Freemium 101

[c4n]

Hi fellow Fastlaners,

I have a few years of experience in the freemium market so I thought I would write a short introduction for those interested in learning what freemium is and how to put it to good use.

» What is "Freemium"

Freemium is giving something away for free (a product, app, service), but charge for extra features (remove adds, increase storage, unlock functionality).

Free + Premium = Freemium

Or, as Wikipedia puts it:

Freemium is a pricing strategy by which a product or service (typically a digital offering or application such as software, media, games or web services) is provided free of charge, but money (premium) is charged for proprietary features, functionality, or virtual goods.

» Freemium examples

You all have seen it in action. Freemium is:

• Dropbox giving you free space, but charging you to upgrade it to 1TB,
• a free mobile app where you can pay to remove ads,
• a free Android game that requires a $0.99 payment to have a good chance to reach past level 45,
• the Fastlane Forum that is free to use, but requires a subscription to become a Fastlane INSIDERS.

What freemium is not? Free trials, limited-term offers... The "Free" part of freemium does not expire. Anything that is set to expire is not freemium, but most likely a different strategy.


» Who/what is freemium for

The main purpose of freemium is attracting new users. Because of the "free" part, freemium model requires the product/service to be scaleable/replicated at a low cost.

The majority of users (95%) will not pay the premium, you need to make money on the few % that do and spend minimum resources on supporting the free users. No surprise it is most popular in two sectors:

1. Software
   It has become wide-spread especially in the mobile world. Look for the "in-app purchases" tag in mobile marketplaces.
   
   
2. Online services
   Evernote, Dropbox, MailCheat(Chimp), Linkedin, Skype, ...

» How to use it to your advantage

Remember the commandment of NEED. The key to using the freemium model is to give the users just enough features to get them hooked up to your product/service. You need to provide a lot of value for free.

How do you know what features to include in the free offer?

• Picture your average user. What features does he/she absolutely need in order to use your free offer?
• Listen to user feedback. This is also a great source of ideas for premium features.
• Trial and error.

Not attracting enough users?

Your free offer may not be good enough. Improve the base offer, think about how you can give more value.


Have lots of users but few are paying for the premium features?

This usually means that either:

1. You free offer is too good; try restricting some functions or making the premium features more appealing.
   
   
2. Your users don't understand premium benefits; make sure the distinctions between free and premium features are both clear and give a lot of extra value to users.

» How many users do I need to convert to premium?

The basic rule is: enough to keep you profitable.

Conversion numbers differ vastly from vendor to vendor, usually quoted as 2-5% of active users. If you are in a niche market you will probably want to aim for higher conversion rates.


» Revenue streams

Commandment of SCALE comes into play. The more users you have, the easier it is to create. Here are some common practices and ideas on how to generate revenue from the freemium model:


I. One-time purchases

This is what most mobile apps use. Pay a one-time fee to get a benefit or a feature or to speed up progress.

You will notice a lot of them use some sort of internal virtual currency (coins/points) for add-on pricing rather than a fiat currency (USD, EUR). Users spend "real money" to purchase "virtual money" then use the virtual money to purchase premium add-ons.

The psychology behind is that with virtual money we experience less resistance to spending it. Virtual currencies in games also give us a sense of accomplishment, progression and in other ways appeal to our brain's reward centers.

For example: you get 1000 "gamecoins" for $0.99 then use 250 "gamecoins" to purchase a powerful weapon in a mobile game.


II. Subscriptions

My favorite kind. Get people on a monthly/yearly subscription and you have a recurring revenue stream. Commandment of TIME.

You should:

• Offer different subscription plans to capture different types of customers (free, entry, medium, high-end).
• Offer discounts for yearly vs monthly subscriptions.

Remember, it is much easier and cheaper to maintain a customer than to attain one.


III. Ads

You can show ads to the free users. A common practice in the mobile world.

Ads used to perform great in the SaaS (Software as a Service) world in the past, but nowadays irritate users more than anything.

