Many up-and-coming successful companies are opting for the freemium model for their business. A deeper understanding of the same is crucial in understanding the nuances of the model and its implication in the way businesses operate today.
What is a freemium business model?
The freemium model is essentially a pricing strategy that offers free services along with adding an optional non-free premium service. Users can sample most features of the service for free but need to pay for an upgrade to enjoy the premium features. This is the most common business model used by internet start-ups and smartphone app developers. The free services and features also serve as an effective marketing tool to lure users to expand the user base of the business without the need for expensive marketing techniques.
How does a business make money with the freemium model?
The companies operating under this model must strike a fine balance between their free and premium offerings to ensure sustainable growth of their business with an increasing number of new users as well as an increased conversion rate of existing consumers for premium services.
Example: Dropbox lets every new user enjoy two gigabytes of cloud-based storage for free. It has a massive user base of over 700 million people today. Dropbox makes money by charging a subscription fee from its users for providing additional cloud storage.
An optimal long-term strategy for a business would be to aim for a moderate conversion rate combined with attracting a high number of new users with free services. This will enable the business to build brand loyalty and increase the Lifetime Value of its customers.
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