Apr 6, 2022 Written by Tamar Barlev
freemium model

Freemium or The Freemium Model — a phrase as ubiquitous  and buzzy in today’s digital economy as  “Next Gen” or “disruptive.” And yes, you’ve either heard it or, likely, have experienced it yourself somewhere.

So, while it’s buzzy and induces “we get it, enough already,” freemium is actually a key go-to-market strategy that many companies use to get their products into the hands of users.

Ever heard of Spotify? (That’s a rhetorical question.) Spotify became the game maker it’s become due to getting users to love its product for free.

The same goes for DropBox, Skype, MailChimp,  and…dare we say it? Even B2C apps such as ViscoCam or Candy Crush (or Fortnite) have freemium to thank for their popularity. The list of freemium model apps and SaaS products is endless.

Therefore, with all of these freemium -fueled success stories, there must be something smart behind it. So today, we’ll lay out exactly what it is—and its costs.

What is Freemium?

Freemium is a portmanteau of the words “Free” and “Premium.”

In short, freemium (or the freemium model) is a type of go-to-market strategy employed by SaaS companies that offers both free and paid versions of the product.

With this strategy, there’s a paywall between the free version and premium features that cost money (hence the term “Freemium.”) And just to specify—the free version of the app still offers the solution promised by the value proposition. It’s not a demo; it just doesn’t provide all of the perks that the premium version does.

Freemium is often (attempted to be) used as a way to enter the market and convert prospective users to users—fast.  In theory, by doing this, SaaS companies can get more usage and user data more quickly.

By having more users more quickly, these companies would then be able to acquire more customers at lower CACs and be able to iterate and improve upon the existing product more quickly. Again, in theory.

And there are different types of freemium, including:

  • Feature limitations: meaning, offering better, more comprehensive functionalities of free features, or ad-hoc paid upgrades (we’re looking at you, Fortnite skins.)
  • Usage quotas: meaning, monthly credits or data processing, and storage limits.
  • Limited support: meaning, customer service, and resources that are tiered in availability and level of support.

Pros of Freemium

The pros listed below come with the caveat that they are theoretical. Put into practice with an excellent product, the freemium model can propel SaaS products to the moon and stars, and what have you.

However, conversions to paid product versions and churn still depend on user retention and engagement, which still rely on the quality of the product and its product-market fit.

Lower (or no) usage barriers:

We all like free things. We also know there are no free lunches (if you’re using a product for free, you’re the product, yadda yadda yadda.) But, we still like things that are titled “free” and still like to see “free” on the price field of an app in the app store.

Increase in User Base and Customer Acquisition

Riding on the coattails of our collective affinity for the word “Free” comes the easier acquisition of customers when you hand them your product for free. And, by getting them to try the product, they may find that they like it enough to stick with it.

And those that stick with it may discover their willingness to pay for it—whether it’s for no ads, enhanced functionality, or any of the other conditions we laid out above.

Lower Customer Acquisition Costs

With a lower usage barrier and increased user base come lower customer acquisition costs to do with marketing and sales. When users sign up for your product of their own volition—meaning, without sales outreach or aggressive marketing tactics—you lower average customer acquisition costs. 

Cons of Freemium: Investing in and Supporting Non-Paying Customers

This is the biggest and most obvious flaw of freemium.

The freemium model inherently requires that you build a great solution—one worthy of upselling—for users who won’t pay for it.

Ergo, it’s a trade-off and gamble that hinges on a few questions:

  1. Can you afford to invest in building a great product with the possibility that not as many users will convert to the premium version as you planned?
  2. Do you have a solid strategy to build a compelling case for users to convert to a premium version? For example, is the free product good enough, and the differentiation between the free and premium versions stark enough that users will want to convert to the paid version?
  3. Is there a contingency plan for monetizing the free version, and will it negatively affect user experience and retention? (i.e., too many distracting or spammy ads, etc.)
  4. How do you introduce limitations on free users that are compelling (and not alienating altogether?

If you have these answers—and more or less have a plan for walking the line between user acquisition, spending, and monetization—you may have a good strategy laid out.

But it’s important to consider all of your options with go-to-market strategies, including product-led growth (which can incorporate freemium elements), before making a decision. 

Well, this was a lot. We know.

Coincidentally, hi, we’re Goji Labs—a product and software development consultancy with experience in designing, “rescuing,” and deploying hundreds of products.

Looking to develop a new app or revamp an existing one? Need some product strategy or mobile app and software development help?

Have any general questions about who we are and our authority on the subject?

Reach us at GojiLabs.com or drop us a line.

– Goji Labs