Freemium business models - what they are and pros and cons

Keep reading for our introductory guide to the concept of a freemium business model and its pros and cons.

Hannah Dawson

The concept of a freemium business model has become increasingly popular with business owners. Freemium models can enable a company to grow and build its customer base without a traditional sales team. Keep reading for our guide to freemium business models and find out whether they are right for you.

Freemium business models - explained

The term freemium stands for free and premium. A freemium business model comprises of two tiers: a free product and a premium product for paying customers. The latter tends to have a larger array of features for premium users, while the free version will have limited basic functionality. A large number of famous SaaS companies use a freemium business model with a free and premium version (eg Dropbox, Skype, or Evernote).

Skype logo
A freemium business model comprises of two tiers: a free product and a premium product for paying customers.

Advantages and disadvantages of a freemium model

A freemium model comes with a number of benefits - it can enable quick growth because the hurdle for a free user to join is very low. Also, it is much easier for a potential customer considering to subscribe to make the decision if the basic features do not come with a subscription fee.

Of course, a freemium subscription model with a large number of free customers can struggle to create as much revenue as other business models. Freemium models are also prone to a higher churn rate, as clients can adapt a “throwaway” mentality when they’re not paying for a product.

Man using smartphone
A freemium model comes with a number of benefits - it can enable quick growth because the hurdle for a free user to join is very low.

Changing to a freemium business model

If you are thinking about adopting a freemium model, there is a couple of things to consider. First, running your business should not involve a large cost, as you will need to support the free users of your limited features. Second, look at your potential market. Most freemium businesses need a fairly large market to succeed. You then need to establish a migration strategy for users to upgrade to premium services and become paying customers. Should you succeed in attracting a large number of users, you need to ensure your business's infrastructure is prepared for this. And last but not least, you could consider having separate offers for eg corporate and private users. This provides even more opportunities to progress people or businesses to premium features.

Men on screen
If you are thinking about adopting a freemium model, there is a couple of things to consider.

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