (such as blogs, Quora posts, etc..) are the most value generating avenues but I’m also trying to hit more number of downloads and customer reviews through Google Ads and promotions.
You’re right, i myself am baffled how some products are making money by offering free services. At least some of the apps do have ads or offer in-app or complimentary purchases or some are built for brand promotion. While of course some do it out of sheer passion, although rare.
Looking forward to know more about the “invisible funnel”!
Thanks Jayasurya, very nice to hear about the journey you are undertaking. I can see why that market is such a huge attraction, esp for educational arenas in India. One of my friends started a website for IAS coaching and is now amongst the top rated websites in the country for that. The approach he followed was very interesting – it was a lot to do with free content and getting people to engage. It picked up remarkably well to get over a million visitors per month and I am sure now it has gone much beyond that.
* I suppose it is very hard to get that initial attraction to be recognised by google with free apps and so much out there to compete. The hardest part I believe is the initial traction and getting noticed on the first few pages of google play or app store. There are options of sponsored listing but they can very easily get expensive. I suppose content marketing plays a huge role in this one.
* Something I have seen certain businesses do is spread the app to known circle and get them to review these apps. That adds to the number of donloads and some initial traction. But this certainly depends on the spread of your circle and how many real feedback you can get. There are agents who do this, but I am of a certain doubt of these agencies though. Always a very hard choice to make to find the real and authentic ones who can actually be useful
* Marketing should be inbuilt in the product – that is a very interesting angle. I think Canva does it quite well, there are also some other products which do it reasonably well such as Jira. Some of them end up crossing the line and over advertising. I suppose it is a faint balance between the two so that the consumer doesn’t really get discouraged.
I am quite eager to make that post on invisible funnel, I will certainly let you know as soon as that is up :).