A two-pronged acquisition structure that classifies users as either premium or free tier based on certain criteria

What is Freemium?

Freemium can be defined as a two-pronged acquisition structure that classifies users as either premium or free tier, contingent upon whether a user pays for access to a service account. Users in the free tier category receive very little access to products and features because they don’t pay. Premium users, on the other hand, enjoy a lot of access to products and features, but they need to make a payment to continue to enjoy the same level of access.


Breaking Down the Freemium Model

The freemium model produces a naturally nurturing configuration. The model provides users with the chance to encounter and interact with products without necessarily being subjected to salespersons or marketing campaigns.

Once a product experiences success, free tier users eventually exhaust their access to free-level features, after which they need to make a decision, based on experience, on whether to seek a premium level account.

Freemiums work well when developers offer additional features, superior functionality, or paid upgrades that many consumers will wish to access.

Limitations on the Freemium Model

For a freemium model to work successfully, there must be a certain level of limitation on certain features of a product. This can be done in a number of ways:

1. Feature limitation

Freemiums work well when developers offer additional features, superior functionality, or paid upgrades that consumers are likely to want. Feature access is limited for free tier users.

2. Usage quota

A usage quota comprises storage limits, recurrent credits, or information dispensing quotas.

3. Limited support

With limited support, freemiums can offer tiered products, support features, and different levels of customer service.

Limiting usage or access to products creates friction, particularly for free tier users, and encourages an upgrade to a higher tier. Businesses employ such limitations in order to amplify the friction effect.

Limitations cause customers to want to access more features, but developers need to make sure that the users’ appetite is not so great to the point where customers miss the product’s principal value. There must be a balance, and this requires an in-depth understanding and knowledge of consumer needs and the value derived from the product.

Free Trial vs. Freemium

After knowing the meaning of freemium, it’s possible to wonder why companies don’t just use free accounts. In fact, it’s a question that businesses deal with on a daily basis. The correct response to the question depends on a number of issues, including specific goals, product type, and the target market.

Like a freemium account, a trial account is designed to convert available leads to paying consumers. However, freemium and free trial accounts come with a few differences. Freemiums last for a lifetime, whereas trial accounts last for a short period, after which one needs to upgrade.

In addition, free trial accounts typically allow users to access almost all the features of a product, while freemium accounts only allow a limited amount of access.

Benefits of Free Trial Models

An obvious benefit of a free trial account is the fact that a product provider is not obligated to offer support to casual consumers who don’t create any benefit for a business.

As soon as the trial period is complete, users face a choice between signing up for premium membership or leaving altogether. In this way, a business is able to create a high commitment rate because only paying members get to use the product on an ongoing basis.

Additionally, free trial accounts are quite adept at converting free users into paying members, particularly when credit cards are used during the sign-up process.

Benefits of a Freemium Model

Although there is a clear crossover point with regard to using freemium accounts versus free trial accounts, a freemium model is usually an easier option for most customers.

A free trial account causes a lot of pressure on a customer because a credit card is usually needed during sign up, and the free period lasts for only a short time. Thereafter, the client must make a decision on whether to pay up or quit the product altogether.

Freemium accounts are more pressure-free, particularly for new customers, because they are given the chance to interact with and explore a product without necessarily having to make a purchase.

Some customers don’t need all the features at their disposal once they sign up for the first time. Nevertheless, with time, their needs may change, causing them to want more. That way, a product can easily be integrated into a customer’s workflow.

Examples of Freemium Business Models

1. Dropbox

File-hosting service Dropbox is a good example of a freemium business model. The company offers free storage up to a certain level, but charges for additional storage space and additional services.

2. Tinder

Another notable example of a freemium business model is the popular dating app, Tinder. Users are allowed to use the app for free but are also given the option to pay for the premium version of the app, which provides additional features in addition to the basic ones.

3. Spotify and Apple Music

Spotify and Apple Music are free music-streaming platforms that provide additional features of downloading and listening to music off-line on a premium subscription basis.

Final Word

Freemium offers the potential to increase a product’s acquisition prospects and then promote the rapid growth of the business, while keeping related costs at a minimum. All a business needs to do is focus on the needs of the client.

More Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!

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