Freemium

A freemium business model offers a basic service for free, additional premium functions or services are only available for a fee.

Description

“The easiest way to get one million people paying is to get one billion people using.”

Phil Libin, Evernote

The freemium business model is known as the “business model of the Internet”. The term freemium combines the words ‘Free’ and ‘Premium’. The basic product is available for free. The company generates revenue by offering connected premium product, i.e. additional functions or services which usually attract a small number of users. By giving away the basic product for free it is easier to lure users and create a customer base. This business model pattern is one of the most widely used for Internet start-ups.
There are other business models that include a free product, but they are not based on the core concept of freemium. Neither the ad-financed model (link) nor the “premium with a free trial” model can be defined as freemium.

Success factors

Value Proposition – Free v. Premium

Thoughtfully design the value of the free product in relation to the premium product and make both your free and your premium services desirable.

Ratio of free v. paying customers

Attract new customers with your free product but keep in mind what ratio between free and premium users is necessary in order to finance your business model.

Examples

Skype
Free computer-to-computer video or audio calls; to be able to call mobile phones and landlines as well as to have video calls with two people and more.

LinkedIn
Platform that connects people, companies and recruiters; free to publish profile and connect to people, paid services to contact and write messages to new people or to use profile pages as a company in a more professional way; combines freemium and multi-sided platform patterns.

Dropbox
Free storage and sharing of data; additional storage space available for a monthly fee.

Spotify
Free music streaming service; for a monthly fee it is possible to listen off-line and ad-free.

MailChimp
Free newsletter service; monthly fee if you want to send a larger number of newsletters or if you want to send your newsletter to more than 2,000 subscribers; MailChimp changed their business from premium to freemium and had a huge increase in users.

 

Chances

  • Customer acquisition: It is easy to attract users when giving away a basic service for free
  • Marketing effect: people are likely to spread the word about free services (word of mouth)
  • Networking effect: the more people use the service, the likelier it is that they attract other users

Risks

  • Large number of free users but not of paying customers: there are investments and costs involved in providing the free service, but you do not earn any money to finance it.

Responsibility

Giving away for free

Giving away for free a quality product that helps people can support people without or with limited means.

Data privacy

Often a product seems free and users pay with their data (see >> Customer Data Monetization). The use of customer data to optimize your offer should respect customer privacy.

Resources

More inspirations

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