By Keith Shields, CEO at Designli, a digital product studio that helps entrepreneurs and startup-minded enterprises launch transformative apps and web apps.
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Unfortunately, good ideas don’t keep the lights on. An early question any startup should ask themselves is, “How are we going to monetize?” Within the software world, the freemium monetization strategy has been dominating. Though its popularity is fueled by its flexibility, offering startups a good chance at success, it’s not guaranteed to be the best option for every company.
What Is Freemium?
Freemium is the process where you let a user access your software for free. There is no cost to download the app, sign up for the program or any other upfront payment. Spotify is a common example. Anyone can register for free and start streaming music immediately.
Where the “premium” part of freemium comes into play is in what features are available to unpaid users. For example, if you’re on the free version of Spotify, you’re limited to how many songs you can skip in an hour and have to listen to paid ads. However, the upgraded version removes ad play and offers wider playback controls, supported devices, social features and curated content.
Adding a paid subscription model is a common practice today within the software world. It gives the startup control in offering various features at different price points.
Pros Of Freemium
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If there are free donuts in the office, you’re likely to try one. The same goes for new software and apps on the market. Offering users the chance to use the software for free removes their barrier to entry. Drawing in an initial larger audience can set your startup on an early course for success due to the following benefits.
1. Virality: More people will try a platform when it is free. If your new app costs $5 to download, a lot of traffic will fall off as they’re unsure if your software is worth the cost. Also, free products have been found to encourage more people to share them with others, which in turn introduces new users to your software.
2. Income Reliability: Ad revenue is entirely dependent on how much the third-party companies are willing to spend. What if your biggest advertisers all have a poor quarter and cut their marketing budget by half? Suddenly, your revenue is reduced, though it’s no fault of your own. In contrast, if your main source of income is through regular subscriptions, you can reliably forecast your monthly profit.
3. More Successful Than Free Trials: There is a nuanced difference between a free trial, which has time-limited access (like 30 days), and a freemium plan, where a user can access the software forever without paying. The trend as of late shows users are hesitant to agree to free trials, due to concerns about the ease of being able to successfully cancel the trial once the free period ends. However, freemium encourages users to fully experience the platform and become engrossed, funneling into paying customers.
An important note is that software startups inherently have an easier time adopting the freemium model than startups in other industries due to their low marginal cost to add a new user. For example, an individual signing up to use Slack doesn’t cost the company much more than minimal server access. That being stated, there are certainly times when a software startup should not choose to go the freemium route.
Cons Of Freemium
1. It Can Be A Drain On Resources: The popular SEO service Ahrefs doesn’t offer a free version because the cost in bandwidth and server availability of allowing a large number of free users running intense searches would be too great. If your startup also would suffer from supporting a large base of unpaid users, then the freemium model would not suit your company’s needs.
2. Paywall Problems: Knowing where to appropriately put a paywall can require some finessing. It’s a balancing act in allowing just the right amount of features to users for free to encourage them to upgrade. If this is misjudged, then you can find yourself on the wrong side of conversion numbers.
How To Measure The Success Of Freemium
If customers can quickly and accurately understand your startup’s product, then you’re set up well to try freemium monetization. If your software requires a lot of walkthrough or training, then the cost of onboarding a new free user could outweigh the benefits of freemium.
A good measure is to look at conversions of users who upgrade. If you’re seeing lots of traffic, but no one is upgrading, then you’re likely offering too many valued features for free, so there isn’t the impetus for a user to upgrade. On the other hand, if you are experiencing low traffic, then too many of the app’s features are being hidden within the paywall and people don’t understand the value of signing up and upgrading.
In general, an easy rule to follow is to allow individual users free access but charge for enterprise usage. This is demonstrated across most major SaaS companies. For example, you could personally use Microsoft OneDrive and may never reach the data storage limit, but a business would care enough to pay for expanded storage.
In general, aiming for a ballpark of 5% of users to convert is a good standard. Though this might seem like a low number, think about how freemium allows a large, horizontal user base to access your software. If two million people use your product and 5% of them are paying customers, you’d have 100,000 paid subscriptions.
In Conclusion
Free does not guarantee automatic success. If that was the case, then every owner of the 3.8 million apps in the Play store would find themselves cashing checks from Google. There are multiple factors to consider when offering a free version of your software, like your industry niche, audience and service provided. Simply, freemium models are a popular option to be considered as you think about how you’d like to monetize your startup. The choice ultimately has to be based on what does best for your cash flow and bottom line.
