A freemium model is a plan that lets the user use a software or inter surface free of charge but limits the number of options or limits the potential of the application, unlocking it only if the user pays a certain fee. A famous example of this a Spotify where they let you use their service for free but only let you listen to music ad free if you pay a certain amount every month.
Speaking from personal experience, I’ve interned in a start up business before. With long hours, low pay, strict budgets and tight timelines. Freemium products might be manageable for large tech companies like Spotify and Dropbox as they have the budget and manpower but what about those smaller startup companies that are barely surviving as it is? The question becomes is it worth it to run a freemium products for startup tech businesses?
I would argue that the answer is yes. As to how I came to that conclusion, let’s look at the pros and cons of the freemium product.
Pros:
1. A freemium product will attract more users and get them hooked.
Imagine if someone gives you something absolutely free, what are the chances that you would use that product? I’d imagine it will be pretty high as you would not want to let the product go to waste. People like free things as it is a high motivator when it comes to businesses and on the internet it is no different. When users don’t have to commit to a plan but use it on the basis that it is free, they will most likely sign up to give it a try as it has a high trialability factor.
The trialability factor to facilitate product adoption has been studied intensively by Marketers and more specifically from Open University. Simply put, a free product will entice customers when they feel that it benefits them which will help build brand equity.
2. A freemium product will get you more media coverage and publicity
If you are a reviewer, is it easier to review something that is free or something that you have to pay for? The answer in this case is obvious. When something is free for the public to use and a myriad of online forums are available, it will generate more discussions. The more discussions generated, means that there will be more sign up for premium products. Even if the person reviewing the freemium product does not sign up to be a premium member, the reader of those reviewers might. The success of the publicity is evidenced by the number of searches by freemium product HootSuite having 10 million search results as compared to a premium only product competitor which only has 718,000 search results.
3. A freemium product will create more word of mouth traction
According to Harvard Business Review, the value of a free consumer of a freemium product is in the referrals they bring to your business. These free users are typically worth 15%-25% as much as a premium subscriber.
A freemium product will create more word of mouth and spread once consumers felt like they loved it. Based on the Consumer Based Equity model, once consumers feel that they like your product and feel positive about it, they will tend to resonate with it and will become brand apostles by sharing your brand with everyone else. This will in turn lead to higher customer based brand equity and overall equity for your business.
Freemiums models are great for building brand salience, awareness and brand equity and it is a great way for businesses to grow. However, now that I’ve talked about all the positive aspects about freemiums. I would like to touch on how startup businesses using freemiums could fail.
Cons:
1. The wisdom to know what is the right amount of premium things to sell
One of the weaknesses of a startup business is the wisdom to know when to stop giving away free things. There is a danger of giving away too many free things that it would not make sense for someone to take up a premium membership. An example would be LinkedIn whereby the premium membership is not satisfying enough to most people that they would pay for it.
As a business, your mindset should be on premium membership adoption and therefore cannot afford to give out too many free options, lest you risk wasting time, energy and resources on things that people are already satisfied with and thus see no need to buy a premium membership. Thus, wisdom and a lot of market research are needed in order for startups to avoid making the mistake of giving away too much that they don’t get premium membership of people.
2. If the premiums are not understood by consumers, they will think it’s free service.
Using LinkedIn as an example again, even though they were one of the first freemium companies, they do not have as many conversion rates as compared to DropBox due to their lack of distinctions between free and paid offerings. As consumers don’t understand the differences between the free version and the paid version, consumers are less likely to convert.
Premium memberships would not seem worth it because people do not understand the value of the premium membership and will thus continue to use the free version of your product which barely earns the business money. As a business owner, you have to make sure that your premiums are attractive and well defined enough so that people would want to buy them.
In conclusion, I feel that the freemium model is good for start up businesses to use other than the small pitfalls that can easily be avoided with market research.
So those are my arguments for and against the freemium model. What are some of your thoughts and opinions on this topic? Comment them below and I’ll reply!
Thank you.
Marketing in the Digital Age 
I agree with your thoughts. Having a freemium model will attract more consumers to use your service and will create more word-of-mouth, but businesses have to be careful as to the extent that the freemium provides. Good post!
