How The Freemium Model Leads To Rapid Growth

August 18, 2020

As a business owner, you are always searching for the best ways to get new customers at a minimal cost. Unfortunately, the two share an inverse relationship. Many people believe it is impossible to get more customers without paying more money. Espicially as customers are savvier and more skeptical than ever.

Today’s customers would like to know the value they get before deciding on buying an item. Therefore, a lot of relationship building and educating are necessary to convince someone to buy something. You may need a variety of advertising, sales demos, and several other marketing techniques on many occasions.

However, there is a way around this. If you chose to use a freemium model, you could reduce the cost of getting new customers. It consists of shifting your focus from your marketing and sales teams to your customers. 

What is the Freemium Model?

What is the Freemium Model?
Source Bmtoolbox

The Freemium model is a technique where you offer a product to users with limited features. The main goal of doing that is to show the users the value of the product and keep them wanting more. As they try out the free features, they learn how useful the product is to them. This then increases the chances of them wanting to unlock more features.

Many SaaS companies offer some free options, but their main goal is to have the majority of their users pay for a product.

These companies understand that offering a free product is excellent for marketing. It is attractive to new users as the marginal cost would be low.

The companies also go for a freemium model because it creates a network effect, which is what happens when a service or product gains more value as more people start to use it. For instance, a phone isn’t that valuable if you can’t call other people with it. But as soon as everyone you know gets a phone, it becomes useful.

A Freemium Model Is Ideal When The Following Are True:

  • The product has low costs: Do you need a large percentage of people to use the product to stay profitable. If so, maybe the freemium business model isn’t ideal. 
  • Product value increase with user base: Does the value of your service or products increase as more and more people use it? If so, then a freemium model would be beneficial.
  • There are multiple tiers to unlock: Do you only offer one major feature? If so, then a freemium model wouldn’t work because there would be no incentive to upgrade to a paid plan.

Why A Freemium Business Model Leads To Rapid Growth

The reason people use a freemium model is to lower the user acquisition cost for the business. Eliminating the sign-up fee enables you to make it easy for new users to start using the product. 

As they say, “What’s the best advertising strategy? Give it away for free.” Giving away a piece of your product for free helps highlight your product’s value and build trust with the customers.

The freemium model lets your users learn everything about the product and know its value, which is crucial in the lead nurturing process.

When they start seeing success with your product, the free users will usually have exhausted the free account and feel the need to invest in the paid account. 

A freemium business model also creates an environment where the user feels less pressure. New users can explore the product without feeling forced to purchase before they are ready. This way, users can freely join and benefit from the product as they familiarize themselves with it. As potential customers get to know every feature in your product, they are likely to upgrade without any pressure. 

The model also helps users find a solution that matches their needs without taking on any risk. When a customer initially signs up to your product, what they may figure out is that they don’t need all the features you offer. Some may figure out that all they need is a free plan. 

For instance, in Dropbox’s freemium strategy, free users get 2GB of storage space. As users start to see its value and begin uploading more and more data, it becomes their habit of saving their files there and sharing them. When a user reaches the limit, it would be hard to look for another new solution, and they end up subscribing for more storage.

What Companies Have Used the Freemium Model?

Now that you know more about the freemium model and how it helps achieve rapid growth, here are examples of companies that implement the freemium model in their product:

1. How Spotify Used The Freemium Model To Achieve Rapid Growth

Spotify using the freemium model to achieve rapid growth

Spotify lets customers stream any song of their choice from a computer or mobile phone. This app also allows users to create and share their playlist, save songs, and discover top music. To keep its customers, Spotify offers a freemium model. 

Limited Features

The Spotify free plan allows its users to stream curated radio stations (but only on shuffle play), playlist, and albums. However, they encounter ads in between their playlist. They can’t skip these ads to get to a specific song.

On the other hand, the premium plan offers a lot of features such as an offline playlist, individual song selection, and Spotify Connect for connecting to other devices.

The feature limitations used are substantial. Users with a free plan can still enjoy the product’s value. But the inability to choose a specific song on the playlist reminds the users of everything they are missing.

Limited Usage

Users with a free plan can enjoy up to four-song skips per hour, which makes them wish to upgrade so that they can skip as many songs as they’d like.

Adding this limitation to the fact that users with a free plan can only play music on a shuffle mode leads to a powerful incentive for picky music lovers. 

