My daughters love visiting Costco to taste all the free samples they hand out. It makes Costco an adventure, not just a shopping trip. More than once, it has probably tipped our hand and led us there instead of some other store.
That proves that freemium works!
What exactly is freemium? Here's a great definition:
"The word freemium is a combination of the words free and premium.
It describes a business model in which you give a core product away for free to a large group of users and sell premium products to a smaller fraction of this user base."
Does that describe free samples. Well...sort of. True freemium is ongoing. Samples at Costco are only "ongoing" if you keep "on going" back for more. And that could get you kicked out of the store.
Freemium could get expensive in the real world. But online, the business model makes perfect sense. When the incremental cost for each customer is very small, it makes sense to draw as many people to your software as a service (SaaS).
A case in point are online fax companies. According to fax comparison site FindAFax, the top 5 sites all offer a free 30 day trial. Some online fax companies do not offer a free trial, and some offer as long as 60 days.
But even a free trial is not quite freemium. It allows potential customers to try the service risk-free for a month, but a true freemium does not have a time limit.
Vistaprint was one of the first companies to harness the Internet to market its services. It made waves by offering 250 free business cards. Everybody likes free, so they got a lot of attention. They limit the quantity one gets for free, but it is on a one-time basis.
True freemium gives a basic product at no cost for an indefinite period. I used to use LogMeIn when it was a freemium service. Now it's a free trial service, so after the 30 days are up, you have to pay.
A few prominent examples of true freemium services that I use are:
- Skype (upgrade for additional phone services)
- Dropbox (upgrade for more space)
- PicMonkey (upgrade for access to premium features)
- Hootsuite (upgrade for a more robust platform)
- ViralContentBuzz (upgrade for additional services and for more credits)
- Slideshare (upgrade to collect leads)
Why Freemium Works
The first and most obvious benefit of freemium is that it allows people to try your service risk free. In other words, you take away the need for the customer to consider and debate. The internal debate is a huge barrier for a busy, information-overloaded person.
No risk, no debate. Sure, I'll sign up. Maybe I'll upgrade later.
The second benefit is the loyalty that free users develop. Loyalty? Or habit? Doesn't matter - either way, some will upgrade. Although upgrade rates are low, they are highly lucrative. Even one or two percent of users upgrading to a paid account can make for a very nice profit. And once people are hooked on your service, some will want to upgrade:
- People who are not as cheap as I am.
- People whose business is growing.
- People who see the most potential in the service.
- People whose business grows to the point where they need to upgrade to keep up with the growth of their business.
The third benefit is a captive audience. Every time you improve your service, you have a chance to get more upgrades. This is not just a list; this is a sympathetic list, already warmed up to what you have to say.
The fourth benefit is a captive audience. Yes, that's the same as the third, but with a different purpose. You can send related marketing messages to that audience. Those messages can promote a partner's services. You can use that audience as leverage to get a great deal with a partner.
The fifth benefit is that you have lab rats. That's right, if you want to test and tweak a new feature, test it on some free members. Since they are not paying, you can test and tweak until you have it right. And those that use the feature are also potential upgrades.
The sixth benefit is that even free members can refer paid members. This could be through an affiliate program. Or it could be by awarding points to referrers. Or it could be just by prompts to share on social media.
The seventh benefit is that you can sell ads. Free members might not pay, but they will view the ads. I see ads all the time on PicMonkey and Skype, for example.
The eighth benefit is that in the end, your company becomes more lucrative. It becomes a better acquisition property. Yes, you can sell your company for more cash. Your membership base is an asset. That includes free members.
Not every business should run on the freemium model. But every business should look very closely to see if the model can work for it. There are so many benefits to freemium, and if the costs for each member are incrememntal, there a good chance this model will be profitable for you.