Even if you haven’t heard of the freemium business model, chances are you’ve encountered a company who uses it. Essentially, the freemium business model functions by first offering customers a free service; from there, the customer can then opt for “premium” features, such as an ad-free version or special perks. Used for a lot of mobile apps, some of the more notable companies who follow the freemium business model include Dropbox, Skype, and Spotify.
So, with the popularity of this business model, how do companies actually make money?
One problem that freemium services often face is a majority of their users settling for the “free” version of whatever service they are using. For example, the majority of mobile games are free, and aside from ad revenue (if the game has ads), most players aren’t really contributing directly to the company’s profits. In fact, for games like Pokemon Go, a popular mobile game, most of the game’s revenue comes from the few players who do spend money on the premium options the game offers. While some companies have found success with this model (i.e. Dropbox, which in 2017 earned $1 billion in revenue following the freemium business model), some are looking for a more stable source of income.
This model of offering a free service to many in order to gain revenue from a few seems to be working for some companies, but what can we, as marketers, do to further ensure that customers opt to pay for services?
In a study conducted by the Harvard Business Review, it was found that when the premium options were extended, sales in the “middle compromise” option increased. For example, if originally a customer is offered a premium paperback product (versus the free pdf version), sales in the paperback product actually increased when the product line was extended to include more expensive hardback and ebook premium products.
So, in the words of the Harvard Business Review:
“Marketers can use our findings to strategize how to extend their product lines — from which products to offer to what prices to set — to motivate zero-price-loving users to pay for premium goods. Any company that uses the freemium model, including online media sites, cloud services, or digital services, can use this research to drive product revenues and create a more sustainable business.”