Freemium Defined (© Jakub Jirsák / Fotolia.com)
Freemium Defined (© Jakub Jirsák / Fotolia.com)

“Freemium” is the combination of the words “free” and “premium”, and it is a term that is used to describe a specific type of business model that provides services that are both free and premium. It has become a very popular term in the business world, as the model is being used by more and more business owners. In this article, we’ll provide a more in-depth description of freemium.

As the business world is constantly changing, new terms and phrases are also constantly being introduced. Freemium is one of the newest words to hit the business scene, and it is rapidly growing in popularity.

As the name suggests, “freemium” is the combination of two words: free and premium. It’s a business model in which a company offers its customers services that are both free and premium. The way this model works is that it involves proving services to clients that are simple and basic free of charge, and additional or more advanced services at a premium. This practice is often used by software providers that offer basic software for free so that potential clients can try it out, but that software is limited in its capabilities.

A More In-Depth Look at Freemium

This business model is often used by startup companies. It’s a great way for them to attract potential customers, as they are offering a service that is free, and most people are inclined to try something out that is complimentary. Once customers try out the service, if they are satisfied and want to enjoy more of the advanced features that it offers – the premium features – they have to make a purchase.

The Benefits of Using the Freemium Business Model

If you are a business owner, you might be wondering if using the freemium business model is a good idea for you. There are two main benefits that this model can provide:

  • It’s a great marketing tool. By the very definition, offering a free product makes it a lot easier to attract customers. When people see the word “free” they are more inclined to sign up for a product, and in turn, if they like the product, they are more likely to purchase additional products or more advanced features that the specific free product provides. As such, the freemium business model is an excellent tool for marketing.
  • Network effects are possible. In short, a network effect is what occurs when the value of a product or service increases as more people use it. For example, phones aren’t really useful if nobody else has one because you can’t call anyone else. However, once other people have a phone, it becomes very valuable because it can be used by more people. If your business is in a market that can take advantage of network effects, freemium is a business model that could definitely be beneficial for you.

What Does Freemium Need in Order to Succeed?

In order for the freemium model to work, there are certain things that need to occur. These things include:

  • Getting a lot of free users. It might seem obvious to state, but it is very important to note. In order for freemium to work, you have to have a lot of free users. This business model is essentially a numbers game. For instance, if just 1 percent of your users are willing to pay you, then you need to have a lot of free users in order to make that 1 percent worth your while.
  • Make sure the free users stay. You also want to make sure that those free users stay around. Without them, this model simply won’t work. How can you do that? Make sure that you are offering a product or services that will increase in value to those who use it.
  • Keep your costs down. Freemium is effective because the marginal cost of every additional user is relatively low. This means that you have to keep operating costs low, too.

The Downside of Freemium

Though it might sound like the ideal business model, there are some definite drawbacks associated with freemium. These drawbacks include:

  • You have to have lots of users. In order to make freemium work, you have to have a lot of users, and getting a lot of users can be a real challenge.
  • A high volume of returning users. You also have to have a lot of returning users for this model to be successful, and if you aren’t offering products or services that will make your free users stay, then this model may prove to be ineffective for you.
  • It can take a long time to be effective. It takes a lot of work and a bit of time (often, a lot of time) for a freemium business model to be profitable.
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