How Customers Win in the Freemium Age

By Aarthi Rayapura April 15, 2014

Joe Andrews Hi-Res Head Shot 0156

Joe Andrews

Sr. Director, Marketing

 

In the Subscription Economy, there are many recurring pricing and freemium models in play. As a result, customers have a lot of choices and tough decisions to make. Freemium is a great no-risk opportunity for customers to try out a new service and can be a powerful lever for businesses to rapidly acquire new customers. Freemium models lower the bar to start using a service, but the offerings typically come with fewer capabilities.

 

Ultimately, freemium models are not about the product, but about the path to enage with prospective customers and the process to educate them and get them comfortable enough to trust in making a purchase decision much faster than they would without the freemium offer.

 

How do subscription companies optimize the use of freemium models in their business? In this post, we share learning from recurring revenue businesses that are using freemium and make suggestions for how to best apply them to your business.

 

Be Clear About Your Value Prop

Originally from Los Angeles, Michael Riley is a serial entrepreneur now based in Philadelphia. His latest startup initiative, Simplpost, was recently accepted into the Philly Startup Leaders Accelerator program. He believes that in order to convince customers that they must pay for a service, you must demonstrate that your service offers more value than any competing service.

 

It’s definitely a challenge to compete in a market full of free and freemium services. Our strategy is to provide more value than our competitors so that it makes sense for our customers to pay for this extra value. It’s a win-win situation for both sides. I recently wrote a blog post on sustainable pricing that has more information about this topic.

 

By offering free services, other companies are unable to provide any high quality support because it would be cost prohibitive. Instead we focus on differentiating by offering unmatched value. We provide the best total solution and have direct interactions with our customers. We get to know their specific needs and customize our service for them.

 

Educate Your Customers on the Value of your Premium Services

Freemium services seem like a great deal on the surface. However, many of them compromise on features, performance and customer service in order to justify making the free and differentiate them from their premium paid services.

 

Gabriel MaysGabriel Mays is the self-funded, sole founder of Just Add Content, LLC, a website builder for small businesses. Mays also served as a Captain in the US Marine Corps for eight years.

 

In many cases, it’s difficult to compete with a free product or a product that has a “the first one’s on me” model. There are a number of well-funded SaaS website builders that offer free websites via the freemium model by charging for specific features. It may sound like a good deal, but it comes with a considerable mark up and compromised quality, security, customer service, and performance.

 

Paying customers on freemium sites are often not aware that they’re receiving the same infrastructure as the millions of free customers, which means that essentially they’re subsidizing them. Even those who are aware still don’t know what to look for or what to expect. As more people understand what they need and why they need it (i.e. SEO optimization), they are more willing to pay for it.

 

There are several key things that all SaaS businesses should be doing:

  1. Charging enough to be able to deliver the value that the customers deserve
  2. Educating customers on the kind of value that they should be receiving and why it matters while also pointing out the questionable strategies of the freemium businesses
  3. Focusing on the things that you can provide because you charge what the freemium businesses cannot provide (i.e. customer support).

 

Fill Specific Market Gaps With Your Premium Offerings

Prasad guptePrasad Gupte is a software product manager of a computer software company. One effective method for increasing value proposition that he champions is to offer services that the Freemium companies do not offer, such as vertical/horizontal integration.

 

Are you are in a space that is flooded with free and paid subscriptions? Are you craving market share? If so, you can elevate your value proposition and gain a share of the paid market by offering the following services and features.

  • Vertical / horizontal integration (with some investment) via features
  • Partnerships
  • Complimentary services that cannot be offered free

 

Grayson CarterGrayson P. Carter is a software entrepreneur and lead generation expert. After spending several years in the business, he saw the need for industry specific software and developed his first paid SaaS business website, BirdDogLead. One reason that companies develop new software is to solve an industry-specific program, which is what Carter has done with his business.

 

The value we provide is that the software solves a problem specific to that industry. When you create a niche for a specific set of users, you get to develop to their specific needs. Consequently they feel like they’re having custom software build just for them at a significantly lower price. If people won’t use your product unless it’s free, then the problem that the software solves isn’t so painful.

 

Be Disruptive by Being Transparent

Michael CarterMichael Carter is the CEO of BizEquity, the first leading online business valuation service. He believes that many consumers want SaaS companies to be transparent so they can understand what they are getting and why they should pay for it.

 

As an SaaS business, you can gain market share from competing SaaS businesses by scaling your company. Assuming that the weaponry of both businesses is the same (technology and service offering), the game becomes all about distribution and most importantly, the customer experience.

 

At BizEquity, we do provide a value for any business online that freemium SaaS businesses cannot offer. We refer to our model as “VaaS” or Valuations as a Service. We are big fans of what TurboTax and Intuit did early on with their freemium model. We offer a business as a free online “estimated business value,” which is transparent to the user. At the end of our seven step online process, users have to subscribe to our SaaS service in order to get a 22-page customized report and access to the online dashboard. Transparency is key here. We think that free works if you are trying to take a billion dollar offline industry and put it online.

 

Using freemium models as part of a subscription SaaS offering did two things for us. The first is that is showed transparency to the user. The second is that it proved truly disruptive, creating fans for our product and service.

 

 

The bottom line of building a successful subscription business is that you have to do more than offer an excellent product. While your product quality is critical, it is not enough to set you apart from your competition. You must be innovative with your pricing and packaging strategies – and freemium is one effective lever for a lot of businesses.

 

The key is to focus on the path from free to paid. It’s about educating, building trust, and making your value so clear and compelling that it’s a no-brainer to step up and pay for it.