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Is a freemium business model right for my business?

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Last editedFeb 20202 min read

Over the past decade, “freemium” has become the pricing model of choice for start-ups and app developers. Allowing businesses to scale and attract a large user base without the need for a traditional sales team or expensive ad campaigns, it’s easy to see why freemium business models are so appealing. But are they right for your business? Learn more about the benefits of a freemium model and work out whether the freemium model of app monetisation could be the right fit for your company.

What is a freemium business model?

Simply put, a freemium (free + premium) business model is a two-tier acquisition model. It divides your product or service into two versions: free and premium. Free users will have limited access to selected features, while premium users are able to access richer functionality for a subscription fee. The freemium subscription model has become widespread in the SaaS space, with some of the most famous freemium model examples including Dropbox, Skype, and Evernote. As the subscription economy continues to grow and the marginal costs of products continue to drop, increasing numbers of businesses are turning to the freemium business model to boost their chances of success.

What are the benefits of a freemium model?

There are a broad range of benefits associated with freemium subscription models. First off, it’s a great way to get your foot in the door with potential customers. Initial adoption is often the most significant hurdle for SaaS companies to bypass, but when your product is free, it’s much easier to convince customers to give you a try. Secondly, freemium business models can enable your company to grow rapidly. Word of mouth combined with a low barrier to entry can drive viral adoption, which is why this type of business model has become so popular among Web 2.0 companies.

What are the disadvantages of a freemium subscription model?

However, the freemium business model isn’t without drawbacks. In some cases, freemium businesses encounter higher churn rates. This is because it’s easier for customers to adopt a “throwaway” mentality when they’re not paying for your product. In addition, freemium subscription models can kill your ability to generate revenue, which may be particularly difficult for emerging businesses and start-ups to deal with.

Should I use a freemium business model?

While the freemium model of app development has a number of major benefits, it’s also fair to say that it may not be suitable for every business. Here are a couple of key points you should consider before making the decision to switch to freemium:

  • Low cost-to-serve – If you’re going to succeed with a freemium subscription model, it’s essential that your business has low marginal costs. Otherwise, you won’t be able to support the number of free users on your platform.

  • Size of your market – In addition, it’s important to consider the size of your potential market. Generally speaking, the freemium model of app development requires a mass audience to work. If you offer a more niche service, it may not be the right choice.

  • Clear migration path – The success of the freemium business model depends on your ability to convert free users to paid users. Without a seamless migration strategy, your users won’t feel the need to upgrade.

  • Two-sided monetisation – Many freemium businesses have multiple streams of revenue. For instance, they’ll offer a service for corporate users and a service for personal users, giving you the opportunity to drive paid conversions for both entry points.

  • Appropriate infrastructure – Finally, it’s important to remember that the freemium model requires viral adoption to really take off, but you’ll need an infrastructure that can handle that amount of people. Make sure that your business is ready to receive a mass audience before rolling out your freemium product or service.

Ultimately, the decision to move your company to a freemium business model depends on the type of product/service you’re offering. For businesses that offer a unique service with broad appeal, the freemium model can help to unlock rapid growth and drive recurring revenue.

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