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Freemium Pricing

Disciplines > Marketing > Pricing > Freemium Pricing

Description | Example | Discussion | See also

Description

'Freemium' pricing means making your basic product free, then offering a paid-for premium version.

Ways to go freemium include:

• Have separate free and premium products.
• Have extra features in the free product that are unlocked with payment.
• Make the whole product free but add desirable services that are paid for.
• Make the freemium product faster and more accessible.
• Have a basic free product and add layers of increasing-cost premium value, such as 'extra' and 'business'.

Make sure it is very easy to acquire, learn and use the product. Also make sure you get good information about each person who gets the product, for example through an online registration process. Then use this information for additional marketing and upselling to the premium edition.

Example

A street restaurant offers a small starter free. People can sit down and have a light bite for nothing. If they stay for a main course, they pay for this.

An online investment service offers to manage the first 10K of investment money free. This attracts small investors and gets the service noticed by larger investors.

Discussion

Freemium can be more than just a pricing strategy. In particular when you want to grow a business quickly and have the financial resources, you can make the whole product free. This can be a powerful growth strategy and has been used with great success in software and online businesses.

Full products can take a long time to develop. Freemium can be a useful way to start a company, giving away the basic product to gain media and customer attention before the main full product is completed. Also make sure you have sufficient funds to cover costs until you become profitable.

This approach is often a numbers game. Making some things free means that many customers will only take advantage of the free component. A typical ratio is that only 1% (or even less) will step up to the premium paid elements, although what is an acceptable ratio may vary greatly. This means you may need millions of customers to make the strategy worthwhile. If you are working at such low ratios then you may also need the free element to be very cheap to produce. This is typical of software, where there is no physical item that has an incremental manufacturing cost. Also make sure your overall business costs are low until premium purchases can cover expansion.

Freemium models work best when the basic product creates delight and loyalty. Work hard to get customers to love you and want you to succeed. Show you are on their side. Freemium is hence a highly marketing-driven strategy.

When you have multiple premium levels, a high-cost top level can make the lower premium levels seem to be good value, hence encouraging customers who are currently free to take the first step into the paid-for world. When each step they take is small, it is often much easier for them to regularly step up a little more.

Do keep a close eye on how customers behave, both new and old, for example in the extent to which they use the product and whether they seem likely to be ready for the premium service. If you market to them at the right time when they are ready, they are far more likely to buy.

Do also keep developing the product, including the free version. Markets do not stand still and if you are doing well you can be sure that others will want to come in and steal a part of your hard-won customer base.

A danger with freemium is that because it is free, customers may devalue it, even as they enjoy its value. Like air or water, they assume it is a right and would never think of paying for it, or even some kind of enhanced upgrade. This points to care needed in providing strong added value in the paid-for part. A related decision is in what to make free and what to make paid-for. The dilemma here is in keeping enough free to attract new customers to the basic product while also having enough valuable add-on for

See also

Free