The Freemium Model - Different Types of Freemium Models

In the modern world, more and more start-ups are selling products and services related to information technology. These companies either bring about a digital revolution in existing businesses or create a totally new product category. Most of these new businesses sell something intangible. Hence, the traditional distribution models are no longer effective.

Web-based companies cannot appoint wholesalers and distributers that push their products into the market. However, at the same time, these companies do need a distribution channel i.e. a way to get their product to the mass market.

The freemium model has come as an alternative solution to web-based companies that want to expand their user base. Top-notch companies such as Spotify, Dropbox, and even YouTube have used the freemium model as a part of their growth strategy. It is important for modern-day investors to understand the freemium model as well as its pros and cons. In this article, we will have a closer look at the working of a freemium model.

What is the Freemium Model?

In order to understand the freemium model, one needs to understand the mindset of the digital consumer. The digital consumer is spoilt for choice. They can choose between multiple apps that perform the same function. As a result, digital consumer does not want to commit their money to any app before they have actually tried it. Over time, start-up founders realized that customers are a lot more likely to buy any products or services from their app if they were given a chance to try at least the basic features for free.

As a result, the freemium model came into existence. The freemium model is based on the start-up company having a differentiated offering for two separate types of consumers.

  • On the one hand, is the basic offering which is available free of cost to anyone who can access the internet.

  • The second type of offering is a premium version of the basic offering. This premium version offers a higher level of product or service. For instance, the service could be provided without any advertisements or interruptions, or paid customers could be given access to more features, a faster turnaround time, or even access to more content can be given. It is also possible for companies to limit the time which basic users can the free service for.

    For instance, YouTube offers its services to everyone. However, if users want an ad-free experience, they need to buy an inexpensive subscription. Similarly, companies like Dropbox offer their services to everyone. However, the more premium version of the service with more features comes at a higher cost.

Hence, it can be said that the freemium model is a combination of two words viz. free and premium. Businesses that offer a combination of free as well as paid services to their customers are said to be following a freemium model.

Freemium Model

Variations of the Freemium Model

The freemium model is not a recent creation. Over the years, many companies have focused on the freemium model and as a result, several variations of this model have already come into existence. Some of the commonly used variations of the freemium model are as follows:

  1. Free Trial: It is common for start-up companies to give a free trial period to their users. This is done by asking the users to enter credit card information at the start of the free trial period. If the period lapses and the user has not explicitly canceled the subscription, then it is assumed that the user wants to continue the subscription. The credit card is then charged at the end of the trial period. Even large companies like Netflix and Amazon Prime use this type of freemium model in order to attract more people to their websites.

  2. Reduced Features: There are several websites that provide a premium model of the website to new customers. However, once a certain time has elapsed and the users have not brought a subscription, these websites downgrade the user’s access. This means that in the future, the user may not have access to certain features which they already had in the past. The effectiveness of this model is questionable.

    There are several studies that have shown that not giving users access to premium features is better than first giving them access and then taking it away. This is because when customer resentment towards the brand increases when features are taken away. This ultimately leads to negative brand perception and brand value.

  3. Ad Based Service: Many companies believe that if customers cannot pay in monetary terms, they should help the company recoup its costs by paying with their time. Hence, such companies use advertisements to recoup the revenue which is lost as a result of providing free services to customers. Since these websites are able to generate data about the customer’s lifestyle and preferences, marketers are willing to pay a good amount of money to advertise on these platforms.

  4. Branding Limitations: Lastly, there are some applications that limit the branding potential of their users. This is done by adding a watermark of the company providing the service. Applications that provide services such as data conversions tend to frequently use this model.

Hence, it can be said that the freemium model is a very important part of the start-up ecosystem. There are many start-up companies that have been able to gain a large number of users thanks to the freemium model.

❮❮   Previous Next   ❯❯

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.

Startup Finance