Freemium model

economic-dictionary

The freemium model is a business model in which most of the services are offered for free (freemium), although there is a small package of paid services (premium) for some clients who wish to do so.

The freemium model is increasingly recurrent and used in startups and new applications that are emerging. The main objective that is intended to be achieved with the freemium or free part is to attract a large number of users, carry out a massive uptake of the database and that a small percentage of these users pay for the premium services, and these will be the ones that make the most of it. the business. Premium accounts do not usually have high prices, they are micropayments that, applied to a large mass of users, achieve large billing volumes.

That is, through this strategy, users are captured by first granting them a type of free service. Thus, since it is such a large group, a low percentage interested in obtaining specialized services is enough to easily keep users who do not pay anything. In this way, you can have a highly profitable business model.

From this system the name "free" is formed, which includes the group of users who obtain the services completely free of charge. These beneficiaries could even reach figures of up to 90% of the consumers who do not contribute to the company. But in parallel there would be premium customers who, although they represent a low percentage, sometimes no more than 10% can maintain the consumption of those who do not pay and even more allow the business to be managed efficiently and profitably.

How are freemium accounts limited?

There are several ways to limit the free part to get the user to pay for the premium account, such as:

  • Limit of functionality or capacity: The most advanced functions have a payment associated with them.
  • Time limit: They offer you a free account for a first period of time and if you like it, you will pay for it.
  • Limit per use: A free license is offered, but if more is needed, you will have to pay for them. This usually happens in the licenses of some business software.
  • For advertising: If you do not want to see and / or hear advertising while enjoying the service, you must pay the premium account.

What is needed for this model to be successful

For this business model to work you need:

  • Give the user something valuable: This means that not only because something is free will attract users. But if we give the customer something that is interesting and creates value, they will be attracted to pay more for something that exceeds their expectations. That is, the free must be interesting enough.
  • That the price they pay is less than what the client will receive: If the client truly finds that what he receives is worth more than the price he pays, he will be fascinated with the service and will even help us to speak well of our service and recommend us, attracting more potential customers who are willing to pay this price.
  • Markets must be massive: This business model cannot work in small market niches, but on the contrary they have to be large enough markets to be able to make a profit.
  • You must work to reduce costs: In this type of business, success is achieved by trying to work with costs as close to zero, and it is a permanent effort that the company must seek.

Advantages of the freemium model

Among the advantages of the freemium model are:

  • To be able to offer a free and valuable service to people and organizations that can benefit from it.
  • Taking a free trial always attracts more users, which allows a greater scope of knowledge of the new service, greater diffusion or virality, and then, those who like it the most, will pay for a higher quality service (the premium package).
  • There are options to improve the product. For example, by launching free versions we will be applying the lean startup method and we will see what users like and what not, which parts are the ones that they value the most in order to be able to pay for them. This is an optimal way to validate the product in the market.

Disadvantages of the freemium model

However, there are also some disadvantages:

  • For the business to become profitable you need a giant user base and it is very difficult to achieve. Many of the companies that have opted for this model are not viable today despite their fame and turnover.
  • Offering totally free services leads to associating the idea of ​​a price greater than zero as unfair and the price-value association is not adequate among many of the users, so it will be difficult to get them to access the premium package.
  • Competition or service is distorted. That is, they often make the one who wins or the one who best positions his professional profile not the most skilled, but the one who has put the most money in the application.

Success stories

There are many cases of successful companies through the freemium model. We highlight some of the best known such as:

  • WhatsApp: APP that allows you to send and receive messages in real time between users. A free chat that already exceeds 1,000 million users worldwide and is highly dependent on the application. When they decided to charge a symbolic price for their use of € 0.89 / year, most of the users agreed to the payment before losing their use.
  • Spotify: Allows you to listen to all kinds of music for free, but with limitations such as, for example, advertisements, necessary Internet connection, limit of daily songs, among others, which with the premium package are eliminated.
  • Linkedin: Professional social network to seek employment. Its use is free, but with the premium account you can highlight your candidacy against the rest, send direct messages to headhunters, or have access to more professional profiles than the rest of the users of the network.
  • Dropbox: Cloud data storage and sharing application. Its use is free and to attract more users they have established a strategy that consists in inviting friends to the application, you receive free storage space. This strategy has managed to viralize the service and achieve a very high user reach.
  • Candy crush and other games: They are free online games, but there are some resources that require a micro-payment to access them and thus be able to have an advantage over other players and advance more quickly.

When a freemium business model succeeds, its scalability is very large and its growth is exponential, as we have seen in some of the previous examples. The key is to offer a sufficiently useful value to the service so that the conversion rate to premium users is high.

Freemium model example

Consider that a person expects to earn $ 40,000 per month using this model and expects to charge $ 4 per month for the premium services it will offer.

This tells us that you have to offer the service to 10,000 customers that comes out of 40,000 / 4 = 10,000. But since only premium clients are counted, let's consider that those 10,000 clients constitute 1%. So, you must have at least 1,000,000 customers if you want to achieve that result.

This results in this way:

X —————- 100%

10.000 ————– 1%

Applying the rule of three we multiply 10,000 x 100%, which gives us a result of 10,000; then divided by 1% and we obtain that 1,000,000 users are needed.

In short, the most important thing in this type of business is the volume of users handled, because success depends on the massive market that we manage to captivate. For that reason, businesses such as WhatsApp, LinkedIn, iCloud, among others, are successful.

Tags:  right USA accounting 

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