TL;DR
- You'll find that Freemium Pricing shifts the onus of product education to the customer, potentially reducing your costs.
- With Freemium Pricing, you can entice users with free features, hoping they'll see the value and upgrade to premium.
- Keep in mind the challenges: low conversion rates, the risk of higher churn, and the need for a large user base to see ROI.
- Understand the difference between Freemium and free trials: Freemium offers limited features with no time constraint, while trials offer full access but are time-bound.
- Freemium Pricing creates brand awareness and increases product acquisition potential while keeping acquisition expenses under control.
- Freemium Pricing is beneficial if your product requires time to show its value and you can effectively use user feedback.
- To succeed with Freemium Pricing, ensure your product is attractive, manage your resources wisely, and diversify your revenue streams.
- Platforms like Togai make implementing Freemium Pricing effortless, offering a practical solution to onboard your pricing strategy faster.
Consumers often seek a clear understanding of the value they can expect from a product or service so that they can make an informed pricing decision. Consequently, businesses face the challenge of investing significant resources to provide customers with the desired information. However, a solution to this issue is offered by the freemium model. By adopting this approach, businesses can reduce the costs associated with acquiring new customers, as the responsibility of product education is shifted from the business to the customer.
In simpler terms, freemium allows customers to experience a basic version of the product or service for free, and if they find value in it, they can choose to upgrade to a premium version for a fee. This way, businesses can minimize their expenses while still ensuring that potential customers have the opportunity to explore and understand the product before making a purchase.
Freemium Pricing: An Overview
The term Freemium is a coinage of the words Free + Premium, similar to how the term 'discount pricing' is used in retail, which you can learn more about in this discount pricing article. It is, basically, a customer acquisition model that businesses implement to introduce new products and services into the market for free. The basic strategy is to entice first-timers with free options and make them upgrade to premium versions with more features for a price. Additionally, freemium pricing allows you to build relationships with potential customers.
This pricing strategy has been around for quite some time. Many software companies used freemium strategy in the 1980s to promote their products with limited features or for a limited period of time. Businesses wanted to ensure that their customers upgraded to premium versions and stayed with them for a long time.
In many ways, freemium pricing has successfully replaced free trials and demos, especially for product-based companies. Users can access a feature or a limited version of the product for free indefinitely through a freemium tier. Nevertheless, they will have to move to an upgraded version and pay a price to use the advanced features.
Many SaaS companies have opted for freemium pricing when it comes to choosing customer acquisition models. However, there’s a catch when it comes to freemium pricing: They produce varying results. The conversion rates are always not what you would expect.
On average, the conversion rate hovers around 2-5%. Even then, organizations like Slack have achieved a 30% conversion rate. These mixed results all boil down to one question: Does freemium pricing really work?
To find the answer to this question, we need to understand the pros and cons of this pricing strategy.
Also read: How to Make Freemium Pricing Work in Your Favor
Pros & Cons of Freemium Pricing
The Pros
Adopting freemium pricing is an excellent strategy because it delivers multiple benefits.
- Low barrier entry
Users can experience the products or services absolutely free of cost. This promotes user engagement with little effort.
- Lowers acquisition costs
Once your customers like your product, it is easier to upsell the premium tiers and scale along with them as they become loyal customers.
- Facilitates business growth
By providing the value of offering for free and allowing customers to experience your offering, you facilitate product-led business growth.
- Acquires larger customer-base
Freemium pricing makes acquiring a large user base easy because you offer your product for free. These customers have the potential to become a steady revenue stream as they upgrade to paid versions.
- Reduce marketing expenses
Freemium pricing is a great way to tap into new markets without burning a hole in your pocket. Users who try your products for free will automatically promote your product through word-of-mouth and bring in more customers.
- Establishes multiple sources of income
Capitalizing on ads and in-app sales paves the way for multiple revenue streams from your main offerings.
- Enables free beta testing
Freemium pricing allows you to collect user data and utilize it for free beta testing. This testing will give you insights about refining your pricing tiers and marketing tactics to target the right audience.
So, what’s the other side of the coin like with freemium pricing?
The Cons
When adopting freemium pricing, you may probably encounter the following roadblocks:
- Low conversion rates of customers who are willing to pay. Even though customers are enticed into trying out the free version, there’s no guarantee that everyone will move on to the upgraded versions.
- A quicker cash burn rate is another pitfall that may likely happen as you burn off your time, money, and other resources to convert free users into paid ones.
- Inflation of churn rates may happen as potential customers may turn down your products if they do not find them user-friendly. Moreover, they may only use the free version if they find it engaging.
- Low conversion rates often force you to fix low prices for premium tiers to upsell customers who are used to free versions.
