Freemium Model: What is it & How Does it Work in Tech Business?

Everything You Need to Know About the Freemium App Model:

1. Freemium Model Definition
2. What is the Freemium App Model?
3. Popular Freemium Model Strategies
4. How do Freemium Model Strategies Work?
5. Freemium Apps: Pros & Cons
6. Freemium App Model Examples

In an era of information overload and endless product or service options, you need to explore every avenue to convince people to try your app. From an app user acquisition standpoint, no method has been more successful than the freemium model.

Online customers are more savvy and harder to please. They expect technology to not only work flawlessly, but also be as low-cost as possible. In turn, businesses are constantly needing to find ways to adapt their monetization strategy to attract more customers.

So what’s one of the best ways to get people to try your app? Consider leveraging one of the most powerful words in all of marketing and sales: FREE!

When you offer some portion of a product or service for free, you’re allowing people to explore your offering to determine if it’s right for them.

Savvy consumers will appreciate being able to try a service out with no strings attached. Later on, this could result in a sale through various purchase options.

This popular strategy is known as the freemium model. It’s all about attracting and engaging with your audience while simultaneously lowering your acquisition cost.

Lower your app user acquisition cost with the freemium model

If you have a product you know people will love “if only they would just try it”, then the freemium model could be an effective option for your business.

We covered the freemium model briefly in our Essential Guide for Developing Mobile Apps. Since the freemium topic is so popular, we decided to review it more detail here.

In this article, you will learn everything you need to know about the freemium model:

• What is the freemium model?
• Which key strategies do companies use to make this strategy work?
• What are some examples of successful freemium apps?

Freemium may or may not be the ideal monetization model for your business. Familiarizing yourself with the freemium model and strategy is the best way to determine if freemium is right for you.

1. Freemium Model Definition

The freemium model, a combination of “free” and “premium”, can be defined as a two-tiered user acquisition strategy where people are divided into either free or paid tiers of a service or product.

2. What is the Freemium App Model?

In the freemium model, app users don’t pay anything to download your app initially. Later, they’re offered optional purchases for a “higher” or “improved” tier of service.

Usually, a free tier has some limitations in place that can only be surpassed once a user pays to upgrade. We’ll explore these strategies more in the next section.

While offering a free tier can be an effective strategy, it’s not a walk in the park. You’ll likely face challenges when considering what to offer, or how to entice people to upgrade.

There’s two important questions you need to ask yourself:
• What are the free tier vs premium tier offers?
• Will you be able to convert users to pay for the premium offer?

What are the free tier vs premium tier offers?

In order for something to be considered “freemium”, there needs to be some level of free access. You want to attract and engage potential customers as much as possible during this stage–that’s what makes freemium so appealing.

Let your potential customers explore some of what your product or service has to offer. Hopefully, what you allow them to access will lead to a conversion.

How much should you give away? That depends on your offering, and how much you think you need to give away to make someone become a paying customer!

Will you be able to convert free tier users to pay for the premium offer?

Are people using your app consistently but never paying to upgrade? Then you should experiment with further limiting their access. Try reducing the amount you’re giving away for free and see if you get more conversions!

However, proceed with caution whenever you take permissions or features away from users. In our experience, rather than have something removed we’ve found it’s better if they’ve never experienced it at all!

As an alternative to taking features away, consider this: do people fully understand your premium offer?

3. Popular Freemium Model Strategies

The monetary benefits of the freemium app model are only successful if a user makes a purchase. Plain and simple! Therefore, you’ll need to explore and implement the best strategies to convince users to upgrade.

What are the most popular freemium strategies?

Free Trials

Free trials are an excellent way to build user habits and encourage people to commit to using your service. Note: Offering a free trial is also the most popular strategy for the Subscription app monetization method.

If users need to make an account or profile, then allowing them to do so with a free trial can let them experience all the good things your platform has to offer. In turn, they’ll provide you with a name, email address, and or/phone number and other information.

Getting a user’s contact info is key. With their info, you can follow up directly during the free trial period, or afterwards if they haven’t chosen to upgrade.

If you’ve built an appealing platform that people feel like they don’t want to live without, then you should be able to seamlessly convert free trial users into paying customers.

The most common free trial approach is to ask for credit card info during the sign up process, then automatically charge their card once the trial period ends. If they’ve gone so far as to submit their payment info, then the onboarding process should be nearly complete!

Ideally, people will love your service so much they’ll be happy to remain as paying customers or subscribers. However, some percentage of paying users will be those who simply forgot to end their free trial before the trial ends. (Confession: I’ve done this on more than one occasion, and so have many of my friends and colleagues!)

If you notice a high conversion rate from free trial to paid subscribers, then congrats! You’re successfully rolling out an effective freemium strategy! But what if you notice a drop off in users shortly thereafter? This is an indication that you should shift your focus to retention efforts.

