How Can You Make the Freemium Business Model Work? 4 Questions to Ask

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Clint Fontanella
Clint Fontanella



Congratulations -- you've perfected your billion dollar idea. Hours upon hours of diligent hard work and overcoming countless roadblocks has finally come to fruition, and now, your brilliant vision has come to life. So we just sit back and watch the money roll in, right? If only it were that simple.

freemium business model

Creating a groundbreaking product or service is an intensive journey all its own, but once your prototype is ready for launch, you have a new challenge of finding customers to share it with. While that may sound simple since your product is clearly awesome and a must-have for all consumers, the reality is that you may find it surprisingly difficult to build a steady customer base.

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Many people are resistant to change and may be hesitant to make a financial investment in a product that has not yet been tested or criticized by the masses. With consumer reviews now readily available for nearly all products and services, customers are more willing to trust other users who have experience your offer and have chosen to give unbiased feedback.

This newfound power that consumers now wield makes those online reviews a significant factor in building credibility with your target audience. But without a starting consumer base to contribute public feedback, how do you kick start that positive buzz around your company?

Introducing: the freemium model.

If you haven't googled it by now, the freemium model is a business approach in which a company creates a desirable product or service and then gives away all or part of that product or service for free. The hope behind this sacrifice being that the customer begins to rely on your offering and is incentivized to make additional purchases from you in the future.

One of the most notable examples of this is the dating app Tinder, where users can use the app for free but also have the option to pay for additional benefits to increase their chances of getting a match. The freemium model is rooted in the idea that if you give your customers a taste of your product or service for free, they will come back to your business willing to pay for more.

So freemium is simple right? Create something awesome, give some of it away for free, wait until people turn out their pockets for more? Not quite. Just like any other business approach, there is no guaranteed formula for success and if you search enough, you can find plenty of companies who have failed using this model. In order to put your business in the best position to succeed while using this approach, here are four important questions to keep in mind when getting started executing your freemium business plan.

4 Questions Ask to Make Your Freemium Business Model Work

1. Does it attract new users

The first question you will need to address before launching your freemium business is whether or not your product can generate buzz with your target audience.

It will need to build a strong following of users simply by giving a piece of it away at no charge to the consumer. But just because you will be offering the product for free does not mean that it will fly off the shelves and become a necessity. Marketing and promotional efforts will always help, but whatever it is that you are offering, it will have to solve a problem or provide a long-term advantage to your customers. These users then share their positive feedback which helps to generate new visitors to your business.

One great example of this is the social media company, LinkedIn. LinkedIn offers a free software in which users can easily register and connect with other users to share resumes and potentially grow their professional careers. LinkedIn has been able to rapidly grow its number of users to nearly 500 million by offering consumers a free career networking service. They were able to build this strong following by not only solving a problem that everyone encounters, but by doing it at no charge for the user. This created an awesome opportunity for their customers to experience the benefits of the company without any significant associated risks.

2. Does it inspire or motivate customers to convert?

Once you have a solid group of users benefiting and sharing your product, the next step is to convert these users into customers.

To do that, you need to create an element of urgency with your offer that incentivizes users to invest in your product. Typically this would be an update or premium membership that offers additional value to the customer that they cannot supplement with just the free offer. These add-ons are alluring enough to offset the financial investment involved and thus create a "value gap" between the free and premium offer. Feature limitations, usage quotas, and limited support are some examples of how you can create this difference in value and start converting free users into customers.

But how do you know if you are giving away too much, or maybe not enough? The best way to determine this is to look at your conversion rate from free user to customer and see if that rate is low, slow, or even has not been calculated yet. If you are seeing that your conversion rate is lower or is not converting at the rate you had hoped for, the first place to look is at your free plan.

Analyze your product usage reports to see which aspects of your product or service your customers are taking advantage of most. If there is significantly high usage rates around one specific area of your offering then maybe you are in fact giving away too much value and need to refocus your efforts on driving incentive around that one element. If you are not seeing much usage at all, then you will need to reassess how much you are giving away if you can add more to that offering. A good place to start is by analyzing your competitors to see what they are offering to their customers and where you can offer more while remaining at the same price.

Another area to look at is your actual conversion process and if it makes sense to even include a conversion process. The freemium model is not an inflexible or static concept and there are tons of variations that can be successful while still offering your product for free. One example of this is Facebook, where the product is still free for all users but has recently incorporated in-app advertisements as a revenue stream to monetize the site.

You could even go as far to consider the Twitter route and sell the company as a whole to a larger business who would want your product as an advantage over their competitors. When working with the freemium model, it is import to keep your mind open about potential revenue streams as the financial value of your offering may come from a source outside of just your expected target audience.

3. Can you nurture the customer?

Creating incentive for users to upgrade is a challenge all its own, but how do you communicate the value of these updates? Whether it is a free or paid user you will need to nurture these customers so that they are confident enough to make the decision to purchase your product.

Nurturing differs from incentive because incentive is the power of generating value whereas nurturing would be the steps you take to communicate that value to your audience. In the freemium model you will most likely focus the majority of these nurturing efforts on new users to motivate them to make their first financial investment in your company.

The best way to approach this communication is through a focus on customer success and seeking out timely opportunities in the buyer's journey where your premium offers would be most advantageous.

One example of this is providing an onboarding service that directly introduces the user to your company and demonstrates to them how to best utilize your offering. This immediately begins an open dialogue with the customer that is focused on their needs and how you can provide unique support. If the customer hits a roadblock that a premium offer can potentially supplement, the line of communication has already been open for the user to reach out.

Other outlets such as constantly pushing update banners and reminders, providing a dedicated customer support service, and creating an active community of promoters are additional ways to help build a trusting relationship in which your customers feel comfortable to reach out and learn more about your premium offers. Having that communication in place, as well as focusing on freemium customer success will generate a sense of trust with your consumers who will be more willing to hear out your offers. Ideally, this nurturing process should create a natural progression from free to paid users by demonstrating to the customer a strong correlation between your company and their success.

4. How do you track success?

Now for the question you are probably most curious about: How do you know if the freemium model is working? While the rest of these questions are important all their own, they won't mean anything unless you can measure the success of the efforts you're putting forward.

Depending on your revenue stream, your measures of success may vary in terms of the specific metrics you are looking to assess, but overall you can look at three main categories: Product and service success, categorization of users, conversion rate from free to paid user.

For product or service success, you can look through the product usage data to see which aspects of your offering are most used, which parts should be offered at the free vs. paid levels, and which parts could be removed altogether to reduce distraction from the conversion process. This will ensure that you're constantly updating your offer and making it as attractive as possible to the customer.

As for segmenting users, you'll want to be able to sort and bucket your consumers by their likeliness to convert. Try grouping your user base into categories like "likely to convert" or "lifetime free user" to get a better idea of which conversion demographic primarily represents your user base. This categorization will help you track users who are most optimal for conversion so that you can focus your sales and marketing efforts around these qualified leads.

Lastly, you will need a way to measure this process of conversion from a non-user, to free user, and finally, to a paid user. It's imperative to be able to outline an individual customer's interaction with your business beginning with their first point of contact and ending with the most recent purchase decision. This will give you a better understanding of the customer lifecycle, as well as help you identify major pain points and trends that need to be focused on throughout the entire customer experience.

To learn more, read about how to provide excellent SaaS customer support next.

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Topics: SaaS

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