Offering your services for free, as a newly formed startup or business looking to monetise, can seem counterintuitive at face value. However, bringing customers on board earlier by providing complimentary features can act as a way to build their loyalty and showcase your brand engagement to advertisers. This is known as the freemium model.

Perhaps the most recognisable startup to have benefited from the freemium model is Spotify, which went on the redefine the music industry through streaming music free to customers, while wholly subsidised by advertisers and its ad-free premium offering. So how and should a startup or established business adopt a “freemium” model? This article explores three strategies for determining the suitability and implementing a freemium model.

Which Features Should be Free?

The most common way in which the freemium model is implemented is by presenting users with a core offering, supplemented with optional functionalities available at cost.

Another alternative is to market your services initially as free then convert them to premium. However, this can be less effective given customers may be disgruntled with having to spend on something they were previously able to freely access.

Freemium is designed to expand a businesses userbase. This should be front of mind when deciding what should and shouldn’t be offered free. Free features should be the most appealing and it makes sense that any paid ones would be an enhancement of the experience provided by those. However, there is a fine balance because having free features that are too high value might take away from subscriptions to the paid ones. While striking this balance might require shifting free features to premium and vice versa, it is something worth trialling if you’re looking to adopt a freemium model.

Some methods for reassessment are:

  • Comparing the effort it takes for a user to perform a task using both the freemium and premium. Ease of use is a critical distinction been free and paid features.
  • Redefining the different customer classes that use the services.
  • Revaluing what level of customer support should be given to free and paying users respectively.

Communicating the Premium Offer to Customers

Another consideration when listing premium features is making sure the customer clearly know what they entail and the benefits the customer will receive from upgrading. If the benefit of moving to the service is minimal or may require the client to think through how they will use it, it will most likely not be an appealing enough premium feature. Again this may be a case of the free features being more than sufficient for the needs of your user and may require a rethink.

Optimising Freemium for Conversions

So how do businesses tailor freemium for conversions? The place to start is by setting a conversion rate target which you can use as a reference point when adjusting your strategy. While having an ambitious target is fine, the reasonableness of this rate is key and what is optimal for you is dependant on your monetization plan and market size. As a general rule to follow is the more niche your market, the higher the conversion rate should be. However, a rate of increase has an ideal range of 2-5%.

The Importance of Continual Improvement

While a feature may initially be attractive, it will inevitably lose its value over time as users find the have new needs that go beyond what is currently offered. Moreover, any prospective customers will also find it to be of limited usefulness to them if the service is not up to date. Considering this, business should be responsive to any technological or industry changes and aim to incorporate them into their feature array.

Key Takeaways

Freemium, a relatively recent product which has grown increasing significant over the last decade, still has unexplored potential as a business model. Nonetheless, freemium is more appropriate to certain companies, namely software-as-a-service and content providers. As such, the above assessments should be made in making any plans to offer a freemium model. For further information, contact our online lawyers for how advice on how to structure a freemium policy.

Anthony Lieu

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