How To Make Freemium Work

As digital start-ups struggle with challenge of how to generate revenue, many of them turn to the ‘freemium’ business model. An amalgam of the words free and premium, freemium as the name suggests, means that customers are offered some goods for free while those with greater functionality or features require payment usually in the form of a monthly subscription fee. The model was initially popular in the software industry but has since spread widely to include music, publishing, newspapers, telcos, education and the vast majority of apps.

 

But making freemium work is not as easy as it sounds and requires some sound decision making. In particular, there is the challenge of identifying what should be given away for free and balancing that with what should be charged for and how much? Give too much away for free and upgrade rates will be low, give too little away and initial user registrations will be low. Remember freemium is not the same as a free trial period, it is always free. What you are looking for is a compelling free offer to generate as many user registrations as possible. Paradoxically, with this model your traffic rates are more important than your conversions. It is far better to upsell just 5% of two million subscribers than 50% of 100,000.

The second issue then is once they sign up, give them a compelling reason to upgrade. A difference in approach can clearly be seen among two initial freemium pioneers, Dropbox and LinkedIn, both of whom were reported to have 300 million registered users in May of this year. With Dropbox, users get 2 GB of storage for free with the option to upgrade to Dropbox Pro giving 1,000 GB of space for a subscription fee of $9.99/month. Regular Dropbox users will hit their storage limit fairly quickly and the benefits of the subscription option are very clear. Dropbox generated revenues of $200 million in 2013. In contrast, the reasons for upgrading with LinkedIn are not as obvious. Four upgrade options are available ranging from €21.99/month to €89.95/month for business users but subscription income of $88 million in 2013 still represents only 20 per cent of LinkedIn’s overall revenues. Customers need to see clear value before they will subscribe to paid services.

Freemium is very much here to stay. And remember even if you are not using this model today chances are you are competing with it!

Related Articles

Shutterstock

Groupon

How To Make Money Online

One of the biggest challenges facing the ever growing digital business sector is how to generate a consistent revenue and profit stream. A good illustration of just how to do it is provided by the photo image website Shutterstock which recently again set a new high for quarterly earnings. It is a company that demonstrates how a well thought out business model can help to generate early and on-going profitability.

Shutterstock was founded in 2003 by Jon Oringer who had been frustrated in his attempts to find good quality images for marketing materials like brochures and blogs. His first investment was in a $800 Canon Rebel camera with which he took over 30,000 photos and uploaded them onto his website. Customers could either purchase photos individually or pay a subscription fee to download up to 25 images per day. This option was then expanded to allow unlimited downloads. The company’s primary customers are businesses operating in creative industries that Oringer reached through search advertising and direct sales. Shutterstock’s business model meant that, unlike many start-ups, it got paid first making it instantly profitable and it has generated revenue growth in excess of 30 per cent per year since its formation. In 2011 the company reported gross profits of US$105m on sales of US$169m and went public in 2012 making its founder a billionaire. Its stock currently trades at a price-to-earnings ratio significantly ahead of stellar names like Apple and Google .

On the supply side, the opportunity was opened to any photographer anywhere to submit photos and they were paid from 25 cents to US$120 if these were downloaded. But its decision to provide feedback to photographers on what was and was not selling was innovative and helped it to generate a supply for photos that customers were looking for. By 2014, 55,000 photographers around the world were uploading 30,000 images per day giving the company a total database of over 30 million images. Since 2006, the company has included video images in its library and in 2014 it decided to expand its business with the launch of Shutterstock Music, giving musicians everywhere the opportunity to make money from the music that they create.

Related Articles

Groupon