Word of caution: policies change, user habits change, "ad blindness" is a real thing. While ads can be a revenue stream, it should not be your main revenue stream in a freemium model. Commandment of CONTROL, anyone?


IV. Other sources of revenue

These depend on the type of product/service you are offering, but could be things like revenue share with 3rd party add-ons, alternative premium products, related products/services.


» Use a "tripwire"

Experience (and studies) shows, that people are more likely to buy from a business they already bought something from in the past. This is how it usually looks like and what we aim for:

Visitor -> User -> Customer -> Repeat customer

Tripwire is an offer that gives a lot of value for a very low price. For example, if your main offer is worth $99 per year, you can offer a tripwire for just a mere $5.

You don't have to make money on the tripwire offer, you don't even need to break-even. The whole purpose of it is to give such a great offer that a sale will occur.

Why is this important? Because, even with just a small purchase, the relationship status changes from a user to a customer. And as a customer, they are much more likely to buy from you again in the future and that is where you make profit.


» Free trials

Just because you have a freemium product doesn't mean you can't do free trials.

Give free users a chance to try the benefits of a paid plan for 30 days. Then they can either go back to free or become a paid customer.


» Don't forget about your free users

Most of your users will never upgrade to premium, but this doesn't mean they cannot benefit your business.

They can be your best sales people and refer a lot of new paid users. Offer referral links and incentives, such as "Get 30 days of premium free for every new paid user you refer".

Treat your free users nicely.


» Don't rest on your laurels

As with any business, your freemium business needs to be constantly evolving and improving.

Give your users (both free and paid) a way to provide feedback and suggest features. Use this as an invaluable insight into their needs and improve the product/service to stay ahead of your competition.


» Sources and further reading

Freemium - Wikipedia
Making “Freemium” Work
7 Examples Of Freemium Products Done Right
Looking at In-Game Currencies | GameSparks

Disclaimer: I am not in any way affiliated with the website listed above.


» Instead of a goodbye...

I hope you found something useful in the short introduction. Most of it reads as "common sense", but that is what business is all about, isn't it?

Please do reply with your comments or questions.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Olimac21]

Th

Hi fellow Fastlaners,

I have a few years of experience in the freemium market so I thought I would write a short introduction for those interested in learning what freemium is and how to put it to good use.

» What is "Freemium"

Freemium is giving something away for free (a product, app, service), but charge for extra features (remove adds, increase storage, unlock functionality).

Free + Premium = Freemium

Or, as Wikipedia puts it:


» Freemium examples

You all have seen it in action. Freemium is:

• Dropbox giving you free space, but charging you to upgrade it to 1TB,
• a free mobile app where you can pay to remove ads,
• a free Android game that requires a $0.99 payment to have a good chance to reach past level 45,
• the Fastlane Forum that is free to use, but requires a subscription to become a Fastlane INSIDERS.

What freemium is not? Free trials, limited-term offers... The "Free" part of freemium does not expire. Anything that is set to expire is not freemium, but most likely a different strategy.


» Who/what is freemium for

The main purpose of freemium is attracting new users. Because of the "free" part, freemium model requires the product/service to be scaleable/replicated at a low cost.

The majority of users (95%) will not pay the premium, you need to make money on the few % that do and spend minimum resources on supporting the free users. No surprise it is most popular in two sectors:

1. Software
   It has become wide-spread especially in the mobile world. Look for the "in-app purchases" tag in mobile marketplaces.
   
   
2. Online services
   Evernote, Dropbox, MailCheat(Chimp), Linkedin, Skype, ...

» How to use it to your advantage

Remember the commandment of NEED. The key to using the freemium model is to give the users just enough features to get them hooked up to your product/service. You need to provide a lot of value for free.

How do you know what features to include in the free offer?

• Picture your average user. What features does he/she absolutely need in order to use your free offer?
• Listen to user feedback. This is also a great source of ideas for premium features.
• Trial and error.

Not attracting enough users?

Your free offer may not be good enough. Improve the base offer, think about how you can give more value.


Have lots of users but few are paying for the premium features?

