October 27, 2016
Freemium Business Model
Freemium is no longer a marketing ploy. Today, it’s a full-fledged business model—one that’s been adopted by companies like Slack, Dropbox, and InVision. Here’s how it works: Companies offer at least two plans. One is perpetually free, while the others are paid. Users who subscribe to the free plan get limited access to the product or service as well as reduced customer support. Those who subscribe to a premium subscription gain access to advanced features and superior customer support. Companies that adopt this business model earn their total revenues from just 5% of their user base. In one example, a company earned 85% of its income from just 1% of its user base. But here’s the thing: These earnings support the entire user base. For this reason, many companies focus all of their efforts on current and future paying customers. That’s why we wrote this list: Because freemium users are an untapped source of income. Keep reading to discover 7 ways to unlock that value:
1. Sign them up for a free trial
Free trials allow users to get to know your premium features. They also make using those features habitual. That’s why—assuming your premium plan offers value—freemium users won’t want to return to your free plan once their 30-day trial has ended. Plus, users who do revert back to your free plan after a trial will soon find themselves missing what they once had. Have you ever heard the saying, “You don’t know what you’ve got ‘til it’s gone”? Well, it applies to relationships of all kinds—including the relationship between your software and your customer. If your free trial fails to convert, consider re-evaluating what each plan includes. In particular, beware of freemium plans that offer too many features. Users need a compelling reason to upgrade.
2. Attract more freemium users
In many industries, network effects can help companies achieve critical mass. In other words, the sheer number of users that use a specific product or service helps to attract more customers. As more customers sign up, a ripple effect takes place, causing additional customers to sign up. To take advantage of this phenomenon, you must invest in recruiting freemium users. When marketing to potential freemium users, aim to attract customers who meet 3 characteristics:
Prospects should fit within your target market. Ensuring a strong fit helps attract paying users. But it also helps third parties, like advertisers. After all, freemium users often pay for the service they receive with their attention.
Prospects should exert influence over your target market. Look for credible opinion leaders with reputations for being trustworthy. Strong communication skills are also important.
3. Network size
Finally, prospects should have large networks. Ideally, they should belong to many close-knit communities. Hypertargeting takes considerable time and effort, but the pay-off can be substantial. This is especially true for startups that must reach critical mass to achieve success.
3. Develop a referral program
Referral programs are a great way to capture value from freemium users. In fact, referral programs provide 65% of the total value you can capture from freemium users according to one estimate. These programs effectively reduce your customer acquisition costs by empowering current users to recruit new customers. According to Columbia University Business Professor Ava Seave, connecting networked users (i.e. family members, friends, colleagues) also increases the probability that they will become paying customers. All referral programs offer their users compelling incentives to recruit people from their networks, and later reward them for their efforts. Outside of these criteria, referral programs vary from company to company. Here’s an example to learn from: Evernote uses a points system: Users earn 10 points each for their first 3 referrals. After that, they earn 5 points for each referral. Once a user reaches 30 points, they get Evernote Premium free for 3 months.
4. Leverage data to optimize your user experience
You can gain value from freemium users simply by analyzing their data. The insights you gain will help you understand both how your software is used and how it is experienced. By acting on what you learn, you can create a wow customer experience—something that’s known to increase customer satisfaction, customer retention, and customer loyalty. This is especially important for startups with few paying customers. Why? Because before reaching critical mass freemium customers provide a sufficient sample for analysis. For this reason, Harvard Business School Professor Sunil Gupta and Fuqua School of Business Professor Carl F. Mela valued one company’s freemium customers at $2,500 each during the early stages of the business. The same customer was worth only $1,360 just four years later.
5. Ask for feedback (and then act on it)
Freemium users can provide useful feedback about your company’s product or service. To capture this value, use online surveys to collect user feedback, listen to what they’re saying on social media, and connect with them 1-on-1 over the phone. Keep in mind: Customer feedback is only valuable if you act on it. By prioritizing issues that are experienced by the majority of your users, you can get the most out of your investment.
6. Ask for help
You can capture value from freemium users simply by asking them for help. Many will ignore your request, but a few brand enthusiasts will jump at the opportunity to give back. Freemium users can help with quality management, customer support, and content creation. For example, the team at Buffer has leveraged the popularity of their brand to recruit social customer support volunteers. They call this team the Buffer Twitter Squad. In doing so, they’ve effectively reduced their Twitter response time. Other potential benefits include reduced costs, amplified reach, and a better customer experience.
7. Encourage more usage
This one is simple. As someone spends more time using your product or service, it becomes more likely that they’ll upgrade to a paid offering. To capitalize on this opportunity, you’ll need to find ways to increase their usage. For example, you could design an email series that introduces current users to a different feature each month. Other ideas include enhancing your onboarding experience, and analyzing usage patterns to detect and resolve issues. How do you capture value from your freemium users? Share your experience in the comments.