Freemium business model- Advantages and disadvantages

Freemium business model- Advantages and disadvantages 

If you are in the SaaS industry, you might have heard about key gameplayers shifting to a freemium business model. The debate is whether the freemium business model is efficient for the SaaS industry not? While many SaaS companies have achieved new levels of success by using the freemium model, some have also faced a steep downfall as this model proved to be inefficient for them. This article will discuss the freemium business model, including its advantages and disadvantages, to help you make your mind up whether to adopt a freemium model yourself.

What is a freemium model?

Freemium is a marketing technique, used by SaaS companies, where they offer their customers a free version of their product or service as well as their paid versions. With the freemium plan, users can engage with a feature lite version of the software without incurring any cost. If they like the software and want access to premium features, they will then have to purchase these as part of a paid plan.

Some of the most prevalent examples of the freemium model in a SaaS company include Spotify, dropbox, PUBG and Google docs. With these services, the user can use the software's basic features without paying for it. There are then upgrades for using specific features which cannot be used for free, and result in the user having to pay to avail of such features.

Freemium models should not be mistaken as a demo or a trial for the product or service, because there is no end date. Users can take advantage of the free features limitlessly and are only required to pay once they need a feature that’s not included for free. A software that lets you download but does not allow you to get its services until you pay and upgrade to the premium version is not a freemium model. For example, if you are permitted to download software that is known for providing wallpapers or ringtones, but you cannot download those wallpapers or ringtones onto your device until you can get the premium, it is not freemium software.

On the other hand, if you can download an app and listen to the songs on it with the internet, but you cannot download those songs for offline listening unless you get the premium membership, it is a freemium model.

Sometimes start-ups exclusively offer freemium subscription models of their products to gather data on factors such as what features are used the most within the product, or just general customer feedback on how the product is to use. After gathering an analyzing this data, they then make the whole product, or parts of it chargeable based on what the data told them was used the most or on any improvements they’ve made.

While upgrading to premium software membership comes with its own benefits, the freemium version also offers a lot to consumers without them ever having to pay a thing for it. This has made the popularity of the freemium model touch new heights and most SaaS companies are now making use of the freemium model.

Advantages of the freemium model

There are multiple benefits of the freemium model for SaaS companies. Some of them are mentioned below.

➔ No barrier to the usage

There is no limit or barrier to the amount of app usage by any user. So, for example, when a person uses Spotify without getting a premium membership, they can listen to unlimited songs for as long as they want with the help of the internet. However, they have to experience advertisements and cannot download the songs, for which they are lured into getting the premium membership.

Similarly, apps like iCloud allow the data of the iPhone to be stored on them up to 5GB, after which if they want to store more data, they will have to get the premium membership.

Another appealing factor linked to this is that the apps appear as ‘free’ when the user downloads them, and customers always tend to go for the free app first rather than the one that costs them. This increases the likeability of the app and the popularity of its underlying SaaS company.

➔ User base

The popularity of apps that offer free services allow SaaS companies to acquire a more extensive user base. Once the users are acquainted with the app’s features, they tend to become future premium customers.

Even if you require them to upgrade to the paid version later, most users tend to stay with your services because those services have become a part of their life. This way, you can offer them free services in the beginning and later leverage the love they have developed for your brand for cross sales or upgrades.

➔ Better service and support

Customers who use the app for free might not be given access to the best customer service that’s on offer. This therefore might encourage them to buy the premium version to get a better level of support, such as the developer's requisite support. This is usually the case when a person uses SaaS software for their business operations, as they need better and faster support so that their business operations are not effected for longer than they need to be.

For example, if a person is using WordPress, Grammarly, Google docs, et cetera for their work, they tend to prefer the premium version in order to get the best support and help in times of need, along with the exclusive features that can help their business grow.

➔ Better and effective customer acquisition

As mentioned above, every customer loves to go for the app or software that provides them good discounts or is entirely free to use. When your competitors charge for products and services that you can offer for free, it becomes irresistible for the customers not to use your services.

Later on, with the help of some analysis and tactics, you can increase your premium per conversion rate and get higher revenues from the same customers you acquired using the freemium model.

➔ Enhancing your brand value

If you are offering your services for free to someone, they will first be lured in by the term ‘free’. Later, you can ask them to pay you to continue using those services. If your brand is good enough and your product resides in the customers' hearts, they will continue using your services even if they have to start paying for it.

This will increase your brand value and show the world that people will continue using your services no matter the situation because your services and brand are the best in the market!

