Question

Explain how entrepreneurs profit from freemium revenue models. What are some pitfalls to avoid when structuring freemium models, and how can they be avoided?

Answer 1

Freemium is a combination of “free” and “premium”. It has become the dominant business model among internet startups and for application developers. Users get basic features at no cost and can access richer functionality for a subscription fee. This model allows a new venture to scale up and attract a user base without expending resources on costly ad campaigns or sales force. The monthly subscription fees typically charged are proving to be a more sustainable source of revenue than the advertising model prevalent.

But despite its popularity it is still poorly understood. It has inherent challenges. Some are as follows-

1. What should be free? This question is not clear in the minds of owner. Sometimes the free channels for are offering have no value in minds of customers and they are not attracted towards it.

2. Confusing for customers to understand the premium offer completely.

3. Not ready for ongoing innovations

4. Distinction between free and paid offerings is not clear.

For avoiding pitfalls of freemium answer following questions-

1. What should be free?- the main aim of the freemium is to attract new users. If you are not succeeding with that goal because yours free offerings are not compelling enough and you need to provide more or better features free. While the case, if you are generating lots of traffic but few people are taking subscription then it means you are offering more than needed, and you have to cut back then.

2. Do customers fully understand the premium offer?- if customers do not clearly grasp what they would gain by upgrading, you will monetize fewer of them than you might. Distinguish between free and paid offerings must be clear.

3. What is target conversion rate?- company should know and analyze how many free users are converting in paid users and it is good conversion rate or not.

4. Are company prepared for the conversion life cycle?- companies should be well prepared for the conversion life cycle.

5. Are users becoming evangelists?- recognize full value of free users because some of them become subscribers and some draw in new members who become subscribers.

6. Are you committed to going innovation?- view freemium not only as a revenue model but also as a commitment top innovation.

Reference-

Article- “Making Freemium work” by Vineet Kumar, assistant professor of marketing at Harvard Business School, published in Harvard Business Review, May 2014

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