Before entering the market, planning the profitability of the company is a prerequisite for financial success. Among startups, especially those offering digital products and services, the model is freemium it is an alternative that has gained recognition.
What is the Freemium model?
The Freemium model offers part of a free service for a large number of users while giving them the opportunity to migrate to a paid version with more features.
When betting on this strategy, it is important that the number of premium customers is generated enough profit so that the company covers the expenses of all users, including free ones.
To understand the concept, think of services like Spotify. Upon entering the application, the user will have access to an unlimited number of free music, but only listen to them randomly, and will also be exposed to advertising. To get rid of that, they can pay a Monthly Rate for the premium model of the app, which is more complete.
Today, countless companies have global success They use the freemium model. This is the case, for example, with Dropbox, Evernote, Skype, Pandora and Hubspot.
Benefit from the freemium model
One of the main advantages of freemium is that it increases the possibilities for consumers experiment the product or service because they can use it for free. This way they can try and if they like what the company has to offer, it is possible that they will become premium users, which will also help them to spread the word about the store.
Watch out for marginal costs
But what is the ideal type of service to bet on the freemium model? In an article for ForbesChuck Cohn, author of books on entrepreneurship, explains that if you are a strong product with low marginal costIn addition to a clear strategy to add value to premium users, the model can conquer more consumers and increase the starting point.
In his opinion, to know if the freemium strategy is profitable and sustainable, it is necessary to calculate whether the value paid by customers is sufficient to cover the company’s operating costs, while maintaining a realistic conversion rate (generally 2-5%) Is accepted.
The importance of offering value
It should be noted that the strategy implemented in the freemium model must be well developed by the company. Otherwise, it will be difficult to attract consumers who are willing to pay. It is important find a balance between the free and premium version. But how does one do it?
The free version should not offer so many resources that users lose interest in payment for something more complete. In the same way, offering very few free offers can make consumers not want to use the service because they don’t have a satisfying user experience.
Therefore, it balances these aspects well. Offer attractive features in the free version to persuade the user, but don’t forget to show the user will increase in value when choosing the paid version. Make it clear what the benefits are for those who buy the updated version.
Now how about analyzing whether the freemium model is ideal for your business? Don’t forget to develop a good strategy increase conversion rate of users and check the marginal costs of your company.