The Freemium Business Model

In our third part of our series of blogs on business models, we review the freemium business model.

The freemium business model, is as the name suggests, free but only up to a point. The way that money is made with it is to offer upgrades, features and/or virtual add-ons. Some businesses start out with a product that people cannot immediately see the point of, such as DropBox. The free access allows for the benefits to be demonstrated by using it and then business owners can build a market.

Many apps are ‘freemium’ products. They are offered for free and if the user wants more then they can pay for an upgrade. As with any form of business, giving something away for free is actually the best way to start out.

Advantages - it’s a great way to get customers to engage with your products are understand what they’re capable of doing. If a product is really good, it will prove to be so useful that when the free introductory offer comes to an end, they won’t want to give it up.

Disadvantages - offering your product for free can remove the risk of buying something ‘useless’ for your customers, but it can also give the false impression that it’s not a product with much value. You will need to plan for only a small percentage of users wanting to upgrade. Even Evernote only has 1 user out of every 4500 who decides to go premium.

Tips:

  • You will need to ensure that the premium version of your product is worth paying the extra for.

  • Ideally you will be able to get money from users through an extra way in addition to the premium payment such as offering add-ons and features.

  • Give users a reward for sharing your product. You are looking for a large user-base and they are likely to know people who are interested in your product.

  • Take a look at this TechCrunch page on how to find more clients.

Examples: Dropbox, Pandora, Skype, Evernote,

Summary: Freemium is clearly a successful business model for some. Its success will depend on thorough research and the possibility of adding on features. It also has to be a high quality product that fills a gap in the marketplace.

Next The Merchant Business Model