What's the Freemium Economy All About?

Some things in life are indeed free, but for a small fee, you can upgrade to something even better. At least that's the basic principle of the freemium model, a hot phenomenon in the cloud-run small business world.

How does its economy work and what makes it so popular among businesses and consumers alike? Let's take a look.

What Exactly Does Freemium Mean?

Free + Premium = Freemium

Freemium, a term combining "free" and "premium," is a marketing model based on the idea of charging absolutely nothing for a basic product or service.

price of free

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How Does it Make Money?

If users want premium or full versions with advanced functionality and added value, they pay a fee to upgrade. Here are some notable companies that have a free model: Google Apps, LinkedIn, SlideShare (just acquired by LinkedIn), Angry Birds, Evernote, Skype, and Dropbox.

"The easiest way to get 1 million people paying is to get 1 billion people using." - Phil Libin, CEO of Evernote Click To Tweet

What are people willing to pay for?

  • Ongoing, sometimes unlimited services
  • Add-ons
  • Support
  • Greater data storage

Freemium Game Apps Generate More Bucks Than Paid Game Apps

Mobile analytics company, Flurry, found that freemium game companies (those that allow players to join and play for free, but are dependent on revenue from virtual currency and goods) have seen a higher profit than paid games.

The percentage of revenue generated from freemium App Store games in the United States in 2010 was 39% with the revenue from paid games at 61%. In 2011, the percentages flip flopped to 65% and 35%, respectively. In short, freemium has overtaken premium in revenue earned in the app store.

The Freemium Sales Funnel

Awareness. The opening of a freemium sales funnel is relatively large compared to the traditional funnel. Why? First, the basic product or service is free so leads will immediately notice. Secondly, social media marketing helps attract consumers faster and more effectively.

Download/Sign-up. Once prospects enter the funnel, consumers are given the option of either downloading or, in the case of SaaS products, signing up for the service. The easier the steps, the more willing potential customers will be.

Use. Users become familiar with the product, including its capacities and limitations. Since users of freemium content aren't forced to pay, transitioning into the next state can take time.

Purchase. Users become paid customers when they upgrade to the premium version.

Advocacy. During this last stage, the effect of word-of-mouth marketing is revealed in the satisfied users who talk positively about the product or service, and invite their peers to try it out. This in turn will lead potential users back to the "Awareness" phase of the funnel.

Why Customers Like the Freemium Model

  1. It costs nothing. Simply put, people like the principle of "free" and the truth is, over the years, many have grown accustomed to accessing a lot of online content without having to pay for it.

  2. It allows testing. With free services, users can test and become familiar with an otherwise unknown product. If they later become interested in the more advanced features, they'll have already had the opportunity to try the core product.

  3. It's just right. Most consumers have only basic needs and are perfectly satisfied with the free features that freemium businesses offer. At the same time, if they did want to start paying for the premium upgrade at any time, the option is available.

  4. Simplicity. The process to start using a freemium product or service is easy and quick. Usually, the product works on a wide variety of platforms so all the customer would have to worry about it downloading or signing up for the free service. Luckily, many freemium businesses also have video tutorials on the site to explain how it all works.

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What are your favorite freemium products? Have you implemented the freemium marketing and pricing strategy for any products or services that you sell?

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