Freemium is the business model which offers the basic features of a product for free with the option of paying for a subscription for the rest of the features. Due to its efficiency at generating users (its hard to beat 'free'), it has been widely adopted by many subscription-driven start-ups in recent years.
Despite its wide use, the model is still somewhat of a mystery to a lot of developers and business managers. What do you give away for free? How do you ensure some users subscribe to the premium version? What kind of conversion rate should you aim for?
There are a multitude of questions you should be considering if you want to go with a freemium model. The features you decide to give away freely should be unique to your market base, competition, and your ultimate goals as a company. Simply giving away free features is not the whole plan, but just a step in the process.
What is going to be free?
So you have a cool new product, service or, app and you need users. This is the primary reason you go with freemium, to pull in users. Why else would you be giving away your hard work for free? The problem you will find is, today, most apps and online services are also based on the freemium model. This means you can't just rely on this perk, you still need to attract and engage customers.
This is where a delicate balance has to be reached as the features you decide are free are pivotal to your success. First, you need to just accept from the outset that the vast majority of your eventual users - 95% on average - will only ever use the free version. This will, of course, vary based on your product and the market, but your reputation will generally be based on the features people immediately have access to.
So if you only give away the bare bones of your product and reserve all that makes it unique only for your subscribers, you won't generate enough users. bloggers, influencers and the average users will judge it by those basic features and that is the most anyone will know.
You need to give users enough features so it's still special in its free state, but leave out just enough so users can clearly see the added benefit of subscribing.
Is there a point in subscribing?
So you've started generating users, but do any of them have any intention of ever subscribing? One of the problems with a lot of initially successful tech start-ups is they struggle to communicate what the added benefit of a paid subscription is to users. Some do it well; Dropbox for example initially gave everyone who simply signed up with their email address 2 gigabytes of free storage. If you ran out of space and needed more, that would be a $9.99 monthly subscription fee. It was straight-forward, clear benefit you reached yourself only if and when you needed it. The simplicity of the offer drew in 200 million users and have had a steady premium user conversation rate.
Linkedin, on the other hand, did not make their premium benefits clear for a while. Most have never been so much as inclined to upgrade as they couldn't possibly fathom what the point would be. To be fair, this is partially because the premium features benefit certain segments more than others (recruiters, salespeople, job seekers). It has struggled to convert average users because it has such muddy premium benefits.
The Goldilocks conversion rate
Another feature of the freemium model which can seem counter-intuitive at times is the conversion rate. You would think a high conversion rate is what you should be aiming for, but this is not always so.
Again, it's a delicate line to ride. If you are drawing in a ton of users but your conversion rate is very low, like 1%, it might mean users are getting too much out of the free version of your product. This is damaging if you make the majority of your revenue from subscriptions, as you need subscribers to pay for everyone else. This could possibly lead to your products downfall if you don't adjust.
On the flip side, however, if you have a very high conversion rate, you might run into a different host of problems. For one, a high conversion rate might mean you're just not creating enough traffic. Ask yourself, would you rather have a conversion rate of 50% but only 500,000 users or a conversion rate of 2% and 10,000,000 users?
The balance should be unique to your company. If you're appealing to a smaller market then you probably do want a rather high conversation rate. However, if you are appealing to everyone who uses the internet, your focus should be centered around generating as much traffic as possible with the long-term goal of aiming to convert 2-5% of users.
Is it too much free, not enough 'mium?
Along with all the benefits that come with the freemium business model, it can take a while to find the right balance. Some digital companies simply aren't appropriate for it. Some, like LogMeIn, start with a freemium model and when they have garnered enough of a user base or recognition, they scale back to a subscription-only model.
This is because it can take a long while to become profitable, so never be afraid to make tweaks based on the data you garner in that time. If you are generating a lot of traffic but not enough subscribers, you might decide to scale back the number of free features available. The worry with doing this is the possible backlash; people generally don't like paying for things they once got for free.
However, you should never view your free users as a burden. They have the potential to become one of two possible kinds of user; either they will eventually become a subscriber or they will bring someone in who will eventually become a subscriber. Word of mouth is probably the most effective marketing technique behind 'free', so keeping all your users happy and content is of paramount importance.
Explore different ways to garner revenue from your users and use your unique strengths to your advantage. Mobile games have been incredibly successful with 'micropayments'; getting people to pay much smaller amounts for virtual goods within the game as opposed to for game itself. And since going public, 61% of Linkedin's revenue has been generated through recruitment services sold to employers and recruiters as opposed to subscriptions from premium users.
So as marginal costs continue to fall, the model will become more and more appealing to companies, even from outside the tech industry. Many freemium ventures don't even see it as a tool to generate users but more as the ultimate motivator to never stop innovating their own company. The reasons Dropbox has been so successful is it has continually innovated. First, it just offered storage, then introduced a file sharing option. Now, it's automatic synchronization with your phone as well as uploading your pictures, all the while tweaking and improving their interface.
Because at the end, it won't be your free features but your commitment to innovation that will make the real difference.