- ROI requires a large volume because it relies heavily on large numbers of active users to generate enough revenue.
- By marketing it as free, you might unintentionally instruct the market that your offering is worth a lower price.
Freemium pricing has an equal number of advantages and disadvantages. Hence it is important to weigh both before getting knee-deep into this market acquisition technique. Another pitfall is that people often misunderstand freemium pricing for free trials and vice versa. What differentiates one from the other? Read on to find out.
Freemium Pricing Versus Free Trials
The Definitions
Freemium is a market acquisition strategy, a type of pricing model, that aims to attract customers by offering certain features of an application or website for free. This approach entices or motivates users to engage with the product, with the hope that they will eventually choose to upgrade to the premium version. The free features serve as a taste of what the product can offer, enticing users to explore further and consider the added benefits of the premium version.
On the other hand, a free trial is a promotional tactic that allows users to experience the full capabilities and features of a website or application at no cost for a limited period. During this trial period, users have the opportunity to fully explore and utilize all the functionalities, giving them a comprehensive understanding of the product's value and its potential benefits. The free trial is typically time-limited, encouraging users to make a decision about purchasing the product after experiencing its full capabilities.
The Features
Freemium allows users to access a set of basic features without any time limitations. These features provide users with a glimpse of the product's capabilities, but they may be limited in terms of functionality compared to the premium version. In freemium, users are offered a taste of the product's potential, giving them an opportunity to explore and engage with it, albeit with certain limitations, unless they opt for a premium subscription.
On the other hand, a free trial provides users with complete functionality and access to all features, just like the paid version of the product. During the trial period, which typically lasts between 15 to 30 days, users have the opportunity to experience the product in its entirety. This allows them to fully understand the value and benefits it offers without any restrictions. The goal of a free trial is to provide users with a comprehensive experience that reflects the paid version, helping them make an informed decision about purchasing the product.
The Product Value
While free trials provide users with a limited time to experience the product's full capabilities, it may not always be sufficient for users to truly grasp the value it offers. Some products require a longer period for users to fully utilize and appreciate all their features, which can limit the effectiveness of a free trial.
In contrast, freemium models offer users the advantage of unlimited time to engage with the product in its restricted form. Users can revisit the product whenever they want and explore its functionalities at their own pace, without feeling rushed or pressured. This approach encourages users to return to the product repeatedly, fostering a continuous engagement and allowing them to gradually discover its value over time. By providing a free version with no time limit, freemium models create an ongoing relationship with users, giving them the flexibility to assess and utilize the product's offerings on their own terms.
Is freemium pricing for everyone? Well, many companies have successfully implemented the strategy. What’s excellent about freemium pricing is that even if it doesn’t give you long-lasting results, it can help you get started.
7 Scenarios Where Freemium Pricing Works in Your Favor
Freemium pricing will help you achieve your pricing objectives if:
- Your product is user-friendly, with a perfect setup or onboarding support.
- Your product requires extra time to demonstrate its value and gain the attraction of your customers.
- It does not cost you much to support free users.
- You are well prepared to collect and make use of the data and feedback from the trial.
- You are ready to consistently engage with free users to educate them about your product and foster brand loyalty and trust.
- Your premium offerings have very desirable benefits.
Freemium pricing may not always generate revenue. Yet it can be a convenient tool to achieve your revenue goals. Besides, it is easy to implement since it is not bound by rigid rules about how and when to use the strategy.
3 Critical Factors of Freemium Pricing Strategy
To get your freemium pricing strategy working in your favor, you must consider implementing these three critical factors:
1. Make your product as attractive as possible.
You will require considerable volume to attract the masses with your freemium model. One of the main criteria is to make your product extremely user-friendly. Quality assurance and user experience are additional criteria that make your product appealing to your target market.
2. Budget carefully and balance your resources.
You should be financially ready to shell out money and deploy your resources to provide high-quality products to customers who are not yet ready to pay you. You must balance cash and other resources to create a sustainable business model to survive market ups and downs and churn rates.
3. Create and manage multiple income streams.
By automating revenue allocation, recurring billing solutions also help you comply with accounting regulations. Investing in the right system will also streamline the additions to your pricing model or any updates to your customer’s invoices.
As We Conclude
The freemium model is adopted by so many businesses because it:
- Creates brand awareness and recognition in the market.
- Increases your product’s acquisition potential.
- Keeps your acquisition expenses under control.
To make it work in your favor, make your customers the center of your focus and understand the benefits they derive from your product. Consequently, you can create a plan to satisfy their needs and leave them wanting more.
Want to implement freemium pricing? Do it effortlessly with Togai, our pricing implementation platform. Togai allows you to onboard your pricing strategy ten times faster and on the same day. Schedule a free demo today.
