October 30, 2020

What is a Freemium Model?

Freemium sign up examples

Freemium has gained a lot of popularity because companies have been using it to grow exponentially by reducing the amount of friction that occurs in the decision-making process.

Slack, Spotify and Skype are all examples of companies that have been very successful due to the freemium nature of their product.

The idea of “try before you buy” has been around for a while, but traditionally, that involved a limited trial. Freemium eliminates the time restriction of free trials so users can truly understand what value the product offers.

What is a Freemium Model?

Freemium is a business model that’s part acquisition strategy, part pricing strategy and part product strategy. It involves offering a version of your product for free and then charging users for additional functionality.

There are two ways you can make a freemium offering: You can take an existing product and slim it down into the most limited form in which people can get value from it. Alternatively, you can offer a related free tool to which your product would add greater value.

For example, with Slack, free users can use most of the features of the tool but are limited in terms of file storage, integrations and the number of messages that can be sent. With HubSpot, the free version has limited features and as you upgrade to higher tiers you get access to more and more features. For Vidyard, their GoVidyard plugin is completely free for anyone to use to produce videos, but for features related to organizing your recorded videos, analytics and embedding videos, you need to have a paid Vidyard plan.

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The Benefits of Freemium for Companies

Really good marketing requires you to know a ton about the people you’re marketing to. Freemium enables you to learn more about your prospects way faster.

Once a user starts leveraging the product, you can use in-product triggers to determine what the best upgrade path is and when the right time to upsell is. You can even use those in-product actions to initiate customer marketing workflows so once someone has demonstrated that they’re a good-fit to become a paid user they’ll automatically receive communications nurturing them in that direction.

Additionally, the free version of a freemium product can serve as the onboarding process. Users set up the software, configure it to their needs and get familiar with the features so once they become paid users your company won’t have to invest heavily in implementation and onboarding.

The Benefits of Freemium for Users

Freemium helps buyers evaluate whether or not the product you provide will actually be useful to them. They’ll be able to work through potential use cases, understand the UI and see how seamlessly it integrates with their workflow. Overall, this enables them to make a more informed purchasing decision.

Another benefit of freemium products for users is that they reduce the friction of change management and adoption because the user is already familiar with the product and can demonstrate its effectiveness.

The Takeaway

Freemium has been proven to be a successful acquisition strategy in terms of bringing in new users.

However, before adopting a freemium business model at your company, you need to understand your goals. 

Not all users will upgrade to paid, and you need to be comfortable with that. So, if you need new customers more than you need new users, offering a free trial might work better than a freemium model. 

But in the long-term, you shouldn’t discount the value free users can provide. While they may not be directly paying you for your product, they can still act as advocates for your brand and refer other users who might upgrade to paying.

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Tag(s): Operations SaaS

Guido Bartolacci

Guido is Head of Product and Growth Strategy for New Breed. He specializes in running in-depth demand generation programs internally while assisting account managers in running them for our clients.


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