This usually means that either:

1. You free offer is too good; try restricting some functions or making the premium features more appealing.
   
   
2. Your users don't understand premium benefits; make sure the distinctions between free and premium features are both clear and give a lot of extra value to users.

» How many users do I need to convert to premium?

The basic rule is: enough to keep you profitable.

Conversion numbers differ vastly from vendor to vendor, usually quoted as 2-5% of active users. If you are in a niche market you will probably want to aim for higher conversion rates.


» Revenue streams

Commandment of SCALE comes into play. The more users you have, the easier it is to create. Here are some common practices and ideas on how to generate revenue from the freemium model:


I. One-time purchases

This is what most mobile apps use. Pay a one-time fee to get a benefit or a feature or to speed up progress.

You will notice a lot of them use some sort of internal virtual currency (coins/points) for add-on pricing rather than a fiat currency (USD, EUR). Users spend "real money" to purchase "virtual money" then use the virtual money to purchase premium add-ons.

The psychology behind is that with virtual money we experience less resistance to spending it. Virtual currencies in games also give us a sense of accomplishment, progression and in other ways appeal to our brain's reward centers.

For example: you get 1000 "gamecoins" for $0.99 then use 250 "gamecoins" to purchase a powerful weapon in a mobile game.


II. Subscriptions

My favorite kind. Get people on a monthly/yearly subscription and you have a recurring revenue stream. Commandment of TIME.

You should:

• Offer different subscription plans to capture different types of customers (free, entry, medium, high-end).
• Offer discounts for yearly vs monthly subscriptions.

Remember, it is much easier and cheaper to maintain a customer than to attain one.


III. Ads

You can show ads to the free users. A common practice in the mobile world.

Ads used to perform great in the SaaS (Software as a Service) world in the past, but nowadays irritate users more than anything.

Word of caution: policies change, user habits change, "ad blindness" is a real thing. While ads can be a revenue stream, it should not be your main revenue stream in a freemium model. Commandment of CONTROL, anyone?


IV. Other sources of revenue

These depend on the type of product/service you are offering, but could be things like revenue share with 3rd party add-ons, alternative premium products, related products/services.


» Use a "tripwire"

Experience (and studies) shows, that people are more likely to buy from a business they already bought something from in the past. This is how it usually looks like and what we aim for:

Visitor -> User -> Customer -> Repeat customer

Tripwire is an offer that gives a lot of value for a very low price. For example, if your main offer is worth $99 per year, you can offer a tripwire for just a mere $5.

You don't have to make money on the tripwire offer, you don't even need to break-even. The whole purpose of it is to give such a great offer that a sale will occur.

Why is this important? Because, even with just a small purchase, the relationship status changes from a user to a customer. And as a customer, they are much more likely to buy from you again in the future and that is where you make profit.


» Free trials

Just because you have a freemium product doesn't mean you can't do free trials.

Give free users a chance to try the benefits of a paid plan for 30 days. Then they can either go back to free or become a paid customer.


» Don't forget about your free users

Most of your users will never upgrade to premium, but this doesn't mean they cannot benefit your business.

They can be your best sales people and refer a lot of new paid users. Offer referral links and incentives, such as "Get 30 days of premium free for every new paid user you refer".

Treat your free users nicely.


» Don't rest on your laurels

As with any business, your freemium business needs to be constantly evolving and improving.

Give your users (both free and paid) a way to provide feedback and suggest features. Use this as an invaluable insight into their needs and improve the product/service to stay ahead of your competition.


» Sources and further reading

Freemium - Wikipedia
Making “Freemium” Work
7 Examples Of Freemium Products Done Right
Looking at In-Game Currencies | GameSparks

Disclaimer: I am not in any way affiliated with the website listed above.


» Instead of a goodbye...

I hope you found something useful in the short introduction. Most of it reads as "common sense", but that is what business is all about, isn't it?

Please do reply with your comments or questions.

This is very very good. One interesting thing is we have been moving from a paid world to a freemium one in many industries ( music, movies in some cases,games) it makes you wonder what is the next one coming up.

