Freemium Business Model-How Does It Work?

What is the Freemium business model?

The freemium business model is often common in the technology industry. The name for the business model comes as a result of a combination of two words, ‘free’ and ‘premium’. In this model, a company usually offers its customers two versions of the same product or service.

One version is free that customers can use without the need to pay for it, while the other version costs money. Usually, the free version of the product has limited or missing features that the full version fulfills.

Through the freemium business model, companies can allow their customers to use their product and test it. They offer the free version with basic features, but ones, which still show off their advantages.

If the customer likes the product, they can pay to buy a full version, which comes with better features and, sometimes, after-sale services or support.

While mostly utilized by modern technology companies, the freemium business model isn’t unique or new. The model has existed since the 1980s, while its name comes from the 2000s. However, due to the additional limitations that companies can put on their products using technology, it is more successful in the technology industry than any other field.

How does the Freemium business model work?

The best way to describe how the freemium business model works is by explaining how it works for a software company. A company makes software that it wants to sell to its customers. However, to attract customers and help them understand how their software works, they allow their customers to use their software for free first.

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There are two ways in which these companies offer freemium products to customers. Firstly, they may allow customers a demo version of the product, which comes with limited features but can work on its own. On the other hand, some companies may offer their products on a trial basis. With that, customers can use all the product’s features but for a limited amount of time, for example, one month.

Once the customers use the product and like it, they can pay for its full version to make full use of it. If they don’t like it, they can either use the limited version. In case the software comes with as a trial version, the software will stop working after the limited amount of time.

While the demo version of products may come with limited features, some companies still earn from that. However, the earning isn’t through the customer paying for the product. Companies introduce advertisements in their products that earn them money, even if their customers don’t buy the full version. However, companies remove these advertisements on the full version to make the deal lucrative for customers.

What are the advantages and disadvantages of the Freemium business model?

The freemium business model comes with some advantages and disadvantages for companies and, sometimes, the customers. Some of these include the following.

Advantages

The freemium business model allows companies to get good exposure by making a free product with marketable features. A company that uses this model can market its products to more customers than if the products weren’t free. Similarly, some customers are eventually going to pay for the product, thus, increasing revenues.

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Freemium products also let customers get a good look at a product before buying it. It not only allows the customers to benefit but also helps companies to develop a loyal following. Similarly, companies can collect user data through their products as a quick way to survey its users before letting them use the product.

Lastly, companies that use the freemium business model are more popular with customers than those that don’t. It is because customers come across their free versions of software, which may solve all their needs. Therefore, their customers tend to be higher in number, increasing its popularity.

Disadvantages

Freemium products, while beneficial to customers, can also be harmful. Most of the times, freemium products come with advertisements or tracking, which collect their data without their consent. Companies recover their money through even the products that are free. Therefore, customers always end up paying through something, be it money or privacy.

Similarly, if a company uses the freemium model, it can, potentially, never earn money. If customers don’t like the experience or get all the features they need in the freemium product, they are not likely to pay the company. Similarly, freemium models increase customers expectations, which if not met, can cause problems.

Examples

Most online cloud storage software makes a good example of the freemium business model. Software such as OneDrive, Google Drive, Dropbox, etc. all have a limited capacity, which users can increase by paying for more. Similarly, some other software, such as MailChimp, Spotify, SurveyMonkey, Skype, etc. are examples of this model.

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Conclusion

Freemium business model is for companies that offer a free version of their product, albeit limited. They earn by allowing customers to use their product for free, with basic features, and asking them to pay for a premium version.

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