Pricing Strategy classes at B School usually touch upon Freemium models as a pricing model. This is a model that has become relevant perhaps in the last decade or so. The advent of mobile apps and Software as a Service (SaaS) model getting more prevalence, the concept of Freemium has become an important strategy to evaluate.
I believe we can consider freemium models as an extension of what we used to call in new product development – prototype. Essentially freemium model is an extension of this concept. Technology has enabled ‘providing for free and test the market ‘ easier to achieve and expand. This model enables to scale focus groups in virtual format. Access to usage data and the granularity or depth one can achieve these days provides great potential if you come from the product management side.
Benefits of Freemium Models
Though freemium may have had its starting point in new product development school, they got prominence more as a marketing strategy especially for start ups. It helps in multiple folds –
- User base development – providing for free can usually attract users.
- A decent user base means a tested market opportunity for your product.
- Identifying brand advocates – early adopters may become loyalists and brand advocates. It can also help in creating the buzz.
- Upsell premium offerings to free users.
- Get funding to improve your product ☺
But is Freemium model a successful pricing strategy? Harvard professor Vineet Kumar in his article Making Freemium Work discusses about the key factors that enhances the possibility of a successful freemium business model. In a nutshell, they are
Judicious selection between free and premium features – The selection should attract enough users to the free offering; at the same time should not be a blockage to upgrade in the case of target customers for paid offering.
Communicating clearly the benefit of premium offering – Clear differentiation between the two offering upfront will definitely add value to a prospective customer in evaluation.
Tweaking the offerings based on conversion rate – It is said that the general conversion rate from a free offering to paid one is less than 5%. So depending on what’s the conversion rate a business is achieving, we would need to tweak the features in each offering.
Developing an efficient referral strategy – Referrals are one way to cash out free users. Developing a good strategy around this concept can accelerate the use base. One typical example is dropbox.
Improving feature set – The company needs to be committed in developing both free and premium features based on the usage pattern it sees. This keep existing user base engaged and attract new ones.
In addition to these, I believe there are two more things one need to consider to make freemium model successful
- Promoting free offering equally. Often one mistake I have seen is the firm devote the budget for premium compared to the free offering. Both are equally important.
- Providing a natural progression from free to premium. The feature sets should be chosen in such a way that existing free users see a requirement in progressing to the premium version. This often requires some trial and error to reach the optimal set.