By Pankaj Gupta
Businesses are constantly searching for new ways to acquire new customers while also keeping costs down. Unfortunately, these two goals usually have an inverse relationship: It’s difficult to acquire more customers without spending more money. Consumers like to know what value they’re getting before making a purchase decision, so it takes a lot of educating and relationship building in order to convince leads to make a purchase. This is usually done through expensive advertising, sales demos, and other marketing campaigns.
This is where the “Freemium Model” comes into the picture, It is a two-tiered user acquisition model that splits users into either a free tier or a premium tier depending on whether or not they pay for an account. In its essence, this model combines “free” and “premium,” where users can access basic services for free, then are nudged to pay for access to premium services. The main goal of using a freemium acquisition model is to decrease the customer acquisition cost (CAC) for a business. By eliminating the cost to sign up for an account, it is effectively lowering the bar to entry for new users starting to use and know the product. This makes it possible to avoid traditional overspending on paid marketing channels and convoluted sales processes to focus more on building trust and highlighting the value of your product to free tier users through actual usage.
In the corporate space, the freemium model has turned out to be a great strategy for companies like Spotify, Evernote, Zapier, Dropbox, Wix, Slack, SurveyMonkey etc. In the case of B2C, mobile and web apps based products have benefited the most from the freemium acquisition model considering the last decade!!
Let’s consider Spotify's strategy in the B2C space; For those not familiar, Spotify is an app for consumers to stream their favourite music from their phone or computer. To get people hooked, Spotify implements a simplified version of the freemium acquisition model. The free plan lets users stream most albums, playlists, or curated radio stations on shuffle play, but they are served ads in between songs and users can’t skip to specific songs they like. Conversely, the Premium plan level affords users a much deeper set of features for a richer experience. Premium users have access to things like:
- Improved sound quality for music streaming
- Individual track selection
- Offline playlists
- Spotify Connect, which allows users to connect Spotify to other devices like TVs, smart speakers, etc.
From the above-mentioned scenario, we can affirm that this model has its fair share of pros since the freemium model in a business creates a pressure-free environment for new users to explore your product without being forced to make a purchase decision before they’re ready. But, it also comes with its fair share of cons as well like Spotify Users in the free tier are only allotted four-song skips every hour. This restriction is completely eliminated after upgrading to premium, allowing users to skip as many songs as they wish. Coupling this limitation with the fact that free users can only listen to playlists on shuffle adds up to a powerful incentive for any picky music listeners out there.
All in all, Freemium also allows a solution to scale in parallel with your users’ needs. A customer may not require all of the functionality when they first sign up, but as they grow, their needs may evolve as well. This makes it easy for a product to become integrated into the users’ normal workflow, making the limits that companies placed on their free-level plan more effective because it is much more painful to switch to something else.
Optimization of Freemium Model :
- Set the right product limitations for your free account.
- Include a full-featured free trial
- Focus on customer success
- Remind users to upgrade at every turn
- Take a more hands-on approach to inside sales Based on usage patterns & Based on third-party data
The interesting trend across all the different freemium model businesses mentioned above is that their customers are opening up their wallets. The Internet Trends Report by Mary Meeker points out that a greater percentage of users, consumers and enterprises alike, are opting to purchase the premium version of the services they use, confirming that the freemium model is here to stay.
The article is written for 180 Degrees Consulting, Delhi Technological University, under the campaign #DemystifyingBizModels. To read more content shared by our other consultants, please check out our LinkedIn page- https://www.linkedin.com/company/180dc-dtu