The Freemium Pricing Model

Freemium is as mash-up of the words “free” and “premium”. The gist of freemium is that consumers receive the basic features for free at no cost. The ‘premium’ features and add-ons cost money (Kumar, 2014).  Freemium is a fairly new pricing model that started in the 1980s (Seufert, 2013) and has quickly grown since. Over 80% of the top mobile applications uses some form of the freemium model (Lee, 2013). It is a pricing model that is becoming commonplace, especially in the software, social media, gaming and the mobile application industry (Kumar, 2014). It is a radical idea and bucks against the common notion that companies should not give away anything for free. Freemium has turned the notion on its head and it is partly due to today’s increasing online market. There are benefits for companies using this model. It makes it easier for consumers to recommend to their networks, which have facilitated the growth of many software companies (Lee et al, 2013). There are three challenges with the model.  First, is how much value of the product should be free, relative to the premium product? Second, how do companies incentivize consumers to upgrade to premium or buy add-ons? Finally, what is the right incentive to offer to influence consumers to share? Future and current business professionals will have to learn how to navigate the freemium model, considering it’s pervasiveness, especially with the digital industry booming.

The freemium model has many variants. Product Sampling is one (Pujol, 2010), the digitization of product sampling can be restricted to either a time limitation or limited us, which is made possible with the Internet (Pujol, 2010).  For example, Harvard Business Review allows four free articles per month, with unlimited articles with a premium subscription. The final type is the product comes with the basic features (unlimited) and with an upgrade to access premium features. (Punjol, 201). Often found in online games.  The challenge here which type of freemium to choose and how much of the value should be free, while reducing the risk of cannibalization? To mitigate this, companies should look at what is being offered and the feedback metrics. The purpose of freemium is to attract new users (Kumar, 2014). If the data shows traffic is low, the conclusion is the free offerings are not enough and better features needed to be added. If there is a lot of traffic but not enough conversions, the conclusion is the free features are too much (Kumar, 2014). The company should first ensure customers understand what the premium offer entails (Kumar, 2014). It should be simple and clear. Second, listen to consumers.  Freemium is unique because there are two groups of customers that are dependent on each other. One is the free users and the second are the premium users. For example, the first premium users act like beta users (Punjol, 2010). Where they test the premium product and give feedback. This allows the company to tweak the free product and the premium product even better. This also allows for customer relationships to emerge.

Finally, what is the incentive to offer to influence consumers to share? Referrals are effective at converting consumers to premium at 40% of the time, due to the viral nature of referrals due to social media (Lee, 2013). To increase referrals, ensuring a steady conversion rate is key. Naturally, a higher conversion rate seems better. This is not always the case if there is a high conversion rate but the low traffic it shows that the free product is not compelling, which limits customer acquisitions (Kumar, 2014). Studies have shown that a conversion rate of 2-5 percent with high traffic is actually better (Kumar, 2014). If it is a niche market than a higher rate is recommended. To consistently retain customers, companies should be committed to ongoing innovation. Users who are late joiners are harder to convert and are typically swayed by upgrades of the premium service (Kumar, 2014).

Freemium pricing is an intrinsic part of the online world and digital marketing. With many products now shifting to bits instead of bricks, it is becoming a default standard for many companies. It is also a practical model for many startups. For example, Linkedin offered their service for free but has a premium version for the upgrade (Linkedin, 2016). This has helped them grow rapidly.  The Freemium model can make a company successful, but again, it must be emphasized, it’s suited to industries where the product can be digital. It is a delicate balancing act. Knowing how much to offer for free, incentives, and continue innovation needed to succeed with the freemium model. It is imperative for oneself to understand how freemium works within digital marketing. As business continually shift and change we must change with it.  

 

Work Cited

  • Lee, Clarence, Vineet Kumar, and Sunil Gupta. “Designing freemium: a model of consumer usage, upgrade, and referral dynamics.” Mimeo Leung, Michael (2013), Two-step estimation of network formation models with incomplete information (2013).
  • Liu, Charles Z., Yoris A. Au, and Hoon Seok Choi. “An empirical study of the freemium strategy for mobile apps: Evidence from the google play market.” (2012).
  • Pujol, Nicolas. “Freemium: attributes of an emerging business model.”Available at SSRN 1718663 (2010).
  • Seufert, Eric Benjamin. Freemium economics: Leveraging analytics and user segmentation to drive revenue. Elsevier, 2013.
  • Wang, Hao, and Alvin Chin. “Social influence on being a pay user in freemium-based social networks.” 2011 IEEE International Conference on Advanced Information Networking and Applications. IEEE, 2011.