How Does Freemium Work?
in Monetization and Pricing
December 13, 2022
If applied correctly, the freemium model can work wonders for any new SaaS-based or service business. In this article, we explain how to do it.
The idea of giving things away for free as a business should always be approached carefully. There’s always a question of how much we should give, for how long, and whether this should be a permanent solution.
Of course, in many cases, this strategy may not be viable at all. But for others, it can be one of the fundamental pieces of a prosperous business. When you browse your application list, you may be surprised how many of them work in a freemium model.
So, let’s talk about how the freemium model works and how to make sure it’s the right path for your product or service.
Freemium 101: What is it and how can it be used?
The freemium model is based on giving customers a limited version of a product or a service for free and then offering more extensive packages and features for a price. The limitations can apply to many aspects, such as extra features, dedicated support, capacity, commercial use license, or use time.
It’s been successfully implemented by many software companies, particularly in the SaaS and gaming industries. And in recent years, more and more online magazines and other media outlets have switched to operating this way.
Let’s take one short example from each of those industries to explain how it may be utilized.
Freemium use cases
Freemium in SaaS and software
In the SaaS industry, freemium is perhaps the most widely utilized among all types of businesses. Most of the popular online applications allow users some sort of freemium access, and the specific kind of limitations can vary significantly. Google probably uses all of them.
For example, Google Meet allows users to conduct calls for free, but if you want to record those calls, you need to pay, so that’s a case of limited features. Google Drive, on the other hand, is free only for a certain amount of data (limited capacity).
Freemium in media
Many online magazines allow users to read only a certain number of articles a week for free. If they want more, they need to buy a monthly subscription. In addition to prominent media outlets, such as The Athletic, the model is also highly popular among independent journalists and entertainers. For example, the rapidly growing publishing platform for individual creators, Substack, is based mainly on the freemium model.
Freemium in gaming
The gaming industry, and especially mobile games, are very often based exclusively on the freemium model. For example, games can limit the time users play each day or allow them to buy premium in-game features that improve their experience. Those games are often “free-to-play,” and companies make money only on in-game micro-transactions.
How can freemium help you grow your business?
The examples can give you an idea of how freemium can be the base of a business model, but let’s focus more on the exact gains.
Why exactly are companies doing it? What business goals are companies trying to achieve by making their products or services partially free?
Attracting more users (for less money)
With a well-designed freemium model, customer acquisition cost drops dramatically. Even a $1 paywall can easily prevent customers from giving a product or a service a chance, so the option to try it for free makes a huge difference. Using this strategy, we’re gaining access to customers that often wouldn’t even consider trying our products. And later on, those users often become actual paying customers.
Gaining positive publicity and building relationships
Many users on the market won’t be interested in buying your product or subscribing to your service anytime soon.
For example, amateur bloggers who wish to work on basic SEO on their websites won’t need a vast, complex platform for advanced analysis with gazillions of features. They also probably don’t have the budget for it. At the time, they’re satisfied with the freemium version, but as they grow, they can switch to the premium version.
That’s why many SEO apps allow limited use of their platforms for a single domain free of charge. It doesn’t cost them a lot of resources, and they get armies of free influencers that share their experience and recommend their product to others. And, of course, some of those that will listen to those influencers will surely be interested in the full version of the app right from the get-go.
The idea of value in the freemium model
All those variables, types of freemium and possible gains can be significantly different from one business to another. Choosing too many features for the freemium option can cause us to lose potential customers who would gladly pay for the subscription. On the other hand, too limited freemium version won’t be the user magnet we hope it to be.
In its very essence, freemium is all about adequately showcasing the quality of a product or service and explaining to customers what potential value the additional features can provide. The freemium version of a product or a service should be attractive enough to persuade customers to pay for what we offer in the full version. But to do so, the freemium option must have value in itself.
Of course, the most challenging part is figuring out how much we should give for free and how we should monetize. Perhaps the best way to find the correct answer is by adopting the value-based approach, which helps businesses estimate the WTP (Willingness To Pay). It’s a complex approach that requires thorough research, but it leads to maximizing profits.
By understanding the value of the service and what it gives customers, you can figure out how much they will be willing to pay for it (and what you can afford to give them for free).
Turning users into customers
In the end, we can’t forget that freemium is primarily an acquisition model. Its role is to initiate action and start the relationship. Then, we must find ways to turn those freemium users into paying customers.
The biggest catch is finding the right balance between a sufficient lite version of a service and an appealing set of features in the paid plans. And we can’t forget that whatever version we consider freemium should never be set in stone. Instead, it should evolve because if we’re not careful enough, our competition can set the bar higher and offer more features, making your customer base migrate to them. And it might be very difficult or even impossible to get them back.
How many users should actually buy our subscription?
The percentage of paying customers you should aim for can drastically differ depending on your offer. For example, in some extreme cases, it may be enough if we have even 1-2% of users subscribing to paid plans, but in other businesses, the minimum conversion rate should be much higher for the model to be justifiable.
How to determine if freemium is the right idea for your business?
The freemium way isn’t for everyone. That’s for sure. And to make it work, it requires both a deep understanding of your product and your customers' needs.
But no matter how we approach the idea of free features or limited versions of our services, it’s always a good idea to at least consider this option. Companies from entirely different worlds based their business model on freemium, which was often the cornerstone of their success. It may be the same in your case.
So, if you wish to find out for sure, we can gladly help you. You can arrange a free consultation with me here.