Having discussed a few different pricing models in class, I questioned why one in particular hadn’t been brought up yet: freemium. Did you know that as much as 95% of the apps in Apple’s AppStore employ freemium models? For those Android fans, the number on Google Play is even greater, at an incredible 98%! Yet, what exactly is it? I would like to attempt to answer this question (bear with me), and provide some insight into the types of businesses that we are now dealing with on a day-to-day basis.

The word “freemium” was coined by combining the words “free” and “premium”. Accordingly, two types of features are identified under the model, namely those which are free and those which are considered premium features. In a freemium business model, consumers are given free unlimited access to a business’ core product, and revenue is earned from a small portion of the user base who sign up for premium features. Of course, as with any proposed business model, there are both benefits and limitations.

Strengths:
– Growth potential
In a word, freemium is scalable. When we perceive something as “free”, a lot of barriers are already removed, making users much easier to win over (perhaps that next targeted Facebook ad will be just enough). This becomes especially true for internet-based businesses where, due to internet economies, the marginal cost of each new customer is very low.

– Marketing
Not to be forgotten are the potential marketing benefits of a free offering. Relating strongly to the previous point, the ease with which users can sign up and start using a product/service extends to the ease with which new users can be invited to join in on the fun. If the initial user didn’t convert, there’s a good chance that one of those they invited might.

– Network effects
Building again on the massive user base that can be achieved by a freemium business model are network effects. Specifically, these are achieved when a product/service is perceived as increasingly valuable as more and more people use it. When properly leveraged, network effects could define the sustainable future success of a business, which is especially true under a freemium business model. In addition, by offering a free (basic) product, it’s easier to own the network effects and prevent someone else from using them against you.

Weaknesses:
– Need for a large user base
In an article from Business Insider, this weakness was summarized as a “numbers game”, and I couldn’t put it better myself. “If only 1% of your users are going to pay you, then you need to have lots and lots of free users (millions, typically) to make that 1% enough money.”

– Need for many return users
Freemium models need to offer a product/service that increases in value over time in the eyes of the consumer. Relevant, here, are experienced goods: products whose value is only determined by a consumer after a period of use. Investor Sean Parker said of Spotify that, once you create all your playlists and organize your music, “we’ve got you by the balls,” which is a perfect illustrative example. Of course, ensuring that your offering falls into this category might be a difficult task, so the need for it should be considered a setback of the freemium model.

– Slow profit
As perceived value to the consumer is supposed to increase over time, it can be quite a while before a freemium business reaches break even, much less makes a profit. Of course, with the scalability of the model, once profitability is achieved it can be achieved in massive proportions – but it will probably only come with patience.

So that just about sums it up. I hope that now you might have a slightly better idea of how freemium business models work and that it may serve as a fruitful dinner party conversation in the future! If you can think of any variations, interesting applications, or anything (really, anything) else, just use the comments section below.

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Sources:

www.freemium.org/what-is-freemium-2
www.techcrunch.com/2011/09/04/complete-guide-freemium/
www.businessinsider.com/what-is-the-freemium-business-model-2011-4
www.businessinsider.com/sean-parker-spotify-2010-10
www.businessinsider.com/what-is-the-freemium-business-model-2011-4#evernote-is-a-big-freemium-success-1