There are a lot of ways to build a business that people are using these days, but so-called ‘freemium‘ software is one that has been with us for a while. In case you are curious about the word, it is based on a combining of the words ‘free’ and ‘premium’. Making and distributing apps that offer basic features at no cost to the users is one way to do this. A fuller definition comes from Wikipedia:
Freemium is a business model by which a product or service (typically a digital offering such as software, media, games or web services) is provided free of charge, but a premium is charged for advanced features, functionality, or virtual goods.
One popular example of this type of product would be Farmville which was an enormous hit on Facebook for a few years. The game itself was free, but the virtual goods had to be paid for. There are a lot of different ways of going about this model, though. You might make, for example, an app which offers information on a topic that is regularly updated, giving basic topical information for free and offering a subscription for updated information (this is called a continuity program which you can learn to build with Founderfly, for instance). This business model is very open to creativity, but not everyone agrees it is the best choice out there.
Be Cautious When Considering Freemium Models
There are some very big name freemium services out there, Dropbox (a web-based file storage service) is one of them. However, as Dmitri Leonov of Mashable recently pointed out:
The problem is most consumer internet startups want to be in the above three categories. But by charging nothing for your service you’re actually anchoring that value in your customer’s mind, making it harder to raise the price later. An alternative is offering your product for free during beta — or offering credits — while you figure out where to put the paywall.
When brainstorming ways to begin a successful business, it really is crucial to be thinking these kinds of thoughts. Cash flow is incredibly important and unless you do have that venture capital behind you, it can be a very long and very rough ride to profits using the freemium business model. This is not to say that it can not be done or you should not try it, it is merely a word of caution. You have to do what makes sense for your business first and foremost. Everything else is relative, really.
Benefit with Lots of Publicity and Brand Awareness
We know that the trick with Internet Marketing is often to keep it simple and focus on bringing value, just as with any non-digital business. Freemium business models do have one very powerful advantage in that they allow you to be seen as giving people something for free and if what you offer them has real value then they are quite likely to spread the word about it. In the business to business sector, if you make a great tool your logo can and often does travel far and wide, opening up a lot of possibilities you might be very appreciative of. As Curt Finch stated recently on Small Business Trends:
Freemium software is positioned for an advantage here. While businesses frown on the inclusion of a software company’s logo on paid tools, it only makes sense to include it and other credentials in a freemium version.
For those running a digital service, the results of a freemium business model can be incredibly good. Bringing in users and getting them acquainted with a good value first, then offering a range of upgrades can be a smart idea. Many of us in Internet Marketing will be familiar with MailChimp. When Finch spoke with the CEO of MailChimp, he was told that this business model has been very successful for the company. Finch quoted the CEO as saying:
Freemium is great for publicity. Some of our competitors will include their logo in the footer of every single email their customers send out. We’ve always felt uncomfortable doing that, especially with a paying customer. But if we give it to you for free, then we have a right to share a little bit of the space. So we put our logo in the footer for all of our free users.
This is the heart of the benefit that freemium business models provide. They create goodwill and, when done correctly, can lead to a lot of good publicity. Instead of doing what companies like Facebook and Twitter have to do, leveraging their users as their product, you can focus on the service. This is often a more comfortable approach for entrepreneurs and can help reduce the amount of capital needed to keep the service up and running, especially during those crucial early years.
Creating Incentive for Users to Upgrade to Premium
The challenge with the freemium model is getting the maximum number of users to decide they want to start paying for extra benefits. A lot of your success with this particular task is going to come down to clear communication. When you offer benefits you want people to pay for, it is essential to make it clear to them how they benefit and to make sure the value added, even with a low-cost upgrade, will be substantial. Whether you market to consumers or businesses, you must make the offer to upgrade attractive or they will naturally decline to do so.
Another consideration is the timing of the offer. If you run a service that allows users to take advantage of the service for a certain amount of time, reminding them that they can purchase more time when they are close to running out can work well. Reminding them too early may cause them to stop using the service before they are fully invested and that means they may not have yet seen the full value of all your service has to offer. It is a bit of a tightrope act, but if you plan intelligently, you should be able to produce significant conversions from free to paid service.
When a company offers something for free and then changes to charging for that same service, problems can ensue. Examples of how sensitive consumers are to changes in a service are all around us. Consider the irritation that YouTube has generated by positioning ads within videos. Hulu took the concept to a whole new level, even inserting commercials at regular intervals into the content that only paid subscribers have access to. Finch even noted:
Changing that value while not adding any additional benefits will convince customers that a company is attempting to rip them off. While it was not a freemium service, the price hike of Netflix last year caused mass outrage amongst its many users, forever tarnishing what was once a near-flawless reputation.
Customers are smart – unless you are offering software as part of a free trial (and you make that clear), do not charge them for something that was previously free.
This is very important to remember as it can make or break your success with the freemium model. As with how we approach our business, remaining as consistent as possible is what matters most. Sticking with the model is smart and, if more capital is needed, innovation is where profits are most likely going to end up coming from.
Every Business Owner Has to Decide For Themselves
Freeumium business models offer a lot of advantages that are certainly worth considering. As with any other business model, there are also drawbacks that need to be kept in mind. You, the entrepreneur, are the one who is best able to make the decision as to how to market your product most effectively.
Have you used any freemium approaches to marketing your company’s products or services? We would definitely love to hear your experiences or even your thoughts on the freemium business model itself. Feel free to leave a comment below and, also, if you have any questions please do ask them. We will respond as quickly as we can.
Resources Mentioned in this Post
- Sixty Days to $10k a month – A Six Figure Business Blueprint– Thinking about developing an app? It could be easier than you think. Troy explains the process so you can begin making your own apps with ease.
- FounderFly Review From Ryan Lee – Entrepreneurs stand to gain a lot when they socialize with each other. Come learn what the FounderFly membership site has to offer those looking to learn about nano sites, continuity programs & more.
- Star Entrepreneur Speaks Out on Key Lessons Every Business Owner Should Know – Business basics are so crucial and often we lose sight of them. Discover what the founder of KISSmetrics & other successful ventures has to say about the lessons he’s learned in the businesses he’s run.
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- Upcoming DotComXpo 2012 Aims to Hit Refresh on Internet Marketing
- Content Marketing Strategies Working Magic for Today’s Businesses