Freemium is a well-known business model that allows online platforms to provide users with free and premium product features. Users have free access to basic features, while advanced options are limited. Users must pay a monthly or annual fee if they want to “unlock” premium features. The freemium business model is also known as the internet model, as online platforms mainly use it.
How the Freemium Business Model Works
The freemium model offers services for free with an additional option to purchase advanced features. These online platforms generate their main revenue by charging for premium features.
Free accounts serve to attract more users and build a customer base. The model works on the premise that users will eventually get comfortable with the product and want more functionality with premium options. Usually, as usage of the product increases, there comes a point when the user decides to either unsubscribe or pay for the premium model.
The premium plan gives you access to advanced features such as more user accounts, advanced tools, more data storage, or, in the case of online entertainment, fewer ads and higher quality streaming.
The freemium business model can be a very lucrative strategy.Providing free access to a product will allow a business to quickly build a significant user base who will then be offered additional premium features or services.
Advantages and Disadvantages of Freemium
Freemium is a convenient model for online businesses, but it has many pros, cons and problems.The main problem is that it is sometimes difficult to convert users of a free plan to a premium one.
After using a free plan, users may get used to this “free treatment” and be reluctant to pay for a premium plan.
Perhaps the company’s free plan is too generous and most users don’t feel the need to upgrade, or the freemium business model is simply not suitable for a particular product.Therefore, businesses should consider the advantages and disadvantages of freemium models before implementing them.Let’s take a look at the advantages and disadvantages of the freemium model.
The benefits of Freemium include:
- Reducing Customer Acquisition Costs (CAC). Offering free product features will attract new users much faster than trying to sell them a paid version of the product.
- Brand value enhancement. By demonstrating the product’s capabilities, users can experience it in a basic form.In this case, users get to see how the product and its core values work by signing up for a free version.
- Discovering new features. Businesses can experiment with new features to see how they work by testing them as part of a free plan.
- User Information. Companies can use data from users to improve their performance.By tracking product engagement data, companies can determine a user’s propensity to buy and find powerful opportunities to increase sales.
- Fighting competitors. User data helps, and further testing can reveal product weaknesses that should be improved.Businesses are investing big bucks to expand their data analytics capabilities.
However, there are also disadvantages to Freemium. Among them we can highlight:
- Wrong balance between free and premium product. Users will cancel their subscriptions if there is a huge difference between free and premium features. Users may feel cheated if they notice that the premium plan is only focused on generating revenue and not on creating a good user experience.
- Stress on operational resources. Freemium implementation costs can be very high. Maintaining a free plan further increases the operating costs for businesses.
- Low conversion rate. Many users never convert from a free to a premium plan. There are many reasons for this, but price usually plays a significant role.
This model has more advantages than disadvantages, which is why Freemium Games and other products are popular among customers.
Who Uses the Freemium Model
Online platforms are one of the most common examples of the freemium business model. Although freemium is a great business model for startups and giants like LinkedIn, there are still some disadvantages.
For example, the implementation costs are very high, making it difficult for start-ups to grow. Also, freemium only works if you are targeting a huge market, so geographical location matters a lot
If a business does not offer enough features to differentiate between free and premium plans, there is no need for a freemium business model. In theory, all businesses can use freemium as a business model. Under the right conditions, the freemium model can drive faster growth in recurring revenue and profits compared to a pay-only model.
Features of the Regime
In the Freemium model, most of the content is usually free (90-95% of content is free and 5-10% of content is paid. Although the initial investment costs of Internet companies are high, service). marketing costs are virtually zero, so the profits generated by paid services can quickly offset the investment in free services and attract new users.
The Freemium model effectively utilises positive network effects. Network effects are also referred to as “network externalities” or “demand-side economies of scale”. This refers to the phenomenon that the more consumers use a certain product, the more utility individual consumers derive from using that product. Phone calls are the most typical example of network effects. In games, a server with more players and a higher level of activity will have a higher willingness of players to pay.
Based on the network effect, the Freemiun model allows service providers/creators to have more ways to generate revenue, such as attracting a large number of users through free services and then using users to attract advertisers, vendors, etc. who are willing to pay.
Is Freemium a Successful Model?
Many experts argue about what is the ideal conversion rate.The answer is that there is no perfect number. On average, the freemium conversion rate is around 1%, ideally between 2% and 5%.This may seem low, but it all comes down to the number of active freemium users a company has.
Some companies have conversion rates much higher than this, such as Spotify, which had a 46% conversion rate back in 2019, and Slack, which had a 30% conversion rate.
Dropbox, on the other hand, has a conversion rate of 4%.If the number of conversions is too low, it could mean that there is no significant difference between the free and premium features.If this rate is suspiciously high, you may be promising too much about the features of the paid plan.
So in addition to conversion rate, customer churn rate is also taken into account. You also need to keep a close eye on the metrics. As our examples show, Freemium can be a successful model if it is chosen for the right product and executed correctly.
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Conclusion
Thus, Freemium games and other similar products will help to bring revenue and expand the audience for those companies that have been in the market for a long time. Even if free users do not generate revenue, they will help the company to grow significantly.