The Art of Freemium

Freemium, a portmanteau derived from the words "free" and "premium," is a popular business model that has been exploited to great success by the likes of (in no particular order) Dropbox, Linkedin, Spotify, Skype, Wordpress, Wix, Candy Crush, and Pokémon Go. Freemium services offer free—and typically limited—access to services or content, while charging a premium for higher levels of access or additional features. The mobile hit Pokémon Go used the freemium model to great success, raking in US$207 million in the first month after its launch in July 2016, and reached a billion downloads in March 2019 (BusinessofApps). But while, according to Marketing Insider Group, "freemium strategies... offer savvy companies a direct path toward massive user bases with opportunities for substantial revenue," they are not without their pitfalls. For starters, how do you convert Freemium users into paid users? And how do you ensure repeat usage of your premium services?

https://www.youtube.com/watch?v=fKK9nVLvhGM

Three great pieces of advice offered by Marketing Insider Group are "don't give away too much value for free," ensure that you "make the benefits of upgrading to higher-priced plans obvious," and "nurture and nudge customers along your sales funnel." In other words, striking the right balance between your free and premium offerings is vital to success, as is 'nudging' rather than nagging your users to upgrade to premium—with the latter approach likely to send them running for the hills! Another crucial consideration is, according to Chargebee, ensuring "your product promotes repeat usage (increases stickiness)." If the service you're offering is not something that users are likely to use regularly, the freemium model is probably not a good fit.

Source: Spotify

According to Tomasz Tunguz of Redpoint Ventures, freemium companies, on average, only succeed in converting a mere 2-4% of users. On the other side of the coin, however, there are some big success stories. Spotify, for instance, currently has a staggering 138 million premium subscribers and has achieve a phenomenonal 26.6% conversion rate (GrowRevenue). The number of paid Spotify subscribers has also continued to rise steadily since 2015 (statista). Key to this success is the clear differentiation between the free and premium tiers of the service, with premium subscribers getting access to a slew of invaluable features, such as being able to skip songs, listen to songs on mobile devices, download music, and enjoy an ad-free listening experience. Spotify's content is also 'sticky,' as it offers a vast treasure trove of music and podcasts which is constantly growing. Additionally, It integrates with social media services like Twitter and Facebook, enabling users to share their playlists and recommendations with friends. This was a shrewd business move, according to Campaign Creators, "capitalizing on the fact that music is an item that brings people together, and that our relationships with music are deeply personal and intimate." People are much more likely to share something that moves or excites them, and the more people share, the more free exposure Spotify gets.

Another interesting aspect of Spotify’s approach is that “the calls-to-action aren’t too intrusive, but they subtly ruin the immersion” (GrowRevenue). Since music is all about mood and de-stressing, the subtly intrusive nature of these "nudges" have been quite successful in bolstering the service's conversion rate.

Source: Spotify

Freemium serves double duty as a powerful marketing tool, too, enabling new ventures to acquire large user bases without having to commit resources to costly ad campaigns. And by combining the freemium and advertising models, businesses can generate an additional revenue stream by running pay-per-view or per-per-click ads on their sites, apps, or platforms. Freemium services, such as Spotify, are an ideal choice for this approach as, according to Michael Rappa, "the advertising model works best when the volume of viewer traffic is large or highly specialized." Spotify ticks both of these boxes and access to users' playlists and listening history allows even more fine-tuning of targeted ads.

While freemium isn't always the right choice, it can be a very effective means of marketing 'sticky' content. The trick is getting the right mix of free and premium offerings, and tactfully nudging users to adopt your premium offerings—and, of course, ensuring your product is awesome!

This blog post was last edited on the 19th of September, 2020. Some formatting changes were made and a link was added.