Explanation of the Freemium Business Model

Downloading a free game, app, or other needed life solution seems like a pretty great deal. Sometimes it really is because it solves immediate problems for consumers. At other times, the freemium business model gives users a taste of what the premium services are like. The ultimate goal of a freemium item is to get people to upgrade to a paid service or include paid additions to the free item that is widely available.

Sometimes it is called a “pay as you go” system or a “modified subscription” system. No matter what it is called, there is no denying that it works. Just ask the makers of Candy Crush Saga. At one point, their freemium game was bringing in more than $600k per day in purchases.

What Is the Key to Success in the Freemium Business Model?

The design of the product itself is a key component of a successful freemium experience. For games, the structure is such that game times are limited so people only receive a certain amount of lives or turns per experience. To play longer, they must pay a small fee to do so. Games also offer power-ups or upgrades for small fees as well to further increase the temptation to get through levels. If it only costs $0.99 to defeat a level that someone has been stuck on for a week, many gamers feel like it is a value buy and so they make it.

Angry Birds crossed the freemium business model for games into a retail industry offering as well. Gamers who love Angry Birds can purchase Telepods to “transport” toy characters or figures into the game to unlock exclusive content or upgrades. Their racing game even created Telepods that work in real life as cars.

Evernote is an excellent example of a non-gaming version of the freemium business model. Users can download the note-taking app for free and put it to use right away. To unlock premium features, however, a small monthly fee is paid to upgrade the service. This shows how a subscription business model can be successfully combined with a freemium model to create ongoing revenues from a solid customer base instead of soliciting numerous one-time purchases.

Freemium Isn’t Just For Software and Apps

There are other businesses that have adopted the freemium business model as well. Red Bull is one of the leaders in the industry in this area. They publish a free magazine for those who wish to read about the extreme sports world. In return, leads give them their personal information. The consistent branding and exposure by other Red Bull investments, such as the presence of Red Bull New York in Major League Soccer, make the brand become a top of the mind contender when someone wants an energy drink.

Flat World Knowledge takes another unique approach to the freemium idea. They create college textbooks, but they offer them for free. The books are online, but are updated with the latest editions for no charge to professors or students. Flat World Knowledge uses these textbooks as exposure to sell other items so that profit can be achieved.

Even the businesses that sponsor samples at the grocery store are incorporating a freemium business model of sorts. If you take a sample of cheese from the demonstrator, enjoy it, and decide to purchase it because you liked the flavor, then the business model has worked to perfection. You don’t have to purchase a full block of cheese from the sample. You probably wouldn’t do it without the sample either, so the free product forces a decision.

That forced decision is the core of this business model. Does the user have the willpower to deny the fact that they want to upgrade to something better? For freemium users, that’s a question they ask themselves every day. That’s why an app like Evernote has a better chance to receive a premium upgrade for every additional day someone uses the program.

Why Does the Freemium Business Model Work So Well?

Freemium works because it provides value to the people who are using the programs or services. In the past, a freemium business model only made sense in specific circumstances. How could you make money from t-shirts if you gave 98 away and only sold two? With software especially, the cost per user is already virtually $0 for what is being used. This means money can be made with 98 free downloads and two premium subscriptions.

Skype is an excellent example of this. This VoIP service provides video calling on a Skype to Skype basis for free. In just one quarter, Skype can clear a profit of more than $45 million. Its valuation as a company is over $2.5 billion. On the average quarter, however, only about 10% of its call minutes are actually paid minutes.

When items are cheap to produce, duplicate, and distribute, then it almost doesn’t matter how many free downloads or services are provided. The longer someone uses the service, then the more likely they are to try the premium services or use them occasionally to meet specific needs because the free version has proven itself. That’s why the freemium business model is so successful.

How Can the Freemium Business Model Be Adapted Today?

All it takes is a glimpse at any app store to see that virtually every app is using this business model. It’s so prevalent, in fact, that people are starting to get sick of seeing it. Even worse – the constant exposure is hardening consumer willpower against making purchases. Instead of paying for extra game time, they just play another game until the first one recharges.

To break the chains, the freemium business model must continue to innovate. We’re starting to see that with free power-ups in games on a daily basis, free episodes of new release television shows, and in other ways that consumers will find valuable. Unlike the QSR business model that seems to always be racing to the bottom, the freemium model looks to create more purchases by proving their concepts at affordable prices.

It is important to remember that some business models seem like they are freemium, but they really are not. Getting a smartphone for free is a great bargain, but users have to pay for talk, text, and data. That means it really isn’t free. With freemium products or services, the item must be used in some way on its own. That’s why a cheese sample [which can be eaten] qualifies, but a free razor with no blades does not.

The freemium business model may not always succeed. When it does, however, the results can be incredibly spectacular. That’s why it deserves strong consideration in the modern world of business.

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