Understanding Freemium - Tips from the Trenches!
Updated: Apr 10
I have been repeatedly asked for advice from product teams on how to make Freemium work for their products because I am a person who likes to talk less and write more. Here I am with some tips from the trenches of product development.
So let’s start!
What is Freemium?
Freemium is a strategy in which a business acquires new users by hooking them in with a free offering and later upselling their premium features and converting them into paying customers. This strategy can work on both a one-time fee or a periodic subscription fee and it is widely popular with today’s internet-based products.
The term “Freemium” is a merger of two terms, free and premium, and was coined in 2006 but the practice is as old as 1980’s where businesses would lure in customers by giving them a basic set of services for free and then charge for the premium or value-added services.
How does it work?
Let’s assume you have a software product with multiple features, you divide those features into basic and advanced categories, the basic features are the ones you will be offering for free to your users so that you can later upsell them to buy advanced features. This reduces the acquisition cost as people like free stuff and would be keen to signup and get first-hand experience of your product.
For example, dropbox gives you free storage space but if you want more storage space, you will have to become a premium user. The same goes for Skype, where basic calling (over the internet) is free but if you want to call someone’s landline or mobile phone, you will need to buy their subscription. Another example can be of games, where everyone can play the game for free but for added lives, moves, or features, you will have to buy value-added services.
Is it a business model or a growth tool?
I would argue that it is a growth tool and can be a part of your business strategy but it can’t be considered as a sole business model. Your real business model is to sell your product(s) and earn revenue either as a one-time fee per customer or as a periodic subscription but entertaining free users is how you are reducing your promotional costs and acquiring potential customers.
This tool has been a proven growth strategy but it comes with its pitfalls, so in some cases, the cost of maintaining free users can become a dead weight on the business. Also, making sure that your free offerings won’t sink your premium offerings is a crucial matter of balance. You will also see that a lot of businesses will opt out of freemium eventually and move towards product demo or free trials for their potential customers.
Tips from the trenches!
So here are some suggestions for you to make Freemium work for you!
Think about your product and market size critically and try to answer these questions. These answers will help you strategize better and fine-tune your offerings.
Can you quantify the demand for your product?
What are your competitors doing?
What are your constraints in terms of the cost of serving free users?
What is the size of your market? Is it too big or too niche?
What are your USPs and how can you capitalize on them?
Do you want to play on the cost or on the quality of your offering?
Have you reconsidered the pros and cons of Freemium vs. Free Trial vs. Free Demo?
Have you reconsidered the pros and cons of a one-time fee vs. a periodic subscription fee?
Categorizing free and premium offerings is extremely important. The free or basic features should be useful enough for the users to love the product but shouldn’t give it all away. The free features should create a value gap that will make them pay for the premium features. Some ways of making sure that your users convert into paying customers are to offer premium support, advanced and novelty features, bigger or unlimited storage and/or user capacity, ad-free experience, more third-party service integrations, and better referral incentives. Also, think about having multiple tiers of paid customers, it may be the way to go for your product.
You should give your free users a taste of the premium features by adding a free trial for the premium products, this is to create a FOMO effect in the users and should make them want to switch to the premium product offerings.
Create helpful content, this should include, helpful blog posts on relevant topics, the knowledge base about the product features, FAQs, newsletters, and excellent email and notification alerts. The goal is to make your customers take full advantage of the product and have hassle-free access to all the information that they need to do so.
Think about the pricing too. I would never recommend you to make your product cheaper and compete on price only, instead, the idea is to price it the right way. In my experience, sometimes, increasing the price to a certain level adds up to the customer’s buying motivation. Similarly, having well-thought-out promotions can also help in increasing your conversion rate.
And here comes the conversion rate, so what should be your game plan here? Should you only focus on getting it higher? I say no. It is all about the context, your goal should be to keep it in check while keeping an eye on the total market size as well as the number of new acquisitions. If the conversion rate is too high but the acquisitions are stagnant, it tells you that you are unable to capture new users and if the conversion rate is too low but the acquisitions are increasing day-by-day, it can add up to your cost of serving free users.
Manage your referral system well. You need to incentivize your users for their word-of-mouth and refer your product to people in their network. These incentives can take different forms. In some cases, creating a discount system on the basis of referrals can work, in other cases, extra features or storage space is a better idea. You can also gamify the whole process and make it fun for your users.
For new user or customer onboarding processes, the first step is not to automate the process, but to create a process and then optimize it. Initially, doing one-on-one onboardings can be helpful in optimizing and automating the process at scale.
Invest in social media and especially in social listening. Products with a lively and helpful social media presence with quick response time do comparatively well.
Email marketing should be done with extra care, the idea is to disseminate information and make people know the product better and not to blast them with promotional content which will make them ignore your emails or worse unsubscribe from your mailing list.
Be mindful of the stuff you are measuring. Not all metrics are useful or give meaningful information. I will advise keeping an eye on the following.
Cost per Acquisition
Cost of Serving a User
Cost of Serving a Customer
Daily Active User
Average Revenue per DAU
Average Revenue per Customer
It is always a good idea to have multiple payment options and plans for your customers.
Constantly remind your users to upgrade and get creative in finding ways to do so.
Use analytics, especially user behavior on your product to decide on future enhancements and re-bundle your free and premium offerings. Not evolving your product can be fatal and you need good data to act on, find that data by observing your users and customers as well as by connecting with them and listening to their needs and concerns.
I hope you will find these tips helpful. If you want to learn more about Freemium, feel free to get in touch. I am mostly found on Twitter @FaizaYousuf.