May 19, 2024

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Freemium business models and how to use them for investments?

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Freemium business models are increasingly popular in recent times. They offer a business the ability to make money, while at the same time developing their products and services. A freemium business model is an economical way to market your product by providing a basic version for free and charging for more advanced features.

Here are some ways you can use freemium business models to make your investments more successful.

What is freemium, and who uses it?

A freemium model means that a service provides some level of free usage, but charges for upgrades and additional services. It’s been commonly used in the software industry, but can also apply to other kinds of businesses.

For example, many online gaming companies have come to depend on the freemium model of generating revenue. This has proven particularly effective for them, so they can easily experiment with new game features on revenue generated from premium sales.

Many SaaS (software-as-a-service) companies also use freemium models on their platform, including companies like:

  • Zapier: A “trigger-based workflow tool” that has roughly 700,000 users. Zapier provides a limited number of triggers to free users. Subscribers to Zapier’s premium package, on the other hand, get access to more features, including more automation integrations.
  • Dropbox: The company started as a cloud-storage service, but has since branched out into other ventures, including online collaboration and document sharing. Dropbox offers 2GB of storage free, and then provides a number of paid tiers of its service.
  • Spotify: Spotify offers unlimited free listening and playlist curating, but charges $9.99 per month for non-premium features like ad-free music playback and offline downloads.

How can you optimize a freemium model?

To ensure that your freemium model works, you must guarantee that your consumers find sufficient value to pay for your product. If the portion of your services are provided free of charge and your premium services are not sufficiently useful, clients will not pay.

First, make sure that you can sustainably provide your freemium services for free. Ensure that your free versions of your services offer enough value so that you can sustain them without extra charge.

A good accounting team is going to be valuable here. Of course your accounting team should be CPA certified, and if you have any team members struggling with passing their exam, point them towards the help they can expect from AIS-CPA.

It is important to find a ratio of paid versus free versions that you can sustainably offer your clients. If the ratio is high, your client base will sustain the paid version. If the ratio is low, then you will need to charge additional fees to compensate for the loss.

Second, A/B/C testing is going to be a powerful ally for you. Your testing strategy should be a compromise between what is necessary and what is exciting for your users. If your testing strategy feels too heavy or like a chore to complete, you will struggle to get the results you want.

On the other hand, if you feel like you’re testing a bunch of free versions of a premium feature, you might not get enough value out of your testing.

Techniques of successful freemium companies:

Provide value

I spend a lot of time coaching people on value as a part of product strategy. Value isn’t simply a concept of price – it’s what it does for the consumer. Virtually every industry is built on providing solutions to problems (some, obviously, more pressing than others). And it is a very effective way of keeping the relationship alive and motivating users to continue to engage with your product.

Entice customers

Enticing customers to your freemium product is a matter of providing a solution to problems they have. It also depends on how you do it. While the end user always wants something for free, many customers don’t mind giving you some of their data to get an “additional benefit” – you can also lead freemium users to sign up their friends with referral bonuses.

Lead towards premium product

Getting your freemium users to purchase additional services depends on several factors. One thing I like to talk about is niche – if your premium services offer niche value that consumers can’t easily find elsewhere, then it’s an excellent marketing opportunity to convert your freemium customers into premium customers.

Addressing common mistakes made in freemium models

Your premium services should always offer additional value on top of the freemium services, which means brainstorming a variety of solutions to customer problems. This does not mean inventing problems in your software that unlocking premium features will solve – that’s a quick way to start losing customers.

Be sure to listen to customers and ask yourself what they are looking for, what they want. You need to know your customers and that’s what your premium services must focus on.

One particularly common mistake freemium startups make is trying to lock in customers too soon – they are not giving them a reason to upgrade to premium services. It’s like holding a gun to their customers’ head and saying “if you want this thing you have to buy it now”. Not a good idea.

Use trial periods on premium features. Give a brief window of access to your premium features. This will make it possible to build up a positive relationship between customers and your product and get them hooked.

If customers don’t make a purchase after trialing your premium services, then you know something is wrong with your services, and you can begin investigating the data to determine why. Remember, everyone is different when it comes to decision-making, so don’t try to force something down people’s throats if it doesn’t fit their needs.

When should I invest in a freemium business?

If you’re looking to invest in a freemium model business, whether it’s your own startup or a fledgling company you believe has a good vision, the first thing you’ll want to consider is the type of market the business is going after and how well it’s resonating with consumers.

If it’s your own startup, then you’ll want to invest in a business model that can give you some early traction with consumers, ideally before you’ve set up your own customer base. In this case, you’ll want to be sure you have a platform that can support the number of sign-ups you’re expecting, as well as the number of users you’ll be able to grow at a steady pace.

This also rings true for investing in someone else’s startup – you want to make sure that your time, resources and money are allocated in the most effective way to maximize the chance that the business will scale up. It’s also crucial to make sure the business has a solid structure in place to support and grow its user base as it continues to attract new users and monetize them.

If it’s a company that you believe has a good vision, but it’s not yet at a point where it can be successfully monetized, then the strategy to pursue will depend on your own knowledge of the industry it is targeting.

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