The Freemium Business Model

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The freemium business model is a popular way of monetizing apps. By giving away the initial app free of charge, you can quickly amass a large userbase that can then be upsold with more premium features or services. While apps are one of the most common examples of the freemium business model, it is also used by museums, art galleries, and many websites.

This article explores the benefits and potential disadvantages associated with using the freemium business model. 

Why has the freemium model taken off with mobile apps?

Freemium has had the most impact with software – and particularly with smart phone applications. Some of the most popular apps and games on the Play Store/App Store free to initially download, with additional features (or lives, energy, or other game enhancements) optionally available to enhance the product or allow you to more quickly advance on games.

There are several reasons that has made this model popular with mobile apps:

  • Minimal marginal cost of providing the free service: There is limited direct cost involved in allowing users to download and use mobile apps. While physical products (e.g., DVDs) may cost many dollars to produce and ship, the infrastructure to provide apps (e.g., servers to host the games), have minimal cost per user – allowing the company to give the product away with only a small incremental cost incurred per free users. A small number of paying customers are thus able to offset the much larger number of free users.
  • The large user base helps on App Store rankings: Gaining a position within the top 100 apps can propel the popularity of a game or service. By giving away the product, developers are able to gain traction and visibility, in a way that can be hard to attain if targeting only the much narrower segment of users willing to pay upfront.  

Key advantages of the freemium business mode

Allows wide spread adoption

The freemium business model allows wide spread option of your product or service – allowing a much large number of users to try the product than may be willing if an initial fee was charged. The freemium model can operate as a ‘demo’, allowing users to experience the product, see what it has to offer, while also being exposed to advantages associated with upgrading to the paid version.

Network effects

One possibility enabled by the freemium model is to drive network affects, that would be limited if the service was paid. Network effects are where the benefits that you drive from a product or service are dependent upon other users using the service – the more users the service has (or sometimes the number of your friends and colleges that use the service), the greater benefit that you derive.

Tinder and Bumble – app based dating services – have benefited from this. One potential limitation of paid dating services is that there may be few users within your area to connect with. The ability to use the services for free increase adoption, with a limited number of users that are willing to pay for additional features – for example, the ability to like more users or see who has liked you first.

Later upselling possibilities

Another benefit of developing a large user base – even if that user base is largely on the free plan – is that it provides upselling opportunities at a later point in time (potentially new products that you have yet to launch, or even envisioned).

Having a Google account for example makes it easier to upsell users onto their Google One paid plans for additional services across their apps. The paid plans were launched many years after Google originally introduced its services. It is a lot easier sell to convince users who have been using Gmail and related services for many years to purchase additional storage, than it is to convince individuals to buy into a paid email service.

Key disadvantages of the freemium business mode

Free service may cause individuals to downgrade

One possible limitation to the freemium approach is if the free tier is ‘good enough’ for many users, then it may discourage customers who would have been otherwise willing to pay, from making the purchase.

Costs associated with providing free service

Another potential limitation of the freemium business model is the costs associated with providing the service to nonpaying users. Server costs and data storage can start to mount quickly if you have a large percentage of users on the free tier. This may result in initial growing pains associated with sudden adoption of the service, or more longer-term structural difficulties in continuing to provide the free tier if the revenue of the paying members is not sufficient to outweigh the costs of serving nonpaying users.

Development and support resources diverted to the free service

The needs of free users may also radically differ from your main customer base, which can result in developer or support time being diverted from serving the needs of your paying customers to addressing issues faced by nonpaying members.

If you have a commercially-focused product, that you also offer to consumers, the features required may differ substantially. Zoom for example was originally focused on business users – and while it was a leader in the area, lacked features more typical of consumer-focused products such as animated features. Its sudden rise among non-business users, associated with the Covid pandemic (in part because Zoom’s freemium model allowing group calls up to 40 minutes in length for free), initially resulted in a decline in the company’s app store ratings. The company has since launched more consumer-oriented features – at least potentially distracting developer attention away from the company’s primary focus.

Final consideration: Striking the balance

One of the hardest decisions when using the freemium model is balancing prodding a functional free service, while still giving reasons for users to upgrade to the premium offerings. If the free service is too good, users will have limited reasons to upgrade. If on the other hand, the free service is too limited – lacking key features to make it functional – the app is less likely to gain the larger following that may propel the success.

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