Freemium Business Model for Marketing: What is It and How Does It Work?
What is a Freemium?
What do you get when you cross "free" with "premium?" Freemium! But what does that mean in marketing? The freemium business model is one in which a free or trial version of a product or service is offered to everyone (what a gift!), while premium features, full versions or upgrades are offered at a cost. The freemium business model is common in the sales of software, video games or other Internet-based services and digital products, although it is used offline as well.
The New Puppy Dog Close
The freemium sales model is very similar to the traditional sales closing technique called The Puppy Dog Close (Wikipedia). Here's how it works...
In the bygone era (Oh God, we hope it's bygone!) when puppies were often sold in pet stores, store owners might offer to let the buyer take home the pup for a couple days to see if it would work out. Of course, by the second hour, the family is in love with the puppy and wouldn't dream of bringing it back, especially to an uncertain future at the pet store. Sold!
Freemiums work very similarly, especially for free, limited time trial versions of whatever is offered. Trial basis customers start using the product and if they are thrilled with the free version, they're almost a sold customer for the real thing.
Freemiums are used extensively both online and offline. Here are some examples of how they are used in marketing:
- Free Trial Period. As with the puppy dog close, the customer is given full access or use of a product or service for a limited time. The length of time can vary depending on the product or service offered, or even by the type of market segment (i.e. a trial period for a software product could be offered to college students). Many companies will take a customer's credit card when the free trial is ordered. Then when the free trial period is up, and if the customer has not cancelled and/or returned the order, the credit card will automatically be charged.
- Free Version. With a free version, a scaled down version of the product or service is offered to almost everyone who wants it. But the full and/or upgraded version is only available at a cost. This is commonly used with media and news websites where free customers can get access to a certain number of articles or snippets of larger articles, but must pay to read more.
- Advertising Supported. Many websites and mobile apps are supported by Internet advertising, either through systems such as Google AdSense or through sponsored ad banners and links. This is how these sites and apps can provide these services for free. However, some users are annoyed by the advertising and will pay to have a version that does not have ads.
- Membership Sponsored. Public television is a prime example of a membership sponsored freemium business model. They carry little or no broadcast advertising on their stations, but host membership recruitment drives throughout the year, usually at intervals during a very popular program, offering various incentives or gifts for those who become members. Membership models can also encompass other freemium techniques such as free trials or versions, with upgraded benefits for various membership levels.
- Blogs and Content Marketing. Blogs and other content sites can, in practice, follow a freemium model using any or all of the above strategies: free trial, free version (or access), advertising supported and memberships. These sites may also offer content as a freemium to help sell the company's more expensive products and services.
Why Some Free Trial Periods are Soooooo Long
Did you ever wonder why some free trial periods are so long... sometimes as long as 60 days, 6 months or even a year? Marketers know that the longer customers keep enjoying a product or service, the less likely they are to return or cancel it. Also, they know that people are overwhelmed attention-wise and could totally forget about the expiration date of their free trial. Either way, it could result in a sale by default.
How Google Gets Paid
And did you ever wonder how Google gets paid? One of their primary revenue streams is from Google AdWords, the text ads that appear in search results. When users click on these ads, Google's cash register rings. Their search results freemium is advertising supported.
Pros and Cons of the Freemium Business Model
The freemium business model sounds like a win for customers... and it is. But it can also be a win for marketers because it can:
- Reduce Customer Risk and Resistance. When customers know they have an out if they're not happy, and it will cost them very little to nothing if they want out, they are more likely to give a product or service a try.
- Build a Continuing Income Stream. Especially for continuing services, a free trial that results in a sale can provide continuing income for months, or even years, to come. Even for one-time purchases, a free trial offer can help build a base of interested prospects for other related products and services in the future.
But there are inherent risks in offering freemiums, including:
- More Administrative Costs. Unless the process is automated, keeping track of expiration dates of free trial periods can be quite a job, requiring systems and personnel to monitor.
- Potential for Returns. Especially for physical products, there is a risk of those customers who do actually go through the trial and then want to return the product. What should be done with the returns? This is particularly problematic for products which cannot be resold at full price or even resold at all. Then, not only has the company lost the sale, they have paid to lose it.
- Freeloaders. There are customers who will be content with the free version forever! Yes, they could have upgrade potential if their needs change. Plus, they are now in the customer database for promoting additional products and services going forward. But until they do trade up or buy something, they will represent a bank of nonpaying customers that expect certain standards of service. This can be a severe drain on the company's resources unless this service is monetized through advertising support or other strategies. There is also the potential to rob other income streams of profitability by relying on a "robbing Peter to pay Paul" profit strategy.
Disclaimer: Any examples used are for illustrative purposes only and do not suggest affiliation or endorsement. The author/publisher has used best efforts in preparation of this article. No representations or warranties for its contents, either expressed or implied, are offered or allowed and all parties disclaim any implied warranties of merchantability or fitness for your particular purpose. The advice, strategies and recommendations presented herein may not be suitable for you, your situation or business. Consult with a professional adviser where and when appropriate. The author/publisher shall not be liable for any loss of profit or any other damages, including but not limited to special, incidental, consequential, or other damages. So by reading and using this information, you accept this risk.
© 2014 Heidi Thorne