Freemium Meaning

While consumers try quality offerings at no cost, businesses acquire a large user base. As a result, companies create a pricing plan for their premium services based on the initial market response. This model aims at fostering the conversion rate of customers from being free users to paid subscribers. It is extremely popular with internet-based ventures that seek to attract a significant user base at a reduced operational cost.

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Key Takeaways

  • Freemium is a customer acquisition model in which businesses make their basic services available to consumers for free. However, to enjoy advanced features, users need to buy premium versions.The term stands for Free + Premium. It lets businesses decide on their pricing strategy and choose those that suit their products and services.Software businesses first introduced the idea in the 1980s by making free versions of their products available to users with limited features or limited periods. It was termed the shareware strategy.Start-ups adopt the freemium business model to acquire new customers and build a loyal user base by offering free basic services.

How Does Freemium Business Model Work?

The term freemium is the merger of two words – Free + Premium. In the 1980s, many software businesses used this model to showcase their offerings with limited features or limited time to consumers free of cost. With this tactic, these companies wanted to ensure that consumers upgrade to premium versions of the same in the long run. At that time, this method got popularized as the shareware strategy.

In later years, it turned into the customer acquisition model for sellers and brands. They began adopting this model to offer basic services without charging anything. With that, they hoped free users would choose their paid versions with advanced features. Simply put, free basic services give consumers a glimpse of an offering and help them decide whether it is worth the monthly or annual subscription.

It is also a way to build relationships with potential users. When offering free basic services, the only thing a company needs to think about is ensuring premium products or services have additional features than free versions. Even though many consumers use free services, only a small number convert to paid services.

Freemium And Media Streaming

Media streaming services frequently use free basic services. Customers can open freemium accounts with these services and access digital media without paying anything. There is, however, a restriction to the number of music or movies or shows they can listen to or watch monthly or annually.

The service provider might ask users to subscribe to consume and download unlimited media on their devices for free. However, those who do not pay for the service get limited access and face interruptions, like advertisements. As a result, they consider taking paid subscriptions for ad-free and better services.

In short, freemium services compel free users to go for a paid subscription. Or in other words, it is all about converting free users into paid users.

Examples of Freemium Business Model

To understand the concept more deeply, let us consider the following examples:

Example #1

A gaming company developed a game for kids above 12 years. The development team was confident about the product and knew it would be interesting at play. So it began offering the game for free for 30 days. After the 30-day trial, it would ask gamers to subscribe to it. As the game was one of the freemium games,teens got excited and found it adventurous.

The game requires players to make calculations to proceed to the next level at every stage. Since it enhanced the cognitive skills of children and teens, the game influenced their parents as well. As a result, gamers decided to upgrade to the premium version by paying the monthly or annual fee per their suitability.

Example #2

The massive success of Netflix as a streaming service has allowed many ventures to explore this segment. As part of their efforts to acquire new customers, these companies introduced freemium digital media streaming services. Technology giants like Apple, Comcast, AT&T, and Verizon have rolled out free streaming plans for consumers.

For instance, Apple offered a free year of Apple TV to everyone who purchased a new iPhone, iPad, Mac, or Apple TV box. Likewise, Verizon gave its wireless customers a free year of Disney+, and AT&T said it would offer regular HBO subscribers HBO Max for free. Similarly, everyone could access an ad-supported version of Comcast’s Peacock streaming service.

Pros And Cons

The freemium model allows start-ups to launch their products and services and acquire customers by offering free basic features. Besides, it creates brand awarenessBrand AwarenessBrand Awareness is a measure of consumer’s brand recall and brand recognition.read more among the potential users. However, every model has its own set of pros and cons. Therefore, before any business opts for this pricing strategy, it needs to know the advantages and disadvantages.

Pros

Cons

  • Free users get limited access to features of products or services. They need to pay to enjoy advanced functionalities.A poor marketing strategy can result in the loss of potential premium customers.If the number of free users is more, a small percentage of them will convert into paid users.Companies adopting the freemium business model have to burn their cash flows to support those not paying for the services.The continuous desire to convert free users into paid ones makes businesses invest more time, monetary and non-monetary resources.A business needs to maintain a balance between expenditure and acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more.

This has been a guide to Freemium and its definition. Here we discuss how the freemium business model works, examples, and pros and cons. You may also have a look at the following articles to learn more –

Freemium is a customer acquisition model or pricing strategy to introduce basic services with limited access for free. After the free trial ends, users/consumers can upgrade to more advanced features at a paid subscription.

Internet-based ventures, including online media streaming, gaming, cloud storage, etc., actively follow the free basic services formula. For example, world-renowned businesses like Tinder, Spotify, Skype, Dropbox, WordPress, and Netflix.

The Freemium model is considered successful as it helps businesses create brand awareness and establish brand recognition. It enables start-ups to penetrate the already dominated market by allowing consumers to use their basic services for free first. Once users start liking the products, they pay for additional features.

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