When you’re launching a product/service into the market, then you have set its right pricing. It shouldn’t be too high and low depending upon, and freemium is also one of the pricing strategies. Today, we’ll discuss the freemium pricing strategy, its types, and pros and cons.
What is Freemium Pricing?
Freemium pricing is a combination of two terms; premium and free. However, it’s a pricing strategy that offers basic services for free, and advanced features for the premium price. This strategy attracts the attention of customers by offering some services for free. If the customers like the basic services, then they have to a certain price to enjoy the additional services.
For businesses and companies that offer free and paid services permanently, the freemium tag doesn’t apply to them. It’s only applicable to those businesses that limited trial services for free. Some of the main examples of freemium pricing are as follows;
- Companies like MailChimp provide free services with limited features and options, if users want the additional features, then they have to pay for them.
- Online magazines and newspapers like Harvard Business Review offer a limited number of free articles, if the user wants unlimited access, then he has to pay for it.
- Free applications like Pandora provide services for free with advertisements, if customers want an ad-free experience, and then they have to pay for it.
The reason companies use the freemium pricing method is to convince customers and lure them with a free option, and they could upgrade it to the paid version anytime whenever they want.
Consideration Before Using Freemium Pricing Strategy
According to research by Harvard Business Review, the conversion rate of companies using the freemium pricing strategy increases by 2% to 5% from being the free users to the paid customer. Here are some points to consider before applying the freemium pricing strategy;
Customer Acquisition Expense
The freemium pricing strategy usually doesn’t work out if the customer acquisition cost is too high. The customer acquisition cost is the amount of money a company spends on marketing to lure a new customer. It comprises of advertisement cost, promotional campaigns, and the salaries of marketing staff.
The customer acquisition cost varies from zero to thousands of dollars depending upon the nature and type of industry in which a company operating its business. For instance, if you’re selling products/services at premium prices, then your company could afford to run after new customers. If it’s selling products at low prices, then it should keep the acquisition cost lower.
As we know that the customer acquisition cost comprises of expense, but it doesn’t cover all. However, if you’re planning to apply a freemium pricing model, then you should ensure that the company has sufficient resources to cover all the costs. Some of the business expenses are;
- Equipment cost
- Office supplies
You should calculate all the expenses, and then estimate whether you’re earning sufficient profit from customers to pay it off. It’s because a lot of users would be using free service and a very few of them
Customer Lifetime Value
You should calculate the customers’ value over time. It means that how much money your business would earn from customers by using the freemium pricing strategy. You should study your paying customers and ask how;
- Long they would use your service
- Frequently they’re paying for your services
- Much they spend on your business
The free use of your services could play the role of a good ambassador of your brand and promote your services to new customers. Sometimes, the free users end up buying your premium features.
Types of Freemium Pricing with Examples
Classical and traditional freemium is a type when a company offers products/services for free forever with some limitations and rate limits. It’s difficult for a company to convert the free customer to the paid customers.
Examples: iCloud of Apple, Dropbox, Zapier’s, etc.
Land & Expand
Land and Expand is to offer a free product for the sign-up, and when the customer reaches the threshold limit, and then the company monetizes its product.
Examples: Yammers and Slack offer free service for the first sign-up when a customer reaches the threshold limit, and then they sell their products. Their conversion rate is approximately 10% to 15%.
Unlimited Free Trial
Unlimited free trial is a combination of traditional freemium and free trial types. It offers unusable free products in order to make users realize the worth of premium features. It’s a highly risky type because you can’t expect customers to stay with the free version.
Example: Basecamp, Echosign, etc.
Freeware is when a company offers a fully functional product for free forever. It’s usually the main product of the company and the brand earns through advertisements.
Example: Mobile Games, Skype, Evernote, etc.
Alternative Product Strategy
It’s a type where you want customers to get the foot-in-the-door with the intention of cross-selling the company’s complementary products. They don’t tell customers of their main offers.
Examples: CRM of Hubspot, Platform of Intercom’s free,
Ecosystem is a type where a company has to offer the base product for free forever, and the company earns revenue through the deal with 3rd party developers.
Examples: Google Play Store, Salesforce App Exchange, Capterra, G2 Crowd, Siftery, etc.
Network Effect is a type where a company collects the users’ traffic and behavioral data and monetizes it. Here its follows the approach that users are product if they aren’t paying for it.
How to Monetize Free Users into Paying Customers
Here’s how you could monetize your free users’ audience into the paying customers;
- You could sell the user data and information to the company about the user behavior
- Leveraging the society and offering them first level support
- You could establish a community from users, and then making some of them your customers
- Studying their behavior, and then selling the intelligence information to the other companies
- You could invite marketers and advertisers for target advertisements
- You could sell them and buy a system
Advantages of Freemium Pricing Strategy
Some of the main advantages of freemium pricing strategy are as follows;
The consumer market has become competitive. Many companies like SaaS and apps target customers and want them to try out their products. However, they offer a variety of products and services ranging from WordPress backup to time management applications. Customers would prefer a product that works for them well. You could lure them by adding the word “free.”
It’s important to keep in mind that the term “free” attracts the attention of customers. That’s why businesses offer freemium services while launching their product.
If you’re a startup company and you want customers to try out your product, then you should start with freemium. It would help you to attract a large number of customers. The large database of free users could help your business in a number of ways. You could leverage the users’ information or make them premium customers.
The freemium works very well for some businesses. Like a game developing company, Zipline asks its users to pay 0.99 dollars if they like the game.
When users buy the premium services, then they expect commitment and additional services from the developers. It means decreasing the cost and downtime if any problem arises. That’s why people would turn into premium users to get the support of developers.
Disadvantages of Freemium Pricing Strategy
Burning out Cash flow
When you start offering products/services for free to a large number of customers, then it would burn out your cash reserve. In extreme cases, it puts your business in great financial jeopardy.
Helping out and supporting the free users don’t guarantee that it would increase the conversion rate. Sometimes, the money spent on free users’ help is higher than the income you earn from paid users.