Approx. reading : about 8 min
FREEMIUM is the mix of the words FREE and PREMIUM and refers to an economic model and a pricing strategy that combines both free and paid elements.
Thus, the Freemium pricing model is a pricing strategy in which a company offers its product or service for free but with limited features, while offering one or more premium versions of the same offer – with more advanced features – for a fee.
The main purpose of a freemium pricing strategy is to encourage users who have registered for the free version of the product or service to eventually want to upgrade to the paid versions or options later on.
This pricing model is widely used in the promotion of digital products and services, such as software as a service (SaaS), video games (Gaming), and media (especially online music).
Some of the world’s largest companies have been built with the FREEMIUM model, including: Hubspot, Dropbox, Sendinblue, Spotify, Deezer, TikTok, and Google.
In reality, the term “FREEMIUM” encompasses a range of different pricing forms and strategies. They’re not all the same, and you might prefer one over another.
In this section, we’ll explore the different ways to implement a FREEMIUM pricing strategy.
The classic freemium pricing model involves the company offering a product or service that’s fully operational and entirely free of charge, with no limit on the duration of the free period but with limitations in use.
This is for example the case of the HUBSPOT CRM model which gives users the possibility to start using the platform for free, with a great range of features, which allows them to manage customer relationships professionally. However, there’s a limit on the number of customer contacts that can be managed with it.
If users want to manage more customer contacts or access additional features, they can subscribe to more options by paying a fee depending on the number of additional contacts or on the specific options they choose.
To learn more about dotsha and understand how we can help you implement this pricing model, feel free to contact our customer support team and request a demo.
In this model, the goal is to offer a fully functional product for free, forever, with no usage or time limitations.
The counterpart is the data provided for usage, the visits, and often the personal data which is used for marketing targeting purposes or to improve other services that are paid for.
For example, the Google Search engine operates this way. The search engine is completely free and there are no limitations on the number of searches or duration.
Google makes money from its search engine through targeted advertisements made possible by the tracking and analyzing usage and browsing data, among other things.
This example shows that FREEMIUM strategies can sometimes prove to be much more profitable than traditional subscription-based pricing strategies.
This FREEMIUM strategy involves trying to attract a large number of users, such as gamers or website visitors, because the more users there are, the more valuable the product or service becomes. The purpose is to provide high value to a particular group of users or external partners.
This strategy is commonly used by social networks and video games.
For example, in many video games, having a large number of players is crucial for success because it allows competitive players to find more pleasure in playing. These competitive players are the ones that end up paying for additional services or features in order to reach and then maintain a high position within the player community.
On social networks such as TikTok or Instagram, the goal of the FREEMIUM strategy is to reach a critical mass of users with the ultimate goal of getting money by advertising brands. Web influencers operate under a FREEMIUM model by offering their content for free to the community and then getting money by advertising different products.
Regardless of the kind of FREEMIUM pricing model that your business chooses to implement, it’s important to understand the advantages and disadvantages of the FREEMIUM model.
One of the main obstacles to adopting digital products or services is the price that has to be paid because at the time of subscription, there are still several uncertainties regarding the quality of the service and the value that it provides. You simply can’t be sure if the product or service is going to meet your needs at this stage. And even if it is not much, nobody wants to pay for a product or service that will be disappointing in the end.
Thus, the free aspect of this model completely removes this obstacle and allows (in principle) to acquire users or customers faster. You can try the product and service in its entirety or with enough functionalities in most cases without having to pay anything.
Getting a large number of users quickly often allows you to quickly adapt your acquisition marketing strategies, communicate the volume of usage, or to prove the relevance of your product or service through its rapid and growing adoption rate.
With a large number of users, the company can acquire user experience and thus stand out from the competition more quickly. It is also possible to find funding or partnerships more easily. This gives marketing teams more material to work with, so the acquisition efforts and costs can be recouped faster.
If your business has to face established and paid competitors, it can be difficult for you to reach a critical size, because these competitors may respond to your entry into the market by lowering their prices.
By lowering their prices or offering significant promotions, they are trying to overturn the benefits of your product or service because the risk/reward ratio is at your disadvantage.
That’s where a FREEMIUM strategy can prove to be profitable because using your product or service costs nothing. So this risk disappears. And if your product or service really stands out, it becomes possible to create CHURN among your competitors, as some of their customers will prefer to come to you instead of continuing to pay for less.
If you have designed modular offers with PREMIUM versions, for example, it will then be possible to convert FREEMIUM customers into paying customers while destabilizing the customer base of your competitors.
The FREEMIUM model does not only have advantages. The disadvantages can prove to be significant for your business. What are these disadvantages?
It is imperative to have high financial resources to implement a FREEMIUM strategy.
The fixed cost is not compensated immediately, and cash flow is heavily solicited. Thus, the cost of acquiring your paying customers is very high because it is impacted by the unlimited free access provided by the model.
It is common for FREEMIUM models to be implemented alongside paid solutions such as advanced services or benefits.
There is a saying that goes “What is free has no value”. In this aspect, FREEMIUM does not tolerate average or poorly positioned products or services.
Indeed, even if access is simplified and made easier, it is generally impossible to have an individualized exchange with each user to convince him or train him on the product or service.
Therefore, he will make up his own opinion about the product. And if the benefit is not immediate, he will leave without looking back.
It is also essential to multiply the marketing messages to continue promoting the product or service and in order to avoid your pool of users from drying up. These expenses can be difficult to support if the CHURN rate is too high too quickly.
Most of the time, those who opt for the FREEMIUM model simply don’t want to pay for the product or service provided. Unfortunately this means sometimes, or often, the majority of users.
It is therefore essential to have a very elaborate strategy to identify and then convert and retain the minority of users who are willing to pay. Most of the time, paying customers are the ones who will get the most benefits out of using the product or service.
The challenge then lies in identifying these customers, understanding the value they find in your product or service, and then materializing it in a price that is balanced: profitable for the company and fair for the customer.
As you may have noticed, the FREEMIUM strategy is far from being a simple pricing model. It’s not just about deciding whether to offer the product for free or not. The company must be very clear about its value proposition, its financial resources, and its positioning for the FREEMIUM model not to fail due to a lack of cash flow.
There are many factors to consider:
It is up to each company to decide if they will use this model or not, because it is often difficult to revert to a pure paid strategy afterwards without taking the risk of losing your audience.
To learn more about dotsha eTo learn more about dotsha and understand how we can help you implement this pricing model, feel free to contact our client support and request a demo.
Approx. reading : about 8 min
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