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Freemium Business Model: A Guide for Subscription-Based Companies
What Is Freemium?
Freemium. It’s a term you’ve probably heard before, but what does it actually mean? In short, freemium is a business model that allows companies to offer their products and services for free, with the expectation that a certain percentage of users will upgrade to paid subscriptions.
By offering a freemium version of your service, you also can reduce your customer acquisition costs and build brand awareness for relatively cheap.
It’s for these reasons that it’s become quite a popular business model for subscription-based businesses. According to a recent survey of 400 mobile app developers, 54% reported using the freemium model and 33% said that this method generated the most revenue for their business.
Of course, you’re right to wonder… Will the freemium business model generate similar or better results for your subscription-based business? Maybe. But it’s not guaranteed.
This guide will help you decide if it’s the right move for your business by discussing:
- The pros and cons of the freemium business model
- 6 strategies to convert free users into paid subscribers
- 3 examples of SaaS businesses that use the freemium model
- How to decide between freemium vs. free trial
Pros and Cons of the Freemium Business Model
The freemium business model can be a great way to grow your business.
But it may not be the right method for your current business goals.
So, let’s take a look at the major pros and cons before you make a decision.
Pros of the Freemium Business Model
- Acquire a large number of users quickly and cheaply. Since there’s no barrier to entry (i.e. users don’t have to pay anything upfront), you can get your products and services into the hands of as many people as possible. This is especially beneficial for companies that have a network effect, as the more users they have, the more valuable their product becomes.
- Build brand awareness. If people are using and enjoying your product for free, they’re likely to tell their friends and family about it. This increased brand awareness can help you acquire even more users at no cost!
- Generate high-quality leads. You don’t have to wonder if the people who sign up for your freemium version are interested in your business – you know they are. In other words, freemium users can be easier to convert to paid subscribers than other leads. This, of course, is only true if you take a strategic approach to conversion. We share some tips to help you with that later in this article!
Cons of the Freemium Business Model
- Some freemium users won’t upgrade. If your free version is too good or not good enough, some people may never feel the need to upgrade to the paid version. You also can’t always predict when a lead might upgrade since there’s no time limit on your freemium offer.
- A free version may cannibalize your paid business. Some people who would’ve been willing to pay for your product may instead opt to only use the free version. This issue becomes particularly true if your free version is too good.
- Free versions are not free to maintain. If you hope to convert non-paying users, you still have to offer them high-quality support and cover all of the operational costs. With too many freemium users and not enough paid subscribers, this can quickly become a financial nightmare.
- Risk devaluing your brand. Some people may think that because you offer a free version, your product or service is not really worth paying for. You’ll have to put more effort into proving that the real value of your product comes from subscribing to the paid version.
How to Convert Freemium Users to Paid Subscribers
Despite the potential risks, the freemium model can be a great way to grow your business. But you should know upfront that the conversion rate typically falls somewhere between 2-5% on average.
If you’re considering this model for your company, here are a few strategies to increase your chances of converting free users to paid subscribers.
Ensure your paid version is worth paying for. None of the following strategies are worth exploring if you haven’t covered this one first. Does your product or service solve a real problem in the market? Does your messaging clearly communicate how your business solves that problem? If your answers to these questions are not a resounding “Yes!”, spend more time working on those things before offering a freemium plan.
Make sure the free version is valuable, but not too valuable. You want people to benefit from using the free version of your service, but you also want them to see the value in upgrading to the paid version. Your freemium should be functional and useful, but have limited features. Make sure you’re also regularly communicating to free users how their experience with your service would be better by upgrading.
Let users experience one or more premium features. Your free users may not really understand what they’re missing out on until they get a chance to try some of your premium features. Consider offering them the option to use one or more of your most valuable premium features for a limited time.
Provide excellent customer support. Free users are like paid customers. And every interaction they have with your customer support team will influence how likely they are to continue using your product and whether they decide to upgrade to a paid version.
Use data to strategically nurture your free users. Which features do your free users value the most? Is their way of using your service different from your paid subscribers? Collect data to find out. Then, use that data to create a relevant lead nurturing campaign that highlights how your paid version increases the value of those features.
Make it easy to upgrade to a paid version. Your freemium users shouldn’t have to start at square one when they decide to upgrade. For one, make sure their information gets pre-filled into their sign-up form when upgrading. You should also offer pricing plans that are attractive to users who still may not be ready to fully commit to the most premium version of your service.
3 Examples of SaaS Companies Using the Freemium Model
Here are 3 examples of subscription-based SaaS companies that have successfully used the freemium model to gain paid subscribers.
Spotify
Spotify is an audio streaming service that we’re sure you’ve heard of. It’s also one of the best examples of a business that offers a valuable freemium version while still managing to make the premium version appealing.
Free users of Spotify’s streaming platform have access to all of the same audio content as paid subscribers. But, unlike paid subscribers, free users will frequently have their experience with the app interrupted by ads, which generate revenue for Spotify. Free users also can only skip a limited number of songs per hour, which becomes a frequent reminder of the limits of a free account.
These limitations are minor inconveniences to the user, but over time they work to convince the free subscriber that upgrading to a premium plan is worth the money. As a result, Spotify had one of the best freemium conversion rates at 46.6%.
Zoom
With many people now working remotely, Zoom has become another popular example of the freemium business model. As you probably know, anyone can create a Zoom account and use its virtual meeting platform for free. But, of course, there’s a catch.
If an organization needs to conduct virtual meetings longer than 40 minutes and/or with 100 participants, they’ll need to upgrade to one of Zoom’s paid plans. And since these types of meetings have become the norm, some businesses see the value in signing up for a paid subscription and convert.
Learn how Zoom scaled users 30X in less than 6 months with Zuora.
Evernote
Evernote is an app that offers free users a virtual storage space in which they can store notes, images, audio files, web page clippings, PDFs, and more. It’s also another example of a freemium offer that is valuable, but not so valuable that users won’t see the value in subscribing to a paid plan.
For free users, there are limitations to what they can store, how many devices they can sync to, and their options for customer support. But, once users sign up for a premium version of Evernote, they no longer have to worry about these limitations and get to enjoy a range of additional features.
Freemium vs. Free Trial
If you’re still not sure about the freemium business model, you may consider offering a free trial of your service instead.
With a free trial, users get to use your product for free (with limited or full features) but only for a limited time. And with that time limit, you can create a sense of urgency that gets users to convert more quickly than freemium users. But, on the other hand, that limited time offer might also not give users enough time to really understand the full value of your product.
So, which one is better? A freemium offer or a free trial?
The answer: it depends on your business, your product, and your goals. If you’re not sure which one is right for you, try experimenting with both approaches to see what works best for your business.
For example, you might try offering a freemium version for a month and then switch to a free trial the next month. Or, you might offer both at the same time and see which one converts more users to paid subscribers.
There’s no right or wrong answer here. So, if you can’t decide yet, experiment and choose the one that converts the most.
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