MaRS Library The freemium revenue model
With the freemium revenue model, the most basic service level of a product is free for all, while more sophisticated service levels require users to pay tiered subscription fees based on usage levels.
This type of revenue model is popular among Web 2.0 service companies as a means of simultaneously getting market penetration and building revenues. Some examples of successful freemium companies include Flickr, YouSendIt, Evernote, 37signals and PDF Online. Skype could also be considered a freemium company.
These web-based companies generally structure their offering with two or more levels of service. They generate revenue by converting free users to paying customers.
The freemium model suits web-based service companies with broad markets that offer ongoing value to their customers.
Compatible products or services
File transfers, file conversions, online media storage and VoIP applications are all offerings that work well with the freemium revenue model. A common feature of most freemium offerings is that they involve a process that can be automated online.
Most freemium companies service a large group of non-paying customers, plus a minority of customers who pay for premium service. Both types of customers will interact with the company online. Registration, payment and service delivery are generally automated.
Marketing considerations for the freemium revenue model
Freemium companies must deliver an excellent customer experience. The service needs to be user-friendly, deliver rapid results and create ongoing value for its customers. Upgrade options have to offer rational service enhancements and premium pricing must be equivalent to the additional value they offer to the user.
Operational implications of freemium
Successful freemium companies focus on establishing a large user base while ensuring that they service free users cost-effectively.
Strategic and financial implications
Because freemium companies rely on their web interface to generate an excellent user experience, they must develop a high-quality, highly functioning online property that has the embedded technical capacity to deliver their offering. Financing the development of sophisticated websites such as these requires significant up-front capital. Metrics used to manage and evaluate freemium companies include number of users, customer acquisition cost, and conversion (to premium) rate.
In a slightly different context, the premium service level of a freemium offering is identical in most ways to the software-as-a-service (SaaS)/subscriber revenue model.
Benefits and costs of the freemium model
While the freemium model uses automated online service delivery to keep operation costs low, the infrastructure required to serve a large user base can be substantial. Storage and bandwidth can become expensive as usage increases. For instance, as of March 2009, Facebook had more than 10,000 dedicated servers, allowing users to upload 850,000 pictures each month.
- Value proposition and Blank’s customer discovery method—Phase 2: Test your hypotheses.
- Creating a mission statement for your startup: When to do it and what to know.
- Defining your competitive edge: Product positioning in your target market.
- Skype’s rapid market leadership over Vonage: Same technology, different rates of adoption.
- Exit strategy planning: IPOs, mergers and acquisitions and licensing.