The freemium business model is one that has crept into the public consciousness in recent years. Yet, there has been some confusion over exactly what it entails. For those who might be fuzzy on the idea, let’s fill in details on what it is and what it isn’t.

From a big picture perspective, freemium means that you give away some of your product and require payment for the rest. There are plenty of examples of successful implementation of the freemium business model. We’ll look at them in short order. Beyond that, perhaps the more important question is whether or not it can work for you.

What Is the Freemium Business Model?

Giving away a product or service as a loss leader is not unusual as a way to gain customers. Where freemium differs is that a company practicing this method gives away most of its product. Therefore, it makes money only through the small minority of customers who pay for:

  • Additional features;
  • Better customer service access;
  • Bonus content.

The differentiating factor between freemium and traditional approaches is that a customer who accesses the free product never has to upgrade to a pay option. Obviously, the business owner hopes a customer will eventually decide to pay. But this is not a requirement.

Is Your Business a Good Freemium Business Model Candidate?

Evernote founder and CEO Phil Libin points to two factors that might make your business a good fit with a freemium strategy. The first is that it should be conducive to getting a whole lot of users. In other words, niche markets might not work with this strategy. Ultimately, it’s a numbers game.

  • You might only plan to have 5 percent of all users pay. So, you’re going to need a ton of freeloaders to generate any appreciable profit.
  • Secondly, Libin says, you need to have a product or service that encourages users to stick around for a long time.

Does Your Product’s Value Increase Over Time?

The secret to freemium success is that you have a product that becomes more valuable to a customer the longer they use it. Think of the freemium success stories we have so far: Evernote, Mailchimp, Dropbox, Survey Monkey, Skype, and LinkedIn to name a few. What factor does this diverse range of businesses have in common? Most notably it’s that they give away a product/service that a customer values and will continue to use long-term whether or not they ever pay for an upgrade.

Let’s look at Dropbox as an example. Online cloud storage. What could be simpler or more boring? The first thing in its favor is it’s dead simple to use. New users open an account and receive a certain amount of free storage space. Most never run out of space. But some eventually fill it up. Then what happens? They don’t take all their files and go searching for another free service. Instead, they pay for extra space. Remember that numbers game Libin spoke of? Dropbox gives a free account to anyone with the scant mental resources necessary to navigate to the website and fill out a form. ANYONE who ventures online and ever has a file to store is a potential customer.

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The core advantage of the freemium business model is that clients already know your product when they pay for it. So, as long as the premium version is as expected, you will have happy and loyal clients.

4 Steps to Implement a High-Quality Freemium Business Model

1. Make the Core Product Exceptional

If you go into this with the idea you’re going to throw something together to get folks in the door, you’ve missed the point. You should put as much work into conceiving and building the free product as anything you’ve ever charged for.

Back to the numbers game idea. You need people to sign up for accounts, and they won’t use a junk product. Invest in your core product. Do this because it is much more important than whatever you ultimately decide to charge for.

2. Don’t Change Your Mind

If there is even a vapor of doubt in your mind that you want to embrace the freemium business model, don’t do it! You’re better off going with a pay upfront strategy right away. To suddenly make what has heretofore been a free product one that a customer has to pay for will lose you a lot of people right off the bat.

The brand damage could be severe and possibly permanent. It’s better to never offer anything free than to only do so for a short while.

3. Don’t Spring the Premium Stuff on Them

Marketing the idea you have a premium product should be a smooth process. Dropbox is good example of how this works. A new user is told early and often that a free account includes 2 GB of storage. Never is it hidden that they can pay for more if they need it.

From the start, customers realize that there is a finite limit to what they get at no charge. At the same time, they are gently reminded along the way that the land of premium is easily attainable if/when they need it.

4. Never Stop Innovating

Once you have your freemium model fully implemented, it’s time to sit back and rest, right? Actually, no. It’s a mistake to see the free product as merely a way to lure customers in. The longer you are in business, the harder it is to acquire more customers.

You’re going to have to continually improve the free product while also increasing the value of your premium offering.

From Free to Successful

No business owner in their right mind would automatically embrace a freemium model. Nevertheless, it’s been successful enough times that it might be worth your consideration. The preceding information can provide guidance for additional research and pondering.

Those readers who have had success or failure with the freemium idea are invited to leave their kudos or dire warnings below. It would be of great value to our readers to hear from real world entrepreneurs who don’t yet have a household name like Dropbox to flaunt.

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