Over the last ten years or so, many software entrepreneurs and internet startups have found tremendous success using the "Freemium" pricing model. "Freemium"- a hybrid word consisting of "free" and "premium" is a dynamic model that when executed properly can help scale up most software operations in a relatively short period of time.
With the "freemium" pricing model, users have access to some basic features for free and can have access to some or all other premium features with a paid subscription.
There are several factors that make the "freemium" model attractive to startups; for one, freemium allows startups to sign up a boatload of new user without expending significant resources on expensive marketing campaigns. Everyone loves "Free" right?
Once you are able to get free users, you have the opportunity to communicate with them to show what your product can do and display the value in "Upgrading". Companies like Benchmark and Youtube have awesome freemium models.
Before you decide whether the "Freemium" route is the best one for your product or service, you first, want to ask yourself a few questions:
1. Does your product appeal to a large audience?
The truth is, the freemium model has a relatively low conversion rate. One major component of a successful freemium strategy is that your offerings can solve a problem for a large group of potential customers. For companies like constant contact or Dropbox, the freemium model makes a lot of sense since every small business needs cloud storage services and email marketing capabilities.
2. Will most users experience a natural progression from "free" to "premium"?
This is a very important question to ask yourself before you decide whether to go with the "freemium" model or not. The idea here that when users sign up and continue to use your product, at some point, they will have to use the premium features as part of the growth of their business.
One great example here is Podio. Podio is a simple, highly versatile CRM application that allows you to add team members. Truth be told, the ability to add team members is the best feature, and I suspect the company knows this, so at some point, as your team grows and you have to add more team members, you will need to cough up a few dollars to continues to use the service.
2. Can the free users be monetized?
Despite what you may think, there are ways to make money, even from folks who use your your product for free. If you have a large enough base of free users, you can generate substantial revenue by selling ads along with their user experience. This model is usually seen with free apps downloaded from the Google or Apple app. store.
The Basic Types of Freemium
Time Limited (Free Trial) – X days free, then user pays
Feature Limited – Basic version free, more sophisticated paid version
Seat Limited – X number of people can use for free; any number over X has to pay
Customer-Type Limited – Small companies use for free; big companies have to pay.
Storage/Capacity Limited – X gigs of storage come free; more than X requires paid version