Freemium: These days, many businesses and startups can get started and grow exponentially because they’re offering digital products or services. Without the need for expensive and bulky inventory, it’s easy for companies to sell to tons of customers quickly and efficiently.
While there are many marketing strategies for digital products, two of the most common (and effective) are freemium products and free trials. When developing your marketing campaign, you need to decide if either (or both) of these tactics will be ideal for your brand. But, how do they work, and what’s the difference? Let’s dive in and explore freemium vs. free trial.
What is Freemium?
Freemium is a combination of the words “free” and “premium.” This business model means that you offer a free version of your product and then charge users for higher-end options. There are several freemium methods, including:
- Traditional Freemium – The primary product is always free, and users can pay to upgrade to better versions.
- Alternative Product Strategy – One or two elements are free; then, users are exposed to other paid products.
- Freeware – Again, the product is always free, but customers can pay for add-ons or additional features as needed.
- Land and Expand – This model only works for products that operate at the company level as well as individuals. Once a few employees get a free version of a product, the provider expands and then charges the client business for a company-wide plan.
- Ecosystem – A free product that acts as a marketplace for third-party vendors to sell products. The ecosystem software makes money from these transactions. Google Play or the App Store are examples of ecosystems.
- Network – A place where users can connect with each other, then the provider makes money from advertising and third-party vendors. Social media sites are a perfect example.
Pros and Cons of the Freemium Business Model
As a business, you’re trying to make money. So, offering a free product can seem like a bit of a gamble. However, many top-tier brands have found tremendous success with the freemium model, and you can too. That said, you have to understand the advantages and disadvantages before pulling the trigger. Here are the pros and cons of freemium:
- Pro: Fast User Adoption – Who doesn’t love getting something for free? Since there’s no cost to sign up or download anything, more users are willing to try your product. So, if you’re offering something valuable, you can see significant growth in much less time. For example, apps like Uber and Airbnb were able to expand exponentially because users didn’t have to pay to download the software.
- Con: Monetization Channels are Not Always Clear or Effective – The primary purpose of freemium products is to build brand awareness and a substantial user base. However, if you can’t get enough people to upgrade or pay for added features, you might not be earning that much. In worst-case scenarios, you might have tons of users but little revenue.
- Pro: Fast Feedback and Adaptation – No matter what product you’re offering, there will be issues and bugs. As more people download and use the freemium version, you can get valuable feedback to improve the product. Also, as users see you improving the software, they’ll often be more willing to pay for upgraded versions.
- Con: High Churn Rates – Just because someone downloads your product doesn’t mean they’ll use it or even like it. Many freemium apps and programs get abandoned quickly if they don’t offer sufficient value. If you have a high churn rate, finding long-term customers is more challenging. For example, perhaps 1,000 people download the app, but what if half of them delete it within a month?
- Pro: Instant Growth Potential – If your app does strike a chord, you could wind up with a massive, loyal user base. Then, once you figure out how to monetize your product, you can build a resilient bottom line. Again, since there are fewer barriers to getting more people to download your product, you can scale up much faster without needing tons of expensive infrastructure.
Which Businesses Use the Freemium Model?
Freemium only works for digital products, such as mobile apps or online platforms. If you’re offering physical products or services, the freemium model can cost too much to make it viable. Here’s a quick overview of which brands can benefit from freemium the most:
- Mobile Games – Most games are free to play at first, then users have to buy the full version or pay for upgrades and add-ons.
- Transaction Apps – In this case, the app facilitates a transaction between multiple entities. For example, DoorDash acts as a middleman between the delivery driver, the restaurant, and the customer. So, the app is free to use, and it makes money from each transaction.
- Social Platforms – While it’s hard to develop the next social media app, brands may create a niche network of users. For example, perhaps the app caters to salespeople only. As the user network grows, the brand makes money from advertisers or third-party vendors.
- B2B Software – Since the B2B sales process is so much longer, many programs may offer freemium products to get their foot in the door with a company. This is the “land and expand” model at work.
Examples of Freemium Models
While the concept may be easy to understand, it can be hard to wrap your mind around how it works in the real world. So, let’s look at three companies and how they made the freemium business model work.
Dropbox – Traditional Freemium
Dropbox offers cloud-based storage, which is valuable for both individuals and companies. When someone signs up for the service, they get two gigabytes free, and they’ll never have to pay to use that storage. However, if they need more than two gigabytes, they can pay for a monthly subscription. The size of the free dropbox is large enough to provide value but small enough that many users will need more.
The brand also illustrated how valuable referral marketing strategies can be. When building brand awareness, Dropbox offered free extra storage for those who referred other users. So, customers were incentivized to get friends and family to sign up. Those referrals were also tempted to join because of the free storage, so Dropbox saw exponential growth in a short period.
Tailor Brands – Alternative Product Strategy
Tailor Brands offers a free logo maker tool, which is helpful for startups and small businesses to create a compelling logo in minutes. Users can customize and refine their logo as much as they want for free. Then, once they find a design they like, they pay for a high-resolution version.
This company also offers tons of other marketing and small business tools. For example, users can form an LLC, get a business email account, set up a website domain, design business cards, etc. Since each of these products can help a company get off the ground, a startup is more willing to take advantage and pay for multiple tools.
Evernote – Freeware
Although Dropbox offers 2GB of free storage for life, it’s not freeware because you don’t get extra features or add-ons. Evernote, on the other hand, is a tool with various functional elements. Users can get a lot of value from the freemium version even if they never upgrade. However, the brand makes money by offering high-value add-ons that can make the software even more productive.
Freemium vs. Free Trial
We’ve talked a lot about how freemium products work, but how does this system differ from a free trial? Here are a few distinctions:
- Time-Sensitive Offerings – A freemium product is free forever, while a free trial ends after a specific period (i.e., two weeks). Once the trial is up, users have to pay for the premium version or lose access to the product’s features.
- Functionality – A free trial often provides full access to the product and all its features. So, during the trial period, users aren’t limited in what they can do. This aspect is essential for a free trial to work since the company wants to show off the product’s value to the user as much as possible. Freemium products don’t have a full suite of features.
Free Trial Example: Audible
Audible is a site that offers tons of audiobooks for users to experience. With so much content on the site, users can get lots of value from a subscription. However, since audiobooks are still relatively niche, the site offers a 30-day free trial. This way, users can test the waters and make sure they like the medium before committing to a paid membership.
Audible can also afford to offer such a long trial because there is so much content. So, even if a user listens to audiobooks every day during the trial, there will still be tons of titles available, so they’ll be more likely to sign up.
How to Choose the Right Business Model for Your Brand
Unfortunately, freemium products can be tricky to get right because you need to find a balance between usability and comfort. If too many people are comfortable with the free version, they’re less likely to pay for anything. However, if you limit the free product too much, you’ll have a much higher churn rate, and it’s challenging to get long-term users.
As a rule, free trials work best when you have a valuable product with lots of features or content. This way, users can get a taste and determine if they need it in their lives. If so, they can pay for it.
Alternatively, if you have a product that can build an audience quickly, it’s often better to use the freemium model. Typically, having a massive following is highly valuable since you can monetize it more easily. Overall, if your product has mass appeal, it might work to build a freemium version. On the other hand, if you’re more of a niche offering, a free trial might be the best option.
Now that you know more about freemium vs. free trial, you can look at the pros and cons of both methods. From there, you can determine which option can lead to long-term success.