Multiple Tiers of Service : The Center Stage Effect

Offering a free trial is effective if your user tier is binary (free/paid). But what if your offering is more complex? Is it possible for you to offer multiple tiers of service with advanced features or functionality? Absolutely!

Other than offering a free trial, having a multiple tier service offering is the other most common approach to successfully converting free users to paid users with the freemium model. Platforms like Mailchimp, Zoom, and Zapier all use the multi-tier strategy to attract users at different price points (and pain points!).

What is the “center stage effect?

When looking at three service options, have you ever found yourself just focusing on the middle option? Well you’re not alone! Studies have found that when prompted with several options, people will overwhelmingly choose an option in the middle. This phenomenon is known as the “center stage effect“.

Take a look at Dropbox’s pricing plan below, you’ve probably seen a similar pricing structure somewhere before:

Companies are all too familiar with the center stage bias. They’ll intentionally put their most attractive (and often most lucrative) option in the middle, knowing it will get the most buyers. Notice that Dropbox goes the extra mile by also including a 30 day free trial.

From grocery store shelves to online SaaS products, offering multiple tiers of service with the center stage effect in mind can be a powerful sales technique, especially when applied to the freemium model.

Discount Pricing Based on Customer Segment

Sometimes platforms don’t have enough features to make the multiple tier strategy worthwhile. However, you may identify different customer segments that frequently use your product. This is good opportunity to offer discounted pricing options, or even bundle sales.

Family plans, student, senior, and veteran discounts are groups that commonly receive discount offers. We’ll see more examples of this in the following sections.

4. How do Freemium model strategies work?

The free trial and multiple tier offering are transactional strategies. Within these strategies are limitation mechanisms that make the strategies appealing to customers:

Features: Users can only access certain features of the app (higher levels or items) once they’ve paid to upgrade to the premium tier.
Usage: The system limits the time, storage, or the amount of users or actions allowed on the system until a user has paid to upgrade.
Support: Tiered levels of access to customer support or resources (ex. Zoom, WordPress).
Branding Limits: Companies will place a watermark or their own company logo on your media unless you pay a higher tier to have it removed (ex. WordPress, InShot).

Putting one or several of these limitation mechanisms in place is the key to creating a freemium value. Experiment with them and see which combinations drive more sales. Just make sure you don’t anger your free tier users to the point of wanting to delete your app!

Achieving that balance is no easy feat. It will most likely require frequent adjustments to your offering based on new features, updates, or insights. You may even find it useful to set limitations to match the needs or wants of your customer segments.

5. Freemium Apps: Pros and Cons

Every monetization method has its advantages and disadvantages. Here’s a pros and cons breakdown of developing a freemium app:

Pros:

• Because you’re offering a free tier of service, people will be much more willing to initially download your app. Acquiring users is often the most difficult (and most expensive) part of the app business, so leverage your free offer as much as possible.

• Compared to the subscription model, a simple freemium model can be relatively low-cost to develop. The cost and level of effort will depend entirely on your feature set.

• A major benefit to the freemium app model is having the option to add features over time as In-App Purchases (IAP). The ability to continuously add new features is an excellent way to drive up retention. Or, IAPs can allow you to add new tiers of your offer if you’re having difficulty convincing people to upgrade.

Cons:

• Just because a new user signs on to the free tier doesn’t mean they’ll become a paying customer. That’s the hard part, and risk with choosing the freemium app monetization model!

• If you want your iOS app to offer an IAP, it will need to undergo an additional review process from the Apple Review team. This is true for all models that offer IAPs.

• Apple and Google take a 30% cut of your sales. This is true for all app monetization models that involve selling digital goods. Make sure to take this into account as you determine your pricing structure.

6. Freemium App Model Examples

Let’s take a look at some of the most popular freemium apps and how they’ve structured their offers:

Spotify

The music streaming app Spotify is one of the most popular and widely used freemium B2C apps in the world. Users are able to access most music on the platform on the free tier, but have various limitations and are also subject to watching or listening to advertisements.

Spotify’s Discount Upgrade Strategy

Spotify started with a simple binary pricing structure (free/paid), but has since expanded their purchase options with multiple discount bundle options:

Notice how Spotify doesn’t stop at offering multiple ways for people to upgrade to their Premium service. They also include three months of service for free.

Spotify Limitations for Free Tier Users

Advertisements can interrupt your listening experience
Limited access to choosing a track of your choice in a playlist
Users can only skip a certain number of songs (as of 2020 you can skip four songs per hour)
Unable to download tracks for offline listening
Limited audio quality as free tier listeners listen to streams at 96kbps on mobile and 160 kbps on desktop, whereas premium listeners stream tracks at 320kbps (almost indistinguishable from CD quality).

It’s important to note that the relationship between Spotify and Apple has not always been positive. In 2015, Spotify argued that Apple takes too large a percentage of their IAP sales. In response, Apple threatened to remove their App from the App Store.

