Freemium – this word was used for the first time in 2006. It is a portmanteau neologism created from two words - “free” and “premium”. Freemium is a business model, based on a product which is provided free of charge, but includes additional paid features or functionality. Its origin comes from ‘shareware’.
How exactly does it work? The basic product is delivered, it is functional, useful, interesting, and for free. The product does not have to be very well-developed, the most important thing is whether the concept or the quality is good. Then, when a larger number of people are interested in your idea, you create additional elements for which users must pay. Of course, a lot depends on your idea and the kind of software that you offer. That is why it is worth choosing a specific strategy that fits your solution the best.
Here are a few examples showing how you can create a freemium business model. Remember that it is very common to combine them together to maximize profit and customer satisfaction. In this article we focus on the IT industry, but it is worth remembering that this type of business model is used in many other industries.
One of the most common strategies used in applications is to focus on advertising revenue. In the free version of the product, you have to place ads that will generate revenue through displays. Then you create a paid version that disables the in-app advertising.
Tip: Remember not to overdo the amount of ads you implement, because instead of encouraging users to purchase the paid version, you will discourage them from using the application at all.
Another strategy, about which you certainly should not forget, is to create a product that provides one of the features for free, but contains many other interesting features for which you have to pay. An excellent example of this strategy might be a game that is really sensational, well-developed and addictive, but the user can access only the first three of twenty levels for free, while the rest are available in the paid version.
Tip: Remember that if you want the price of the extended version to be relatively high, it has to have really valuable content and achieving great success with the basic version is highly recommended. Otherwise, no user will be willing to pay for it.
It’s time to discuss the release of a time-limited version, used especially by large corporations that enrich its offer with a new product. The idea behind this strategy is to make a fully constructed and developed product available only for a limited period of time, for example one month. This period gives the potential client time to get to know the product, encourages him to use it, and reinforces the belief that the user needs a full version.
Tip: It is very important for the free access time to be correctly calculated. From the customers’ perspective the time has to be long enough to learn something about the product, find reasons to use it and discover why your idea is better than the competitor’s. On the other hand, you have to make a profit, and if the free access time is too long, the market may change, and no one will need your product anymore.
This type of strategy is not too often seen in the freemium model, nevertheless it must not be overlooked. Here the manufacturer provides the product for free, offering special, collectors or limited editions for those who are highly interested, especially the fans. A good example is a band that provides their music on a website for free to download, but fans can also buy boxed concert CDs or extended editions.
Tip: In this particular case, contact with customers is incredibly important. They have to like you, as well as your products or services. Frequent updates on social media, replying to the messages from fans and even organizing meetings with them will certainly be helpful in increasing your income.
This tactic is mostly used in computer games development. In the game, which is usually relatively difficult to finish, the user has the option to purchase facilities, hints or bonuses that help to complete the next levels without getting stuck. For example, in many puzzle-type mobile games, there is an option to buy level solutions, when you cannot work out how to finish the level.
Tip: There is some risk in this one, when your game is a multiplayer, you have to remember about the players’ community. The term ‘Pay2Win’ describes computer games in which the winning players are those who spend the most money and not those who are actually the best. Real gamers do not like games like this, so be careful.
Here are examples of companies that have achieved great success in the industry using the freemium model in some of their projects:
Adobe Systems Inc. – they are using a time-limited freemium model, enabling their customers to use specialized software for 30 days for free. Adobe is one of the world’s leaders in software development, best known for Photoshop, Adobe Reader, and PDF.
Skype - is the world’s most popular software for instant messaging. It uses a freemium business model, enabling free voice and video calls between users, as well as the possibility to make calls directly to landlines or mobile phones, for which you have to pay.
Blizzard - one of the largest, most popular and award-winning developers of computer games, it uses a freemium model in its flagship product - ‘World of Warcraft’ - allowing gamers to play for free up to level 20, so that they can see the potential of the product.
Riot Games - one of the most ground-breaking games in recent years, League of Legends, is based on a freemium model. Here players receive full access to the game, however, they can buy ‘skins’ that change the visual appearance of their characters (but not affect the game), or services like the transfer of the accounts to another server or changing the name of the player.
Of course all of these models are just examples, there are many more of them, and they are almost always combined with others, to maximise the revenue. No one should underestimate the potential of this business model because of the flexibility and affordability that it offers. What do you think about the freemium business model?