Have you watch Nir Eyal's studies on product habit design? I believe thats very relevant to make a freemium app succesful in the long term. Also when restricting features (when is too good) one should be aware that this can piss off many free users so you got to be careful with what you choose to restrict.

 

[c4n]

Thanks for the kudos.

we have been moving from a paid world to a freemium one in many industries

True, because freemium can be a good strategy when you are trying to enter a market already flooded with other product. However, keep in mind that Freemium is not for everyone, you really need to have a product/service that has a low cost for keeping the free users.

Have you watch Nir Eyal's studies on product habit design? I believe thats very relevant to make a freemium app succesful in the long term.

I haven't to be honest. Is this similar to Microsoft giving away free Office licenses to students to get them hooked up on their software? People use what you are familiar with...

Also when restricting features (when is too good) one should be aware that this can piss off many free users so you got to be careful with what you choose to restrict.

Agreed. In software/services it is usually easier to add features than it is to remove them without pissing off existing user base.

If you do need to remove/adjust the free offer, what you can do is keep existing free users on the old plan/features and restrict changes to new accounts only. You could for example then try offering existing free users additional large/ongoing discounts to try and get some from the old free plan to a basic paid one.

A rule of thumb regarding features:

If you are trying to enter a market with many established vendors, you will probably need to offer better features in the free part and/or differentiate yourself from others substantially.

On the other hand, if you are entering a market with few/zero freemium vendors, a more basic feature set that solves common use cases may do.

Either way try to over-deliver on the free part, either in terms of features/functionality or in other areas such as customer support.

 

[Olimac21]

I haven't to be honest. Is this similar to Microsoft giving away free Office licenses to students to get them hooked up on their software? People use what you are familiar with...

Is a habit cycle around the use of a product. I like to call it TAVI (Trigger-Action-Variable Reward-Investment) basically is a great framework to know how your product needs to be designer to go through all 4 stages.

 

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[OldFaithful]

Thanks for the primer on the freemium model. Admittedly, I've been the free user many times and become the paid user only on occasion...but I'd guess that's typical. And regrettably, I've only been on the customer side of the equation.

Have lots of users but few are paying for the premium features?

This usually means that either:

1. You free offer is too good; try restricting some functions or making the premium features more appealing.
   
   
2. Your users don't understand premium benefits; make sure the distinctions between free and premium features are both clear and give a lot of extra value to users.

Or 3. Your ads/limitations/sales-pitch are so annoying to the first time user that they quickly dump the free product and swear to never use any version of it ever again. True story.

Some apps & software have the balance figured out quite well, and others not so much.


This is an interesting set of ideas I've not yet seen implemented...

» Don't forget about your free users

Most of your users will never upgrade to premium, but this doesn't mean they cannot benefit your business.

They can be your best sales people and refer a lot of new paid users. Offer referral links and incentives, such as "Get 30 days of premium free for every new paid user you refer".

Treat your free users nicely.

That could be great low cost, word of mouth, grass roots advertising.

 

[c4n]

Is a habit cycle around the use of a product. I like to call it TAVI (Trigger-Action-Variable Reward-Investment) basically is a great framework to know how your product needs to be designer to go through all 4 stages.

I googled and briefly scanned through some summaries; sounds like an interesting book, will add it to my "to read" list, thanks. Need to finish Unscripted first though...

 

[c4n]

Or 3. Your ads/limitations/sales-pitch are so annoying to the first time user that they quickly dump the free product and swear to never use any version of it ever again. True story.

Completely agree. The line between a useful free product and an annoyance is blurred and it takes practice to get it right, hence the importance of listening to user feedback.

Technically, you are then not even a free user anymore, you just trialed, got frustrated and dumped the product. The two mistakes I mentioned are more geared towards products/services that do in fact have a lot of active free users, but too few upgrade.

My take on things is to always try to over-deliver on the free part. Most of my premium users didn't cash out on the first day, but after they have been using the free product for a while, loved it and saw the benefits of upgrading. Some even pay the premium just to "support your great work", even if they don't need any of the premium benefits.

 

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