Many companies that struggle with growth at some point in their evolution or are considering trying a new, maybe even bold strategy, end up giving a chance to the freemium model. The freemium pricing strategy has been around since the 80s, picking up great speed starting with 2010. While it succeeded in heavily boosting certain software products (particularly for gaming), it also has its serious share of failings and critics.
The main problem with adopting freemium is that it can be a tricky trip, with a pretty high risk of becoming a serious blow to the company’s sales. Keep reading to figure out if freemium is the right choice for your business and what is the mindset that usually leads to making a freemium mistake.
From my experience, there are 3 basic assumptions which convince future freemium-victims that this model is the right choice for them:
- Distribution: It will be much easier and helluva lot cheaper to distribute a freemium product and we’ll quickly gain more market share.
- Investment: We know it might take a bit longer to see the return, but I can feel it a mile away: it’s a very good long term investment!
- Premium vs Freemium: We will still keep our Premium paid version, so our revenue won’t even know we’re testing freemium.
Ok, this is a certainty: it is, indeed, cheaper to distribute a freemium version of your product. Taken with a grain of salt, however, because cheaper doesn’t mean free.
Add the fact that the freemium model has one of the lowest conversion rates in the software industry, averaging 1-2% for SaaS companies. Meanwhile, free trials aim for an average of 10% conversion rate, “just” 5 to 10 times higher.
ROI rates for freemium software reach, in the best of cases, a value of 55 – 60%, while the vast majority of products barely scrape for a 25 – 30% ROI. If you factor in the generally low prices practiced for freemium upgrades, you get an idea of how “profitable” it all actually is.
My point here is that you should put the customer acquisition cost in balance with the probable conversion rate, before making any decision about adopting freemium. You might be surprised. And if you are, it’s better to be surprised now than later, when it might get too expensive for your own good.
Yes, freemium is a good long-term investment IF it works out for your product. The downside is that there’s a high chance of long-term bleeding IF it turns out to be the wrong kind of decision. Operating with too many IFs (especially of the critical type) is not a wise business perspective and you can try to reduce some of these IFs by testing & calculating a few key factors:
- What would be the average time between the moment a user downloads the freemium and the same user makes a purchase?
- How much do you expect the customer’s LTV (Lifetime Value) to be?
- How big would your operational costs with free users be? This refers to both customer support and the backend resources you will allocate.
Would these costs still make freemium a profitable business decision? After all, you could end up with 99% free users and a microscopic 1% of paying ones.
Premium vs Freemium
In theory, freemium is not an utterly wrong option and there are some (rare) examples where it produced great results. Personally I have never seen a company play this card right but I’m still giving miracles a chance.
When is freemium supposed to work out nicely though? When you use freemium to penetrate a new market, assuming you have a generous budget and you are a large enough company to be comforted by secondary benefits, like brand awareness, market positioning, etc. Freemium can surely deliver that (not sales though), within a reasonable timeframe.
In most cases, however, freemium will likely choose to eat your premium profits for breakfast. And if that happens you will be, sadly, an official “freemium victim”.
If there is one thing I hope you will remember from this article, it’s this million-bucks question to ask yourself before jumping on the freemium bandwagon:
How often does your client ACTIVELY use your product?
If your answer is daily (meaning your product is the type that evolves into a habit for users), going for freemium might hit the jackpot for you. If it’s less than daily, well, Houston we have a problem!
It is important to understand that “active usage” means that your client is actually & directly engaging with your product. Spam filters or background utility apps don’t really produce engagement, just to be clear.
It’s also critical that you constantly add value to your product, and that its value is perceived by customers. What I mean by this is, for instance, that a bi-annual usage of a file converter or an update adding 2 new file encodings do not qualify as added value.
Customers must be helped to feel & remember that they should buy your product. This is quite easy to achieve by using smart blockers, the kind that limit a full experience without forcing users to stop using the product altogether.
Here are a few examples of right and wrong blockers:
Limiting storage/ file size – This gives your customers sufficient time to become invested in the product, making it more than reasonable to pay for the full version (unless they take a strange pleasure in abandoning days of work within the product). The right amount of product dependency works wonders with customers.
Limiting core functionality after a certain amount of time – this has such a negative impact that I can’t even begin to describe how often & fast customers will run away not just from your product, but also from your company. It can have huge operational and brand costs, meaning you might afford the risk only if you are a single player in a very in-demand industry.
Loss of progress (blocking access to product features when reaching a certain threshold) – probably one of the most efficient ways to frustrate your customers and stimulate them to leave and publicly criticize your product.
It’s true, though: there are some amazing companies which turned freemium into a highly profitable business model. Kudos to Dropbox, Evernote, Spotify, to mention just a few. And then there are the less fortunate examples of companies failing at freemium, such as Avast.
So should you or should you not embrace the freemium model?
This depends on your answer for the key question i mentioned earlier: how long does it take for a customer to test your product and become addicted? If the answer is “a few weeks” , freemium might be your next best thing. If you are dealing with products which generate value very quickly (also reducing future product usage), you should consider using a free-trial model to convert your users quicker & more cost efficient.