The digital age has brought us a great many ‘portmanteaus,’ or words that have been mashed together to make a new word. From ‘hacktivism’ to ‘malware‘ to ’emoticon,’ it seems like a new mash-up is added to our modern day lexicon every minute -such as ‘freemium’.
There’s a reason they’re so popular, and that’s because these word combinations are amazingly accurate at describing what they mean. This is especially true of freemium—a combination of the words ‘free’ and ‘premium’—meaning something that is given to customers for free with future charges for premiums or upgrades.
While this business model may seem antithetical to profit, it’s proving very successful for a variety of organisations. For example, Skype offers voice over internet protocol (VoIP) telephone service to consumers for free, but upsells other offerings to businesses and other users who need more features than the free service. It’s estimated that only 12% of Skype’s customers actually pay for the service, but the company is valued at $2.6 (£2) billion.
Whether that figure is inflated or not, it seems impossible that a large organisation could sustain itself on a model where only 12% of its customers pay. Let’s examine how freemium pricing strategy works, and whether it might be a viable option for your business.
Elements of a Successful Freemium Pricing Strategy
In order to give a product away for free—and not go bankrupt—there are a few specific tenets that organisations must adhere to. The product must…
- Be something that people want. Your product can’t be an afterthought or a throwaway service. It must be something that consumers value and will use.
- Be truly free. This means it has to stand on its own with no additional cost to the consumer. It should function as an independent service or application that does not require a consumer to pay.
- Be cheap to produce. This means it can’t cost a fortune to replicate. One reason freemium pricing works in software is because it’s fairly easy to create an app and get it into the marketplace. In general, overhead costs are low, and the cost to create the product is easily distributed over the lifetime of the product. This makes the marginal cost very low, which is a plus for businesses looking for maximum reach with minimal spend.
- Have huge market potential. This is really at the crux of freemium pricing strategy, because in the end, it’s all about the law of averages. The more people that use the free product, the better chance you have at getting a percentage of them to pay.
Will a Freemium Pricing Strategy Work for my Business?
Freemium pricing has become the default model for many internet startups and app developers, but that doesn’t mean those are the only types of businesses that can make it work. There are some issues you want to consider, however, before using a freemium pricing strategy.
How Big Do You Want Your Company to Be? How Good Is Your Infrastructure?
The basic tenet of freemium pricing is that you will reach a wide and varied audience. This means that your internal team must be prepared to deal with issues relating to functionality and customer service. These issues can easily overwhelm a small team, especially one with multiple responsibilities above and beyond normal customer service.
Additionally, if you’re not looking to make millions every year, a freemium model might do you more harm than good. If your product offering is solid and well-priced, then you can probably forego freemium pricing and use a more traditional revenue model.
Can You Monetise Free Users?
This is a big one, since being able to generate revenue from consumers who use your product for free can add significantly to your bottom line. Many businesses using a freemium pricing strategy are able to sell advertising within their free products. This means that even though they don’t make money off of the product itself, they can still make money off of the user base.
What Is the Cost to Service Free Users?
Servicing costs will be related to your infrastructure. If it costs a lot of money (and/or time) to service your users, then a freemium pricing strategy will actually lose money in the long run. Servicing costs, however, could be offset by the revenue generated from advertising on the product, but be sure to analyse the ratio between your cost to service customers and the revenue that those customers generate.
In short, the best way to know if a freemium pricing strategy is right for you hinges on your product offering. It has to be stellar, above and beyond what’s currently on the market, and consumers must understand that value. Take a long, hard look at your product before deciding on freemium pricing, because it is very difficult to ask consumers to pay for something once you’ve already given it away for free.