The premium plan doesn’t contain any ads, which is another incentive enough for many people.

The overall approach applied by Spotify is simple yet effective. Users have the opportunity to taste the product’s value through its limited features. However, the limitations build up enough friction that users that want more are likely to pay for premium.

2. How Zapier Used The Freemium Model To Achieve Rapid Growth

How Zapier Used The Freemium Model To Achieve Rapid Growth

Being a B2B product, Zapier can handle many complicated business problems at once. It allows businesses to connect apps, such as Gmail, Slack, and Mailchimp, to automate repetitive tasks.

Zapier’s plans can get to be as expensive as $750 a month. So, to help convince potential customers to invest in it, they offer a freemium model with many different packages.

Limited Features

When someone joins Zapier, the company offers you no more than five Zaps (an automated task you want to run over and over again). It also only lets you have the first trigger and subsequent task. 

The more premium plans allow you to access better features that come with multi-step Zaps. The bigger your organization, the more of these features you will need.

Zapier also offers a lot of app integrations that can only be available to premium users. These tools are critical for any business, and they include PayPal, Magento, and Facebook ads platform, another incentive to upgrade. 

The chances are that most of their customers need more than just 5 zaps, and they will have no choice but to upgrade their plan.

Limited Usage

Zapier places restrictions on the amount of usage as well. They do so by:

  • The number of task completions and Zaps: When there is data transfer between two applications, tasks start to occur. Free users have up to 100 monthly task completions spread across five zaps. From there, users can upgrade and get anywhere from 20 Zaps 1000 monthly tasks or go for unlimited Zaps and 50,00 tasks.
  • Syncing interval: Zapier keeps checking for new data at regular intervals. The syncing occurs every 15 minutes but reduces in time as you upgrade your plans.
  • The number of users per account is limited: The highest-paid and second-highest paid plan allow for unlimited users while the other plans have a limit.

Limitations like these are incredibly crucial for getting more premium users. It’s all about showing the user what the product offers and making them want more. Zapier is a perfect example of how expensive and complicated products can apply a comprehensive and targeted approach to generate rapid growth.

3. How TuneIn Used The Freemium Model To Achieve Rapid Growth

TuneIn using the freemium model to achieve rapid growth
Source Apple

TuneIn lets users stream live event broadcasts, podcasts, and radio on mobile phones, tablets, computers, and TV. They, too, implemented a freemium business model for their product.

Limited Features

The main difference between a TuneIn free and premium plan is that free users cannot listen to live sports games. It’s an excellent way to convince free users to upgrade. 

If a person loves to listen to podcasts, radio, sports games, and music, the chances are that they might like live access to their favorite tv shows and sports teams.

Limited Usage

Very similar to Spotify, TuneIn uses usage limits by making users listen to commercials and view display ads between broadcasts, episodes, or songs.

4. How Evernote Used The Freemium Model To Achieve Rapid Growth

How Evernote Used The Freemium Model To Achieve Rapid Growth

Evernote lets users take notes and organize them in different notebooks across various devices.

Limited Features

Evernote offers limited features for those who are just looking for a virtual notebook. This works for many people. However, there are limitations. In the Evernote Basic plan (the free plan), users have limited ways of contacting customer support. Their only option is doing so through online forums. They also don’t have access to collaborative notebooks and the ability to use it offline.

Limited Usage

With a basic plan, the number of devices that users can sync notes is only two. Premium plans allow users to sync across unlimited devices.

As the world keeps becoming more connected, the difference can significantly affect someone’s workflow. The Evernote Basic plan also has limitations on the maximum note’s size and the maximum number of monthly uploads. Similar to Dropbox, if you consistently use the platform, you will inevitability need to upgrade.

Key Takeaways

The freemium model can increase your product’s acquisition potential and quickly grow your business while keeping acquisition costs minimal. Since many users share freemium products with friends, you get free word of mouth advertising. As more people use your freemium product, you will get more leads. Some of these leads may not convert, but it is an effective way to increase your reach.

The reason why this model is so effective is that your main focus is on the customers. Make sure that you understand how your product offers them the value they need. The best freemium models enable users to see how your product can solve their problems while keeping them wishing for more. This is the best way to convert free users to paying customers without paying expensive advertising costs.

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