Over the last two decades the freemium model — a combination of “free” and “premium”—has become the dominant business model among internet start-ups and smartphone app developers. Users get basic features at no cost and can access richer functionality for a subscription fee.
One major factor that contributes to the success of freemium products and services is the instinctive inclination of people to take advantage of anything “free.” Because let’s be real, nothing feels better than benefiting from something that did not cost you money.
Many SaaS companies offer some free options, but their main goal is to have the majority of their users pay for a product. With customers becoming savvier, and more skeptical of traditional marketing tactics, gaining paid subscribers can become a challenge.
The freemium model can increase acquisition potential and quickly grow a business while keeping acquisition costs minimal. Since many users share freemium products with friends, it can also result in free word of mouth advertising. And as more people use a freemium product, a business has potential to gain more leads. Some of these leads may not convert, but it’s an effective way to increase reach.
A great example of a company that successfully offered a freemium product is Spotify. The Spotify free plan allows its users to stream curated radio stations (but only on shuffle play), playlist, and albums. However, they encounter ads in between their playlist. They can’t skip these ads to get to a specific song. Meanwhile, the premium plan offers a lot of features such as an offline playlist, individual song selection, and Spotify Connect for connecting to other devices.
The feature limitations are substantial. Users with a free plan can still enjoy the product’s value. However the inability to choose a specific song on the playlist reminds the users of everything they are missing.
The freemium model is so effective because the main focus is the customers. The best freemium models enable users to see how a product can solve their problems while keeping them on the hook for bigger and better things, that are just a subscription away.