As it stands now, you can only pay to upgrade to premium on the Spotify website as stated here. Apple and Google’s percentage cut on IAP and app sales is a continuous point of contention, and something to familiarize yourself with if you plan on launching a freemium app.

Zoom

In the era of COVID-19 where in-person meetings are nonexistent, few companies saw as strong of a surge and uptick in usage as the online video conferencing platform Zoom.

In a space that was once dominated by Skype, Zoom established itself the video meeting platform in 2020. Their success is due in part to its ease of installation and scheduling process. However, the company did encounter some backlash with security concerns of “Zoombombing” in the process.

Aside from the ease of installation and use, what else attracted so many people to try the platform in the first place? You guessed it–their freemium model!

Zoom’s Multiple Tier Pricing Strategy

Here’s a screenshot of Zoom’s pricing plans as of June 2020:

As you can see, Zoom is willing to offer a lot of services, including the core video meeting functionality, for free. Zoom recognizes the value of having as many people on their platform as possible.

They also understand that by building user habits and a strong user base, more people will be willing to upgrade to higher tiers of service.

Notice the center stage effect is in full force here. They further emphasize the option they want you to choose with the solid bright color on the “Buy Now” button.

Zoom Limitations for Free Tier Users

The limitation that convinces most people to upgrade to the Pro tier is the 40 minute limit on meetings with more than two attendees. Rather than going through the hassle of disconnecting and creating a new meeting, most people prefer to save the trouble and just pay for the Pro account.
You’ll have limited access to higher levels of customer support.
Custom branding capability is limited. You won’t be able to use your own logo, add custom URLs, etc.
There’s a cap for recording meetings (Pro gets you 1GB of MP4 or M4A cloud recording). This feature is especially important for businesses or groups that need to record their session, webinar, or presentation.

Clash of Clans

The now global company Supercell created one of the most lucrative app games of all time using the freemium model. That game is the infamous Clash of Clans.

This fantasy-themed game starring you, the village chief, brought in millions of dollars with tempting in-app purchases. According to Forbes, in 2013, Supercell was bringing in $2.4 million per day with the freemium model.

So how did they do it?

Clash of Clan’s Usage Limit Strategy (Time)

Supercell is an expert in using the free tier strategy–and they’re not shy about it! Heck, at one point they even taught you how to spend money in the tutorial:

How much time would buying gems or other items save you? Sometimes as little as 30-50 seconds! Supercell has found that when the dopamine kicks in and you’re feeling impatient, you’ll be willing to spend big bucks to expedite the game process.

By throttling your experience with time limitations and creating a sense of task urgency, Clash of Clans has implemented a strategy that profits on your impatience.

Of course, they also reaching success through awesome visual aesthetics, story building, social sharing strategy, and the subtle details (such as sheep overflowing with wool when they needing a shearing).

They even went so far as to allow users to create and sell their own items to other players in the game, an incredible and enticing feature that takes in-game monetization to a whole new level.

Clash of Clans Limitations for Free Tier Users

Limiting how much or how fast you can develop your items or characters without purchasing gems. The time-limiting upgrade factor works exponentially in that it takes longer and longer to upgrade each time you advance.
Limitations to the cosmetic look and feel of your characters and items.
The items or characters you can access is limited. That’s right, most people get so drawn in to the battle component of the game, they feel like they have no choice but to buy a flock of wizards as an IAP.

Conclusion

Freemium is one of the most popular app monetization models in the industry, especially if it’s a mobile game. How popular is it? Well, over 90% of app games depend on this model. In 2014 it was and astronomical 98% of all apps in the Google Play Store.

In this article we’ve covered how various companies make the freemium model work by offering free trials, multiple tiers of buying options, and discounts based on customer segments. That’s the attract stage of customer acquisition.

We’ve then examined case studies and seen that companies can move the sales needle by limiting aspects of the service. Most commonly, this is accomplished by limiting the features available, limiting the usage of the app, limiting support, or limiting your branding options. These are the entice mechanisms that, when done well, can result in a conversion (sale).

What’s next when considering whether or not to implement a freemium strategy? There’s another important question should as yourself and your team:

Will you be able to commit to a long term innovative strategy?

As more people sign up for your service, it becomes increasingly difficult to convert those free users to paying customers.

To keep up with the increased demand and skepticism, you’ll need to continue to make your premium service more valuable. You’ll also need to continue to introduce new premium conversion strategies like discounts and bundles.

You need to ask yourself and your team: can we commit to a long term growth strategy based on innovation and adapting to customer needs?

Hopefully, the answer is yes, and you’ll be able to experiment with the proven strategies discussed in this article.

Lastly, it’s important to be confident in your free tier offer. When you give something of high value away for free, people will think: “if they’re willing to give this much away for free, imagine how much better the service will be when I’m paying for it!”.

The big takeaway? Make your customers as happy as possible with a high value free offer, and they’ll become evangelists for your app.

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