Pros and Cons of the Freemium Business Model

Over the past decade, the freemium model has become widely used across a number of digital apps, Internet start-ups, and SaaS. “Freemium” (a combination of the words “free” and “premium”) refers to a business model that mixes free services or software with paid upgrades. Unlike a free trial, the time duration the user can utilize the free services or software is unlimited. Several factors contribute to the appeal, but the great advantage of this model is that it can quickly drive leads, conversion, and revenue without intermediaries.

Plenty of developers and startups like the idea of the freemium model and assume it will work for them since it has worked so well for others (like Evernote, MailChimp, and Dropbox). But, freemium is not a perfect business model for every business.

Take a look at the pros and cons of the freemium model to determine if it is a viable option for your business.

PROS

• Potential to unlock viral growth for your product
• Opportunity to upsell & monetize user base
• Increases audience size with no barriers to entry & no risks
• Perfect opportunity for free beta testing of new products & features
• Advertising can be a viable revenue stream

CONS

• Low free user to paid customer conversions rates – meaning a high percentage of free users never convert
• Incremental overhead & performance problems – support for freemium users can potentially be a large expense
• Finding the right balance between your freemium and premium offerings – customers need to see enough value in your product to persuade an upgrade conversion at some point
• Higher churn rate – users can easily adopt a throwaway mentality. This means users intend to use a product only for a short time, and then “throw away”
• Lowered Value – freemium users are not financially invested in using your product

The freemium business model is not a good fit for every business. For some, freemium is a costly trap. But, depending on how it’s designed and implemented, freemium can actually unlock sustainable growth for some businesses. Your success will ultimately come down to how well you understand the value of your product and strike the right balance between paid and free features.

Are you considering whether or not a freemium model is right for your business? We can help with that decision. Our system will allow you to set up free products for distribution, without any costs for processing the orders (this is very useful for upgrades and beta testing). If you would like to learn more about our services or if you have questions, please feel free to contact our vendor services via email at vendors@bmtmicro.com or visit our website at www.bmtmicro.com.