How to Create a Successful Freemium Business Model

kathryn by Kathryn Hawkins on October 27, 2011
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If you’re starting a web-based company, you’ll gain a lot more site traffic and visibility by offering your product for free instead of demanding newcomers’ credit cards straight away. The problem, of course, is that this strategy won’t earn you a cent. A savvy solution: Blend the free and credit-card models into a hybrid system known as “freemium,” under which you offer a basic service at no cost and premium features for a fee.

Here are a few tips for creating a successful freemium business model:

  • Create a free product or service that users love. Even if users aren’t paying for your basic offering, make it shine. Word-of-mouth is your best marketing strategy, and when people enjoy a complimentary product or service, they’re likely to share it with their friends. Although you’re not earning a profit, you can enjoy substantial savings on marketing expenses when users do your advertising for you — and some of these free users will become paying customers in the future.
  • Don’t try to turn a freebie into a fee-based offering. Remember the uproar that Netflix caused when it opted to charge a separate subscription fee for streaming video, which previously had been included in the price of membership? Those pains are still being felt. The takeaway: When you degrade the user experience, you’re likely to face a big backlash. Before publicly launching your service, carefully consider your strategy. If you can’t sustain the free features over the long-term, don’t offer them.
  • Allow customers to use your product or service for free — up to a point. The most successful freemium companies offer people a natural reason to upgrade by setting usage or capacity limits for unpaid members. For example, Dropbox allows users to store up to 2GB of data for free and charges a monthly subscription fee only for users who need more storage space. Similarly, Evernote provides added storage space, bonus features, and priority customer support for a fee.
  • Focus on your web conversions and make adjustments as needed. When you launch your website, install an analytics program, such as Google Analytics and stipulate the actions you want your users to take (i.e., upgrading to a premium account) as “conversions.” The analytics program will tell you what percentage of free users are converting to paying customers, and what steps they took to get there. Experiment with different landing pages and marketing methods to determine which ones achieve the most conversions, and then stick with the techniques that work.
kathryn

Kathryn Hawkins is a business writer for Intuit and is passionate about solving small business problems.

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