The Freemium Business Model Problems And Cures

Freemium is a model for doing business in which a service or product that is proprietary, that is usually a digital product such as software, web services, or games, is furnished free of charge. A premium is then charged for additional functionality or features.  “Freemium” is a word that is a form of portmanteau neologism. The word combines two components of this model of business: “free” & “premium”.

The freemium model has been increasing in popularity since 1994. At that time, a technology analyst named Esther Dyson, had a vision of a marketplace where the distribution of intellectual property would be very inexpensive. At that time, most creative content providers needed to spend a large amount to reproduce and then deliver additional copies of products.  The internet has just about eliminated these marginal costs, and resulted in a precipitous decline in consumer prices.  However, fixed expenses like employees, buildings, and equipment remain.

The debate is ongoing: How can a business attract numerous customers using free content, and not go broke doing it?

It sounds attractive. Provide content or a version of your software or website that is stripped down, for free.  Avoid having to pay for costly sales representatives and advertising, and quickly gain thousands of customers. The difficulty is “freemium” doesn't function that way. If you approach it with this mindset you will be set up to fail.

Many discussions you will find on the internet related to this topic are limited to speculation and theories and they explain little on what has been successful for real life businesses. So, we will share with you what has worked well in a real business model.

By avoiding the following mistakes, your success won't be guaranteed, but you will have a reduced probability of failure and it will get you going down the right path using the “freemium” model.

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Choosing The Wrong Type Of Market

Most business coaches and entrepreneurs will tell people to concentrate on the right market.  However, rarely do they explain what the right type of market is. Our definition of the right type of market is as follows:

• The market must currently have a customer base who are already paying for a solution to a particular problem.

• There needs to be a gap or under-served segment in the market.

The majority of freemium businesses have problems because the “right market” criteria are not satisfied. Often a niche is chosen where it is tough to charge customers, even if the free version is excellent.  The odds will be much more favourable for you if you assist companies or individuals to make money or you choose a market with already proven customer spending habits.

Reason For Upgrading Is Not Compelling

Many freemium offerings fail because either too much or too little value is offered in the free version. This is a balancing act where you must ensure that everyone gets some value for free, and customers who upgrade to the version that is paid get excellent service.

Simply promising support and service is not likely to be enough to differentiate a product that is free from its paid version. If you are selling an enterprise software product to a large business, customers may be quite willing to pay for service and support but individuals and small businesses usually care more about what they receive for their money rather than service and support.

A better idea is to utilise customer support as a tool for marketing. Provide users with an excellent experience that will exceed their expectations and then have them spread the word.

Using The Wrong Metrics

To be successful with freemium, your metrics need to be well managed.  There is a large amount of data, however, not enough freemium sellers are able to answer the questions that follow:

• What is the total expense associated with creating the free product, or to provide this service to a number of customers for free?

• For what length of time will the free content be able to continue getting new customers?

• How often are updates needed and how much will an update cost?

• What ROI are you expecting from this free offering?

Knowing the answer to these questions and examining your metrics will help you to understand how to best allocate your resources as you move forward.

Not Guiding Potential Customers Through A Sales Funnel

 If your strategy in using freemium only involves a basic call to action, like, “This is our free version ….. get the paid version for even more features!”, then you are likely to have problems. In order to convert prospective clients into paying customers, you need to give them guidance down a path.   For example:

• Design a path that is general purpose that provides free content to interested prospects, but that are not convinced yet that they are in need of your product to rectify this problem.

• Once on this path, inquire if they desire to know more in regard to a particular topic or to rectify a particular problem by utilising a premium feature. Clearly state how this can benefit the customer.

• Provide a free product or services that partially solve the problem and demonstrate the benefits of how the paid version can completely solve their problem. During this sequence, give multiple chances for them to purchase your paid product or service.

• If the customer signs up, provide quick start tutorials and information on making use of the product and provide them with support.

• Subsequent to the purchase, ask the customer about additional issues they need to solve and return to step 3 to provide them with additional free tutorials and tips that partially solve these problems.

• If the prospective customer does not buy any paid features, return to step 1 and keep staying in contact with them and building your relationship with them.

All of the above can be accomplished with strategic emails, snail mail, and telephone calls for existing customers.

Conclusion

Keep in mind. If you have a desire to attract customers, without going broke, adhere to the four principles we have outlined above.  Select the right market. Differentiate between paid and free content in a manner that matters to users. Closely track the appropriate metrics. Create a sales funnel for potential prospects that look promising.