The Power of Freemium

Want to accumulate a lot of users for your product as quickly as possible? Well, give it away for free.

Seriously, just hand it to anyone who might even be remotely interested. It’s worked recently for companies such as Spotify, Evernote, and LinkedIn, all of whom boast more than a million users. The key, of course, lies in eventually converting as many of these free users into paying customers as possible. Businesses who successfully walk this fine line then boast the best of both worlds – millions of users and growing profits.

The Devoted

As we mentioned earlier, the largest benefit to utilizing this business model is the accumulation of as many users as possible. This can create enormous value and heightened brand awareness, just like it did for professional social network LinkedIn. Originally a small site where people could upload their work histories, it has since grown to more than 100 million registered users and an IPO that at one point raised the value of the company to $9 billion. After gaining a large base of users and going public, LinkedIn began to roll its premium features, which are only available to paying customers. And those paying customers are often large companies and recruiters who utilize this network to find talent to fill open positions. In fact, more than 55 percent of Fourtune 100 companies have a LinkedIn Recruiter account.

What can a small business learn from this? Well, it’s the lesson that will always, undoubtedly, ring true: with Freemium, large numbers will join but only a few users will be paying customers. That’s not a bad thing, though. According to numerous statistics, those paying customers will be incredibly devoted, which will provide a strong and growing revenue base.

Tech blog reported that a study by mobile analytics firm Flurry showed that “the average customer on iOS and Android phones spend $14 on any given transaction.” The study goes on to say that 13 percent users spend more than $20, meaning they are the premium customer base for these games – ultimately accounting for “half of all freemium revenue.”

The Right Model?

The question any entrepreneur must ask before using the freemium model is: Would this help our business? And, often, the answer is no. Look at all the business we’ve mentioned so far – LinkedIn, Spotify and Evernote – what do they have in common? They accumulate data. In fact, a lot of data that only grows in value over time for users, advertisers, recruiters and a host of other industries.

If your business is a single product with no up-sell potential, say brake pads or Adobe InDesign, giving them away for everyone for an unlimited amount of time makes no sense whatsoever. Those products have one revenue stream and do not collect data, so they devalue over time until a new version is released. The key to an effective premium lies in making a product more valuable over time. If that’s not the case for your venture, then another business model should be explored.

For those who have the business infrastructure and the fortitude to give freemium a shot, the benefits we have laid out here can be tremendous. Just keep in mind that it’s not for everyone, and nothing in life truly comes free.

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