Freemium Model: How to Make Money by Offering Stuff for Free

How many times have you set a personal goal, like better eating habits or fitness, and searched the app store for an app that can help? When you find one that looks good and free, how likely are you to download it? Significantly, in most cases.

Therein lies the allure of the freemium model. There’s no risk to the consumer in trying something for free. Moreover, if they like the service or come to depend on it – in this case, the app – they are more likely to pay for additional features and benefits to improve the experience.

Freemium, a combination of the words “free” and “premium”, is a pricing strategy where a product or service is provided free of charge. However, additional features, services, or goods to get more out of the product or service are provided for a fee. With the freemium model, your customers are split into two categories – free and paid.

Although the freemium business model has been used since the ’80s by software companies, the term freemium didn’t appear until 2006 when venture capitalist Fred Wilson summarized the model in a 2006 blog post saying,

In response, Jarid Lukin of Alacra, one of Wilson’s portfolio companies, suggested calling the model “freemium”. Today, the freemium business model is so successful that more than 77% of the top sellers in the Apple App Store use the freemium model.

With the freemium business model, most of your consumers will use your free service, while a small segment will pay. The paying customers receive “more” in terms of use. The more can be offered in a variety of ways, the most common being:

There are two main components necessary for a freemium business model to work. The first is offering a valuable service with a great experience. The second is to make “more” available that provides even more value, i.e., enough that users are willing to pay. With this tactic, you are using your free service as a marketing tool to create a pool of customers who already find value in your service and are more likely to pay for even more value.

Let’s look at an example of a freemium business model – Spotify.

With the Spotify freemium business model, users can stream music for free. However, Spotify chooses your music based on your search criteria and delivers it as a playlist, which may contain songs you don’t like or care to hear. So although you can listen to playlists, albums, or artists on shuffle, you can’t select a specific track to play. Also, you are limited to skipping only six tracks per hour, and your music is interrupted by non-skippable ads.

So, if any of this hinders your music listening experience, you can opt for their premium service. In this case, for a monthly fee, you can listen to any track, album, artist, or playlist you like – at any time, in any order, with unlimited skips – completely ad-free. You can also download tracks, which you cannot do with the free service.

As you can see, Spotify is an excellent (and successful) example of a freemium business model that provides a valuable service for free – but a better experience for a fee.

The freemium business model has been particularly popular with SaaS (software as a service) companies for many reasons, which are both tangible and psychological.

Tangible:

Psychological:

Let’s look at the Dropbox freemium business model, a shining example for freemium model statistics.

Dropbox offers free storage online (up to two gigabytes free) and has 500 million registered users. However, when the user exceeds this capacity, they can upgrade to one terabyte by paying a monthly or annual subscription fee. Dropbox generated $1 billion in revenue in 2017 from 11 million paying individual and business users and continues to grow its user base. It’s safe to say Dropbox’s freemium business model is winning all around.

Let’s go back to the Spotify freemium business model. We laid it out earlier, but is it successful? In 2019, Spotify made over $7 billion – and 90% of that was generated from premium subscriptions. So, yes, Spotify is killing it with a freemium pricing model.

There are quite a few benefits of the freemium model, some of which we’ve already touched on. Let’s review:

On the tail of these advantages, there are some disadvantages to the freemium business model.

Although we see more examples of freemium model adaptation in the SaaS industry, there are situations where it can work in the non-Saas industry. Again, let’s look at some examples.

Many communities offer free public events, like outdoor concert series. Sponsors usually fund these events. However, the event organizers can monetize concerts by offering a premium membership.

For example, paying members can get early entrance access, priority shaded areas or stage proximity, or performer meet and greet opportunities. So, although some may be fine simply enjoying the free concert, others may be willing to pay for an elevated experience.

Another example is a non-profit organization based on volunteers. Say the mission of the organization is to keep community parks and trails clean. There are plenty of volunteers who would be willing to sign up to contribute their time and energy to the mission. However, what if premium membership gave them priority access to sign-up days/times/locations? There may be plenty of people that are willing to pay for the opportunity to volunteer on their schedule, especially given the charitable aspect of the cost.

The freemium business model is just one of many that can help your business succeed. How do you think it can apply to your business? We would love to hear your thoughts.

At Living Proof Creative, we’re experts at inside-and-outside-the-box marketing strategies and tactics.