What is Freemium?
Freemium refers to a business model that gives products away to a large group of target audience and also market main products to selected customers. The term is a combination of the words “free” and “premium”.
Among the most popular practitioners of this business model is Skype that offers computer to computer communications for free but sells calls to landlines, voicemail services and other products.
The freemium business model is usually used by companies who are promoting games, apps and software. However, this business model is now used in different industries. As a matter of fact, any industry that offers free products that can be duplicated with minimal cost can be promoted through this new business strategy. Even companies in design, manufacturing, publishing, music, film and home furnishings are now embracing this.
The usual free app can be downloaded for free and uses in-app purchases to generate revenue instead of charging a fixed rate for the app. This business model has become very well-known over the last five years, particularly on mobile devices such as smart phones and android devices.
Background
Some forms of this business model have been used in the 80s during the early days of software industry. There were companies who distributed free computer programs that are saved on floppy disks.
This business model is largely dependent on having a free product or service that can be reproduced at a low cost. Hence, this business model only flourished as online distribution and the decreasing price of online production pushed down the marginal cost.
This is evident by the fact that this business model was non-existent before 2006. Fred Wilson is regarded as the one who coined and popularized the term and Jarid Lukin described the business model in his blog.
Common Misconceptions about Freemium
It is crucial to take note that this business strategy is no way similar to a free trial. Some people think that this is composed of trial offers, particularly when the company is offering software. This is not true. Remember, a free trial offers customers to try products or service for only a certain period of time. After the test period, the customers need to pay a certain fee to continue using the products and services.
On the other hand, this emerging business model offers the products and services for free forever, which generates a great value. There are customers who will buy premium versions, but usually this is only a small percentage. The bottomline here is that free trial is a lot different business model.
However, a free product or service doesn’t mean that they are offered through this business model. This is another misconception because not all companies who are offering free products are following this idea. It is also not a form of advertising, although these business models are usually combined. This business model is not also similar to cross subsidizing, in which you can get products for a lower price but you need to pay for subscription.
The Popularity of Free-to-Play Model
Free-to-play is now an effective online revenue model. The basic app offers core functionality for free and provides upgrades to add specific features. Basically, this is like combining the trial version of an app with the choice of upgrading the experience through purchases.
A free app can be downloaded, and the mechanism of this emerging business model is based on the ideal that once you have given your customers with the chance to experience your app and consider its value, they will be more willing to spend money for the game.
The Emergence of Freemium Business Model
Most business models are composed of free offers, and this is becoming more popular among these models. The reason behind this is the changing landscape in the economy of online and digital process.
Nowadays, it is becoming easier to produce products and services through computers and the World Wide Web. Also, the cost of these of producing these things is becoming cheaper. Hence, the marginal cost of offering products and services done by computers and the Internet is basically zero. Producing one more copy of a movie, or e-book, or digital music costs zero.
Advance technological developments have paved the way for building effective business models in innovative ways, which includes the use of free services.
Why Choose this Business Model
There are two main reasons why you need to try this business model – marketing and networking. Virtually, offering a free product makes it easy to entice target customers. And online economics make this easy, due to the fact that the marginal cost of every new user could be very low. Customers who accepted the offer can also be beneficial even though they may not be converted into paying customers because they can invite their friends to try the free products.
Meanwhile, this business model can also have positive network effect. This happens when products and services can become more valuable if they are being used by more and more people. An app cannot be that useful if you cannot connect to others who are also using the app.
Not All Products Can Be Offered Using This Business Model
Many business start-ups are embracing the idea of freemium, because it is easy to create a product and entice users really quick, and at the same time earn revenues through the in-app purchases. Experts suggest that companies who are using this emerging business model must work hard to entice more users. Certainly, this may appear as very obvious but it is crucial to bear in mind. This business model is a numbers game as well as a popularity contest. If even a small percentage of your users will pay you, then you need to have millions of users to convert that small percentage into profits.
The Promising Future of Freemium
More and more industries are becoming affected by online promotions. Just imagine the disruption Skype has caused in the telecommunications industry, especially among companies who are making large profits through long-distance calls. There’s high possibility that in the future, companies in every industry will be using this business model.