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Hi Lynn! Thank you so much for your comments! Yes, I agree that freemium models are really risky to use however if done right it can provide the businesses with lots of sales that can greatly increase their profits.
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I think in life it is all about balance and finding the balance in freemium products is very crucial for the success of the business. Good job for pointing that out in your blog-post. I’m beginning to see that freemium products may be good for small businesses if they have the wisdom and market research to do so!
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Hello Henry! Yes, I do agree that wisdom in marketing is very important more than just information. Knowledge is knowing that tomato is a fruit and wisdom is knowing that it doesn’t belong in a fruit salad! HAHA! Thank you for your comment!
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I’m glad that you talked about startup businesses! Startups really do have a huge lack of resources and in order to make a profit, they have to focus all their time and energy to sustain a business. Thank you for taking the time to recognize and write an article about how they can better grow with a freemium model! It’s very interesting to read! Great job!
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Thank you, Alicia! I aim to bring value to small businesses as I worked in small businesses and I see their struggles in marketing therefore this blog is to help them!
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Hello Marvin,
As a marketer, I always found it interesting how freemiums work and earn money. Personally, I’ve only signed up for Spotify (As a premium member) but it’s interesting to see that freemiums help the company to gain more brand equity. I did not sign up for a dropbox membership but I do hear their name very often and I guess that is the result of freemiums. Thank you for this in-depth analysis of freemiums, very insightful!
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Hi Thomas! Yes, even if freemiums do not gain a lot of subscribers, it at least helps as a marketing tool to help them get their name out! Thank you for your comment!
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Dear Marvin
Thank you for this post which educates me about Freemium! I wondered how the system works and your deep analysis on the pros and cons help me to understand more about it. It looks like even YouTube is going towards the Freemium model, and it’s more effective overseas than Singapore as many of us do not find the worth behind paying $15 a month to skip advertisement. Apps like Spotify is one of the more popular Freemium in Singapore due to word of mouth marketing among Millennial and that it can be shared about 5 people. Overall, this post captured my attention in this aspect of business model and gave me a lot of thoughts and insights.
Thank you for your post!
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Hi Dian Tian! Thank you for your comment! I learnt about this in class and lectures that I attend! I just thought it would be interesting to share it as I am running this site for small businesses! Cheers!
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In my opinion I feel that the topic of freemuims definitely has its pros and cons and you have listed them down in a nice easy to follow manner! Free WOM traction, media coverage and attracting more users for free are really really bug plus point of Freemiums. Do they outweigh the cons of know what is the right amount of premium things to sell?
For myself I do enjoy all the free benefits of LinkedIn as even as a free user, I am able to create a decent profile of myself and I have been able to land internships with my free LinkedIn account.
However I do pay for my Spotify so that I can listen to all my favourite songs for free without having to download them in my phone.
The freemiums models ultimately boils down to what the particular application does, the value it provides and whether it is worth the extra $7-$10 per month.
Cheers!
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Hi Bryan! Yes, I agree! I think it all boils down to how much benefit does the additional 7- 10 dollars give you as well! If it’s not enough value, people probably won’t choose to get it!
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Hi, insightful post! Truthfully, I am big user of freemium businesses. As a consumer, I feel that it is a great way of getting people to try it the product/service is worth it. At the end of the day, freemium or not, the core product/service is still the most vital. & if I feel the value is worth it, I would upgrade. However on the business side of the spectrum, not all kinds of business can get something out of freemium. It really depends on what kinds of services you are providing and if you are able to sustain using a freemium model, as this model doesn’t aim to earn profits fast but to acquire customers fast instead.
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Hi Vincent! Interesting analysis! I would say with the more customers you have, it would increase your chances of getting more profits as well. Better, you have customers and have good branding rather than nothing at all right? That’s what I feel! Thanks for your reply!
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Nice post, enjoying your content so far. Freemiums has its time and place, but i think it is important to keep track of conversion results and metrics too
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Hi Fabian! Freemiums are just one of the models for businesses that they can use. As a market researcher, I do agree on keeping track of conversion results and metrics! Thank you for your comment!
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