Freemium

Index

The Freemium Model 2

Business Model 3

Freemium Strategy – Benefits vs Risks 4

Customer’s Perceptions and Behaviour 5

The Advertisement of Free – Communicating Value using Freemium 6

From Paid to Freemium – Mailchimp Example 7

Is Freemium the Future Business Model? 7

LisbonLabs Meeting Experience 7

Appendix (Interview, Examples and Graph) 8

Bibliography 13

THE FREEMIUM MODEL

Freemium is a pricing strategy that can be defined as a mix between “free” and “premium” that has been envisioned by Esther Dyson as early as 1994, but only now is catching the attention of new enterprises. Basically Freemium is a new trend that is innovating the technology industry, typically a digital offering that gives away the core product for free with an optional premium quality option. Examples such as Skype, Dropbox, Mailchimp, LinkedIn and Surveymonkey are successful Freemium applications that generate high profits, even compared to paid applications. (Freemium Business Model, 2014)

In a Freemium model, a basic version of an offering is given away for free, with the hope of eventually persuading a sufficient number of customers to pay for a more advanced version. With this model, companies are creating a sustainable businesses and new ways of capturing value among their customer base. For companies what is the value of a free user? They hope to acquire a large base of users and then convert enough of them into premium ones. The value of the user will be based on the probability of converting him into a paying customer, and on the network effects. Thus, a free user can have greater value than a potential paying costumer. A company that chooses to use the Freemium strategy should do it to gain a strong competitive position and lower the costs of its activities by creating an online user community.

(Reime, 2011)

The value proposition of a free offer is meant to attract new users. It is sustainable over time because eventually people will be force to use or consider an upgrade of the service. The value proposition of a premium offer is meant to convince users to upgrade and pay for the service. Both value propositions need to be very strong, otherwise the business model has to pay the cost of supporting a large base of users that do not translate into sales and revenue. However, some successful Freemium companies have already adopted some strategies to make/save money from the free users, by reducing the marketing costs (Dropbox is an example) or by making money from advertising or data. (Shmilovici, 2011)

We can also state that there are three levels of value: Inherent value (we can use Skype only if the person we are talking to also uses it, and the same with Dropbox); Added value (we do not want to be the only user of LinkedIn, so we derive value from it if other people are using the app also); No value (if people do not care if someone is using it or not). Freemium can be a really powerful strategy regarding acquiring and maintaining customers in the case of the inherent value and added value because we can gain costumers either by necessity or by an invitation mechanism. (Kumar, 2011)

Free is also a strong emotional button that immediately reduces mental barriers for costumer purchase intention. Free makes people feel that they will lose nothing, since most of them ignore time as an investment. Thus, free is an accelerator of adoption and purchase intention. However, it is very hard to convince costumers that already use the product for free to start paying for it.

BUSINESS MODEL

A business model translates the value creation of a company and should be linked with strategy. In the case of the app market, we will discuss three types of models: paid, paymium and freemium, but before more attention will be paid to the free business models.

Concerning business that use free models, Anderson identified four types. The first one is direct cross-subsidies, where products or services are given for free because they are bundled with other high profit products or services. In the end, the customer pays for the cost of the free product, although the price is not clear. The second model is what he has called the three-party market, where the free product is typically paid for by advertisement or other third parties. The costs of free, once again end up with the customer. Freemium comes in third, and has become the dominant business model among internet start-ups and smartphone app developers. The fourth is nonmonetary markets, which can take different forms, but the most important ones are the gift economy, labor exchange, and piracy.

Despite the popularity of the freemium business model, the strategy is still poorly understood. Revenue from the premium service is the main source of revenue in the Freemium model, but other revenue streams are often used to support the operation like advertisement and complementary products and services.

So, one of the key factors in making Freemium work is the structure of the offering. What is it that you offer for free versus what you charge? To address this question, different strategies can be applied. With a true freemium you give a version of the product for free and charge a fee for the other versions. This strategy can be value based, characteristic based, and quantity based. With the value based, the most successful type of freemium strategy, the more a customer uses the product, the more value he will derive from it. With higher switching costs it more likely to convert a free customer to a paying customer. (Regenesys Business School, 2012)

Once users have been acquired there should be features or mechanism that work to retain them and encourage continued use. Leveraging customer loyalty, customization, or network effects, are ways of increasing the switching costs of the users. (Regenesys Business School, 2012)

Another way to design a freemium model is by give one product for free and charge for complementary products (free product for a cross subsidy). The time based free