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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:
» 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:
» 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?
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:
» 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:
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.
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.
» 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:
- Software
It has become wide-spread especially in the mobile world. Look for the "in-app purchases" tag in mobile marketplaces.
- 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:
- You free offer is too good; try restricting some functions or making the premium features more appealing.
- 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.
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.
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