The "Freemium" Business Model: Is It Right for Your Company?

Louise Armstrong
by Louise Armstrong on July 24, 2013 in Business
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"Freemium" has become a common business model in the Information Age. Though not new, the freemium model has gained attention recently thanks to the large number of online companies that now operate as freemium companies. But what is "freemium," and does it make sense for your business?freemium service

"Freemium" Defined

The freemium business model contains two essential aspects:

  • A free product or service that anyone can use
  • A premium version of that same product that users can upgrade to

A business is only truly freemium if the base product is truly free. A short-term free trial is not considered freemium, because after the trial period, people cannot continue to use the product for free. In almost all freemium business models, the vast majority of customers only use the free version, and they continue to use it indefinitely without ever paying anything. Only a small percentage choose to upgrade to the premium version.

In addition, a product is considered freemium only if it comes with a premium option. If your service is free to all, and you make money some other way (such as through selling advertising space on your free content), then you are not a freemium company.

Freemium Examples

Freemium lends itself mainly to online services or software products. Common freemium ventures include:

  • Social media networks. Though most are free to use, some have premium options. LinkedIn is a prime example of a successful freemium business.
  • Management tools. A number of SEO, social media management and website management tools are freemium. Examples include HootSuite, Google Analytics and various WordPress plug-ins.
  • News and entertainment sites. Many online newspapers and streaming video or audio sites offer free access to some content alongside premium access to all content. Hulu and Spotify are examples.

Who Should Use Freemium

Freemium is not a workable model for most companies. Though we hear about the successes, many more freemium start-ups never survive long enough to make the news.

Freemium might make sense if the following conditions apply:

  • The free service is cheap to maintain. Each free user costs you something, and it is quite common to have 99 free users for each premium customer. A downloadable piece of software or an application that can be cheaply hosted might therefore work for freemium; after the initial development cost, the cost of each new user is very small.
  • The target market is large. If only one percent of users pay anything for the service, you may need millions of total users to produce any sizable revenue.
  • There is a network effect. Freemium makes more sense if you need a large number of users before the service can work. A dating website, for instance, has premium service to sell because it already has many users on the site.
  • The service becomes more valuable the more you use it. There has to be a reason for free users to eventually make the switch to becoming paying customers.
  • You have startup cash. It takes a long time for a freemium business to become profitable, but much of the expense comes early on. You must be able to cover the costs of growth until you can reap the later rewards.

By its nature, freemium is a niche model and could be considered risky business. With the right product and the right set of circumstances, though, it can also lead to some big successes.

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Louise Armstrong

Louise Armstrong

Louise is a Senior Digital Strategist at Bonafide. A pop-culture addict with a passion for all things digital. She's Scottish by birth, but don't ask if she likes haggis...