Freemium Models

“Freemium is the opposite of the traditional marketing strategy of providing a free sample: instead of giving away 1% of your product to sell 99%, you give away 99% of your product to sell 1%.

The reason this makes sense is that for digital products, where the marginal cost is close to zero, the 99% cost you little and allow you to reach a huge market. So the 1% you convert, is 1% of a big number.”

– Chris Anderson, Wired Magazine

Does freemium really work?

Dan Ariely, the famous behavioral economist, conducted an experiment, where he investigated “free” as a special price for hershey kisses. His results answer with a resounding YES.

freemium-experiment

The image above shows that even though price was reduced by the same amount to both candies in group B, there was a huge increase in the number of consumers that chose the hershey kiss over the other candy.

How do you build a successful freemium model?

There are three main ingredients:

  1. Cheap network
  2. Value paywall
  3. Cross subsidies

Growing a cheap network

The biggest benefit of selling something for free is that more users will be willing to try your product, and more users means more free marketing. Dropbox used this to great effect. They provided users with extra storage in exchange for inviting friends, tweeting, and liking the service. This drastically lowered their cost to acquire a new user.

However an important note is that this only works if it is cheap to support free users as your business grows in scale.

Value Paywall

Key to the value paywall is that users must receive increasing value in using your product over time. This implies that users will more likely hit this paywall with additional use. An example of a company that executed this quite successfully is Evernote, a company that allows you to store your notes in the cloud. The more notes you store, the more valuable the service becomes. And once you hit a certain storage limit you need to start paying for the service.

Cross Subsidies

Cross subsidies describe any base product that entices you to pay for something else. Most freemium apps use in-app purchases to this effect. Other well-known examples are Spotify and Pandora. These companies entice users to pay in order to avoid ads and remove limits on music listening, which enhance the base product.

Should you go freemium?

Before you decide to go freemium, it’s important to first ask yourself a few questions about your business:

  • Do users realize increasing value with time?
  • Do free users provide marketing ROI?
  • Is it expensive/difficult to locate valuable customers?
  • Do your costs scale with the number of free users?
  • Is your market huge?
  • Is your primary market B2C?

If you’re not too sure about any of the above, why not consider going premium instead of freemium. Your business might be better suited for a premium model if you can determine that users are willing to pay for a purchase from the onset.

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