Freemium models

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What is Freemium?

Freemium is a type of business model combining the words “free” and “premium”. Its name translates into the idea that while free products will be offered to a large group of users, some premium products will be sold to a smaller portion of the user-base. A few examples of companies that use this model are Linkedin, Dropbox and Skype.

  • The Apple Store is also one of the famous places were Freemium Apps have managed to emerge. Read more about Apple's view on the Freemium Business Model

The Freemium benefit originates from features of the strategy used. They are the following:

  • o **Free features: **the firm is enabled to scale up a user base without spending much of its resources on marketing or a sales force.
  • o There is no “free trial period”: It allows indefinite free access to the product marking it attractive to its consumers.
  • o Wins your customer’s mind share: Enables users to learn about the product themselves, benefit from its features, without having them purchase it.
  • o Hooks users: By hooking users to the free product, they become motivated to subscribe to the paid plan.
  • o Identify the favourites: with the help of the data from free users’ behaviour, you can identify which features of your product are/are not favourites.

Nevertheless, Freemium suffers from various criticism and failures. These are a few:

  • o Only big guys survive: products provided by a big player are more likely to be demanded, which shuts the market to smaller competitors.
  • o Choice is restricted: given the barriers to entry for smaller firms, less choice is available for the consumers.
  • o No such thing as a free-lunch: business people know that free isn’t sustainable, so uncertainty develops about how long they can exist in the market if they do not charge the product.
  • o Focus on volume, not quality: without a fee, little incentive is available to improve and track usage patterns and service levels. This means that there is a low likelihood of offering differentiated services targeting performance, as the focus is to appeal a mass market.

To make the Freemium model a success, firms need to determine whether the model works for them. The criteria below can be a starting point to determine if it is right for you:

  • o You have a high-quality product that people will derive sufficient value from.
  • o You are certain your long term Freemium users with eventually convert to paid users.
  • o The duplication and distribution costs are almost negligible.
  • o No training, guiding or support is needed to understand your product.
  • o The potential market will be huge, so that the few paid users make your business profitable.
  • o Sufficient infrastructure and operations are available to serve a large market.
  • o You are certain your users will repeatedly use your product.
  • o You work in a market where free products are desired.
  • o Optimal balance in features that is strong enough to keep users hooked.

  • More on HBR Analysing Freemium and its potential

As an entrepreneur, you must have some key objectives that go hand in hand with the freemium model such as: conversion rates, virality, revenue, ROI and profitability.

Ultimately, a half way point needs to be reached in this model where you strive for a high enough conversion rate and low enough marginal costs.

Eloquens enables you to keep track of such metrics with the tools below. With the help of these, you can track and determine how successful your Freemium business can be

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