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Is Freemium Marketing Right for Your Business?

DATE PUBLISHED: December 04, 2012

In the consumer marketplace, very few things can beat “free,” which is why the term shows up so much in advertising of all kinds. Products that are genuinely free to own or use can generate enormous buzz among consumers. There have been some clever marketing ploys that have sought to take advantage of this consumer demand, enter "freemium marketing."

A freemium pricing plan allows customers to own or use the basic model of a product without charge. A more robust model with more features is priced higher, of course. Some companies utilize a strict hierarchy of models like Basic, Premium, Expert or Deluxe; while others allow separate features to be purchased individually. For example, Skype offers internet and video calling without charge, but it requires users to pay for the landline calling feature.

The recent introduction of the freemium pricing model has revolutionized several industries, particularly the technical software industry.

Freemium pricing is an excellent way to gain market share but before you embrace this marketing strategy, there are some factors to consider:

  • Assess your costs accurately – It doesn’t help your business to acquire a million new customers if you are losing money on each one. The freemium model is attractive to many industries, especially software, where the production cost is minimal, but there may be other costs associated with your product. With software, the biggest cost is technical support, which will increase with the number of users. Other costs like distribution and customer relations should be estimated and correlated with expected returns. If you lose money for six months, but expect to make up the loss and begin generating profits in the next year, freemium may be an ideal marketing strategy.
  • Explain the pricing model to customers – Many customers may feel resentful that the basic product they received does not contain all of the bells and whistles they expected. They may even believe that your company is attempting a bait-and-switch maneuver. In order to combat any consumer backlash, you and your marketing team should be clear on what the typical consumer expects. The baseline model should possess enough functionality to meet the consumer’s needs without giving away everything. The most successful companies have provided a valuable product or service for free while allowing those who are willing and able to purchase add-ons that are not critical to performance.
  • Third party revenue – Many companies offer their product free to the consumer, but generate profits by attaching ads from third parties. This is common enough that most consumers have developed some acceptance of the practice if it is relatively unobtrusive. It is important to understand your audience when going down this path. Video game enthusiasts are much more inured to this type of advertising than the casual mobile phone user who may resent so much of their viewing space being taken up with ads. The key to appealing to customers is that their use of the product is not significantly inhibited or disrupted. This, of course, must be balanced by the advertiser’s need to get its marketing message to the consumer. These opposing interests must be carefully balanced so as to not inhibit business growth.
(Example of Skype's freemium pricing model.)

The freemium model is here to stay. Many powerful companies like Google and Dropbox have found enormous success with this marketing strategy, and thousands of other companies are following their example. If you want to adopt a similar strategy, be sure to evaluate all of the details of such a strategy before you start giving your products away. The key to the freemium marketing model is a good product or service that people will eventually want to buy.

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