The rules of making money with Freemium

Should you use the freemium business model?

We’ve looked at the free taste/sample, and investigated the reciprocity principle and “first bag is free” ideas in small business marketing, and now I want to talk about the rules of making money with the freemium business model.

Freemium – what is it?

Freemium or freemium/premium is a business model you’ll have come across if you’ve ever used Basecamp, Spotify or Mailchimp or other online software, but it’s becoming more prevalent in other areas.

The idea is that you give people a free, easy to sign up to, service with basic functionality or with irritating ads.

They start using it because it’s risk free to try out. Then they get hooked and tell their friends. And then they get irritated by the ads and pay you £5 per month to take them away, or they want to use it more, or they want additional features so they happily pay for the upgrade.

The problem with a freemium model is that it doesn’t always work. You need deep enough pockets to support all those free users while you get them to upgrade.

Spotify consistently lost millions each year before they got enough paying subscribers to offset all the people on the free package.

I often see companies which have a freemium model, but haven’t worked out the premium bit yet.

This is especially risky, as you basically have a giveaway shop with nothing to sell in it, so you have no incoming cash at all.

For small companies, it’s dangerous to assume that there will be an investor there to give you some money to continue.

There’s also a risk that if you don’t tell people at the beginning that they might have to pay, you’ll annoy people when you do offer a chargeable service. All too often, especially for online services, people are used to getting something for free, and think you’re exploiting them when you finally ask for some money.

The rules of making money with freemium

  • Ensure that you steer as many people as possible towards the paying product right from the beginning.
  •  Make sure that your cash flow can cope with all the people who don’t pay – have a plan to take care of different scenarios here.
  •  Make the free service is really brilliant – just because it’s free doesn’t mean it can be rubbish. People don’t want rubbish, even if it’s free.
  •  Don’t do the same as everyone else. There’s really no reason in the world to invent another Mailchimp, or anything else that someone else is doing really well. People don’t want your copycat product, even it’s free.
  •  Make sure it’s really easy for people to move to a paying level of service, and that there’s a real incentive for them to do this. Otherwise, they’ll just eat up your free service and never give you any money.
  •  Make sure you have a really clear marketing plan to get lots of users.
  •  Get your enthusiastic free users to get their friends to join – their friends may well want to pay you.
  • Don’t make the free service the automatic choice.

Want some help to work this out?

I’ve worked with a few people on how to make money out of freemium based business models, and have seen some of the difficulties here. That’s how I’ve been able to work out these rules of making money with the freemium business model.

If you’d like to check out if your freemium based idea can actually make some money, how long it might take, or what your ratio of free users to paid for subscribers might be, do get in touch for some help and advice with your business.

Photo credit – free hugs by Matthew G from Flickr on a creative commons licence

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Julia Chanteray