What Is A Freemium Business Model?
Freemium is a type of business strategy that provides users with free access to basic aspects of a product or service while charging a premium for extra or advanced capabilities.
The terms "free" and "premium" are combined to form this term.
A business that uses the freemium business model offers the consumer certain basic services for free, frequently in a "free trial" or restricted version, while charging a fee for more sophisticated services or more features.
The Advantages of Freemium Business Model
Popular freemium business models have the benefit of gaining a sizeable pool of initial customers during a risk-free trial, especially when there is no charge for evaluating an app or service. Most consumers are eager to give new apps or services a try, which gives businesses a simple approach to attract new customers and analyse their usage patterns.
Many times, businesses still gain from their free users since they may gather user data, show them advertisements to generate income, and increase their own business numbers while the programme is still being developed, even though the users may not be expressly buying upgrades or other products.
The freemium model helps startups and businesses that are aiming to grow a customer base for their product by raising brand recognition while reducing the need for extensive customer service.
The Disadvantages of Freemium Business Model
The free users never become paid users, which is one of the drawbacks of the freemium model. In the end, even though some businesses are completely satisfied with their free users (and have estimated that these users will account for the majority of their forecasted earnings through their consumption of ads or time spent on the app), they may offer too many features on the free version that discourage users from ever upgrading into the premium version.
Additionally, the churn rate is high in the freemium model, as the subscriber will discontinue their subscription in a short time after purchase. Supporting the free user would increase the operational cost which means a quick depletion of funds.
Freemium Model Examples
Spotify is a music streaming platform that gives users access to a large catalog of music. It uses a freemium revenue model that offers a basic, limited, ad-supported service for free and an unlimited premium service for a subscription fee.
Spotify relies heavily on its music algorithms and its community of users and artists to keep its premium experience delightful. Its premium subscriber base has grown from 10% of total users in 2011 to 46% in 2018. Like in any subscription model a user’s lifetime value (LTV)—how much Spotify can earn from a user over time— increases the longer the company can retain users. This is called managing customer churn.
In the first half year of 2019, Spotify’s premium subscriber churn rate fell to a record low of 4.6%.
Spotify has been extremely successful at converting free users to paid users. Its premium service has additional features and it removes advertising.
In 2018, 46% of Spotify’s users are premium users, who generate 90% of its total revenues. The particularity of the freemium model is that one need to be able to cover the costs of free and paying users.
Spotify’s user base grows to over 248 million users in 2019 for which it needs to pay royalties. Of those users, 54% consume (limited) music for free.
Dropbox, the popular cloud storage platform, offers a free plan for up to 2GB of space for backups and simple file sharing. The Pro plan for a significantly larger amount of space (1TB) is only $9.99 per month. Dropbox's freemium approach is to allow users to see how easy it is to backup and share their files using the Dropbox platform.
Their approach works because they allow us to backup from anywhere, including our mobile device. And anyone with photos and videos can tell that 2GB of space will never be enough and hence, an added charge of $9.99 makes it lucrative to churn customers.