➔ More cost-effective for the company

When you offer freemium model plans to your customers, they do not expect a high level of service support and commitment from you because they’re using the product or service for free. They’re also happy to discover the ins and outs of the products themselves, without the need for costly demos or customer support.

This leads to cost-effectiveness for the company. It cuts down on the costs incurred by your developers or support team. For a premium customer, you can use the basic onboarding tactics and regular emails, and no exceptional service or higher costs will be required.

Disadvantages of the freemium model

While the freemium model is highly beneficial for some SaaS services, it’s not immune to negative repercussions. There are multiple disadvantages also attached to the freemium model, which we’ve listed for you below:

❖ It costs the SaaS company money to offer a freemium plan

While the user is not paying anything for using the product or service, the company still has to pay the incurred costs. These include the expenses utilized in building and maintaining the product, handling the customers' accounts, providing them with data storage and processing API calls.

While all these costs are being made, there is no guarantee that they will ever be retrieved from the customers. Only the customers that convert into premium members later will provide revenue to the company to cover these costs, while all others will just draw out, causing losses to the SaaS company. This unpredictable nature of the freemium model makes it risky for companies.

❖ Not all users want the premium features

Not all of your users will be tempted to take the premium membership to make use of the paid features. Only some customers that have a certain dedication to your brand, or need the features offered by your premium membership will be ready to take it.

The others will only learn to satisfy themselves with the free features and will never look up to your higher-value features. Therefore, they will continue using the free features and drop out of the company or look towards your competitor when the freemium model will be taken away from them. If you find this frequently happens to you, it would be better to offer customers a free trial instead of a freemium model.

❖ Lower return on investments

Letting your customers use your services for free for a long time have a negative impact on the return you make on your investment. This is heightened when conversion rates are low, and the free population is much larger than the premium users.

Even if some of the users acquire the free membership, it is not always possible for the revenue generated by the premium users to cover the total investment, including the one made on the freemium model. This might result in losses for your SaaS company.

❖ Conversions are not easy

If you offer a service for free to your customers and after a few months you ask them to pay you for the same service, they will probably jump to another service which is offering the same features for free. Conversions are not easy in SaaS business, especially when there’s a lot of competition.

Also, it totally depends upon the overall worth of your product whether the customer is willing to pay for that or not. If not, you will lose customers as soon as you start demanding money from them.

Things to keep in mind before shifting to freemium model

If you’re a SaaS business trying to make a shift towards the freemium model, it’s important to consider the following -

➢The reason for offering the service for free- if you are offering free services to widen the customer base, you need to be prepared to meet the rising demand that comes with a larger customer base. You should carefully assess the reason why you are going to adopt the freemium model in the first place, for it to be implemented effectively.

➢ The level of benefits you can get- you need to ensure that you do not end up paying more than the revenue you’re generating already when shifting to the freemium model. Your costs incurred on support, guides, tutorials, data etc should not be more than what you earn through your freemium model or premium conversions.

➢ If you have a conversion plan ready or not - starting with freemium, a customer will upgrade to the premium version only if you attract them with lucrative features or essential services that will make them want to upgrade and pay for your services.

➢ Do you have a backup plan- you should formulate an additional pricing strategy in case your users do not convert. You can offer them add-ons or free trials to features not included within the freemium plan, which they cannot resist. You can do this by-

○ Partnering with advertisers so that they can make the customers want an advertisement-free subscription

○ Capture their information. This is worth a lot as it helps you understand how they’re using your product and service so you can charge for that

○ Sell information to the other vendors based on their usage patterns

○ Build a community of the customers

○ Up-selling them to buy the system.

Cases where freemium models work best

There are many cases where companies have adopted the freemium model and been successful in it. Some studies have even identified circumstances where freemium models work best. Some instances are mentioned below.

A. Your product or service is easy to use

B. With time, your product can get people hooked or to understand its value

C. Your company does not have to pay a lot to support free users

D. You have no problem using customer data and feedback

E. The premium membership of your product or service has an inevitable and undeniable benefit

F. You have other sources of revenue and income through your app or software.

With so much knowledge and information, including the advantages, disadvantages, potential risks and compelling factors, you can now decide whether your SaaS company is ready to experiment with the freemium model or not. Implementing the freemium model strategically can help you achieve significant revenues and a broader customer base.

But it can be hazardous for your business as well. It’s therefore essential to create a perfect implementing strategy, keeping in mind the risks involved, so that you can continue raising your revenue without going through a loss first.

Source - Freemium Business Model