Possibly the most common example of the freemium business model is apps. However, while freemium apps are given away, the freemium business model relies on making money through upgrades and other in-app purchases. While having thousands or millions of users may be great, unless you are able to convert at least a proportion of these users to paying customers, there is no financial benefit to the large user base. This article explores considerations involved in upselling with a freemium business model.
Disclaimer: This article should not be relied upon or considered legal advice. You are encouraged to seek further guidance from qualified individuals on all legal matters, including your monetization approach.
Consideration of how feature-rich the free version of the service should be
Both the cost associated with providing the product to non-paying users, as well as the importance of keeping nonpaying customers to the overall ecosystem are key factors influencing how feature-rich the free version of the product should be relative to the paid version.
Cost of providing the service to non-paying users
For some freemium apps, the costs of providing the service to non-paying users may be negligible. If the majority of the processing is undertaking on the user’s phone, with only limited interaction with the server, then the costs associating with supporting free users may not have a large influence on decision making.
If on the other hand, substantial server resources are required (e.g., document hosting), or there are per-user licensing fees or other on-costs associated with providing the service, the cost of continuing to have non-paying users may start to mount substantially.
If per-user costs are high, you may need to achieve a relatively high conversation rate in order to subsidize the cost of non-paying users. This may influence only offering a more limited service for free – and accept that non-paying users, who are not willing to pay, may no longer use your service. Restricting features in the free tier both encourage users to upgrade to the premium offering, while also resulting in some non-paying users stopping to use the service (with associated costs savings).
Indeed, if the ongoing costs of non-paying users are particularly high, ensuring that the free version of the app lacks some essential features may be part of your approach. This may allow users to try your app before they purchase (without the time pressing nature of a limited-time trial), but largely with the expectation that to properly use the product, users will at some point have to make the choice between upgrading, or to no longer use your app (with few to no users expected to remain on the free plan long term).
Importance of non-paying users to the service’s overall survival
The split between features in the free and paid versions of an app may also depend on how important retaining non-paying users is within your ecosystem. For certain apps – particularly those that rely on having a large network of engaged users – it may be critical that you retain your user base, irrespective of whether they are paying or not.
For example, dating apps rely on having a large network of users. Thus, while Tinder and Bumble have paid plans, that provide various additional features, the free service is feature-rich. It is important that users retain using the service irrespective of whether they ever subscribe because the more users there are the better the platforms are (in turn driving more users some of which will become paying).
Non-paying users may also be indirectly important by influencing the app’s rating. It is not a satisfying experience to download a ‘free’ app, only to discover that it is almost unusable without having to pay additional fees to unlock critical features.
The payment model for paying users
There are various different approaches to the revenue model of freemium service, including:
- Onetime payment: The first approach to freemium upgrades is the on-off upgrade – allowing users access to features in-prematurity for a onetime payment.
- Subscriptions: Rather than providing access to the full feature set, require an on-going monthly (or annual) subscription. This approach has the benefit of providing continual income, while potentially allowing the recurring payments to be less upfront than one-off amounts.
- Multiple one-off payments: Rather than seeing payments as one-off, or recurring, this approach involves building the option for multiple ‘micro-charges’ – for example to unlock character features, more lives, or more coins. This approach is common in games – although as discussed below, is also an approach that is susceptible to criticism of being predatory in nature.
- Multiple approaches: It is also possible to combine the approaches – for example, subscription payments with additional fees to access certain features. A consideration with this approach is to be aware that users who think that they have purchased or subscribed to the entire product, may be frustrated by additional payment requests to access certain features.
Dimension to restrict usage
One common way of restricting usage on mobile games is to have some sort of time limit built into the product. This may for example be the number of lives that you have available before either needing to wait for them to recharge, or to pay to continue with extra lives.
While it is usual to have a time component built into productivity apps, a permutation is to restrict how much data can be processed or stored. Potentially 1GB or storage may be given to free accounts, but a much higher amount to paid subscribers.
Another way of restricting usage is to consider which features you can restrict between the free and paid offerings. One approach is to consider which features are essential – required in order to run the app, and which ones are more optional. Keeping useful, but non-essential features restricted to paying users provides an incentive for individuals who use the app the most to upgrade, while still encouraging widespread adoption.
A final means to segment between the free and paid plans is to systematically consider which components of your app or directly cost money, and to limit these cost-incurred elements to paid subscribers. This can help keep your costs lower, while also providing a clear basis for users to see why certain features are likely restricted. Rather than useful features being restricted solely to make you upgrade, it may be self-apparent why it is not possible to provide certain features on the free plan.
For example, certain support features are often restricted to paid plans. You may be able to offer community support (e.g., a forum for asking questions, answered by other users), while limiting chat or phone support to paying users.
Final consideration: User types and legislation considerations
While the freemium model is common for both software services and mobile apps, certain audience categories may not be as well suited to this approach, or there may be legislation impacting certain in-app purchases.
Children: In-app purchases are not necessarily well suited for products sold to children – who may not have the ability to make the purchases or whose parents may not desire apps using this business model to be used. Platforms have faced criticism over children running up bills on their parent’s accounts without permission. Indeed, there may be specific legislation that restricts in-app purchases by children.
Business markets: A somewhat related concern may apply if you have business users. While software subscriptions are common in the business world, it is less usual to change small ‘in-app purchases’ to company accounts. A difficulty in expensing such amounts, and a reluctant for employees to pay for such costs out of pocket, may restrict the application of in-app purchases for business purposes.
Excessive purchases, drop boxes, and legal considerations: It is important to ensure that your implementation of in-app purchases complies with the app store policies as well as local laws. Some users may incur large charges, and there has been concern that certain forms of in-app purchases (especially micro-transitions) may be predatory in nature, resulting in large unexpected bills for users. Certain types of in-app purchases have been characterized as gambling, with the use of ‘loot boxes’, where a payment is made for a random item, restricted in multiple markets. If you are implementing in-app purchases as part of your freemium approach, it is thus important to research applicable policies and verify that your implementation is legal in the markets that you serve.