Freemium – how to acquire new customers? The acquisition model used by Slack, Spotify, and many others | Business strategies #15

What is freemium?

Simply put, freemium is about offering potential customers a free version of a product or service. But importantly, “free” doesn’t mean weak or faulty, and certainly not any version. A free version of a product or service is a basic version. It has two goals. Firstly, to attract as wide a group of users as possible, and secondly, to whet their appetite for more – for a paid version.

No wonder, then, that so many companies decide to acquire customers in the freemium model. It works well in both the digital and analog world, although we more often associate it with the former. And unnecessarily so. Free perfume samples, a small packet of laundry detergent, or trays of cheeses and meats in a hypermarket are a few examples of using the freemium model in the physical world.

Moreover, this model works in both the B2B and B2C segments. Let’s see how popular technology companies, which we use at home and at work, utilize it. You probably know all of these companies. All of them are highly successful.

Giants and freemium. Examples

• iFirma (B2B). The basic version of the software from iFirma is used for independent invoicing, offering invoice templates and a mobile application. However, if you need something more, such as accounting assistance, you can opt for one of the two higher-tier packages. In one of them, you will receive support from a dedicated accountant.
• Firmbee (B2B). Firmbee is a project and team management tool available in three pricing tiers, including a free option. What sets it apart from the paid packages is, among other things, the number of supported projects and team members who can collaborate on a given project. Nevertheless, the basic version of Firmbee provides a comprehensive overview of what users can expect from the paid version of the software.
• Slack (B2B). Slack is a business communicator primarily used by remote teams for exchanging information. The free version of Slack allows access to its core features, namely the communicator, and it works well, just like in the paid version. However, the free Slack does not allow browsing conversation archives. If you need such capability, well, you have to pay. And companies do pay.
• Spotify (B2C). The popular music streaming platform offers both free and paid options. With the free version, you can listen to music with ads and can’t choose specific songs. But with the paid version, you get rid of ads and can pick any songs you want.
• Zoom (B2B i B2C). It offers a video conferencing platform. In the free version of the product, you can, for example, participate in meetings lasting up to forty minutes. However, in the paid version, you gain additional options, such as longer meeting times, a greater number of participants, and higher-quality recordings.
• Dropbox (B2B i B2C). Dropbox is a platform for storing and sharing files. As you might easily guess, the free version of this tool offers limited disk space, where you can store files with a total weight of 5GB. However, the paid version provides greater capacity, starting from 2TB, as well as the ability to share data, meaning sharing them with friends or members of your team, because Dropbox operates in both segments – B2B and B2C.
• Trello (B2B i B2C). Trello is a project and task management tool. Its free version allows for creating ten Kanban boards and getting acquainted with the software. However, if we want to use more advanced features useful for teams, such as progress tracking and creating more complex task lists, just like with any other tool described here, we have to pay.

Freemium – why is it a good model?

Why do startups often opt for freemium? The answer is quite clear. This model facilitates acquiring potential customers. It’s easier to convince users to sign up for free and test the software than to immediately ask them to reach for their wallets and pay for software they’re not familiar with yet.

So in one fell swoop, freemium allows you to:

• Achieve economies of scale. Freemium fosters the growth of the number of users. In the early stages of building a business, it is a confirmation of business hypotheses, and in the later stages a springboard to recurring revenue.
• Gain trust. Before purchasing, the customer can test the product or service.
• Get customers used to it. Once a customer starts using a particular product, it may be difficult for them to give it up later. So, it’s about loyalty.
• Take advantage of recommendations. Satisfied users of the free version of the product recommend it to their friends, and thus the manufacturer can benefit from inexpensive marketing.

Of course, the freemium model isn’t perfect in every aspect. It also has many drawbacks, with high infrastructure maintenance costs at the forefront. Free accounts are a cost – borne by the company. As a result, the company either has to generate revenue to sustain this business, or obtain capital from external sources, such as venture capital funds, to continue scaling operations and eventually monetize them.

Another challenge lies in convincing non-paying users to switch to the paid version of the product. For some, the free features may be so good that they’ll never opt for the paid option. On the other hand, freemium must offer enough value for free to make registration compelling. Therefore, the challenge in this customer acquisition model is striking a balance of value—how much to give away for free and what to reserve for paying customers.

Freemium – is it for me?

How can you tell if freemium is a good customer acquisition model for your business? According to Canadian entrepreneur, investor, and CEO of SaaS Academy, Dan Martell, when seeking an answer to this question, you should consider the four factors described below.

Factor #1. You are creating a product that has the potential to reach the masses

According to Martell, it doesn’t make sense to go freemium if you’re in a niche. In his opinion, this model works well in large markets where you can count potential users and customers in the millions. Why is that? We can only guess.

You can simply monetize niches right away because they’re often too small to invest capital in maintaining free accounts, and furthermore, niche users are sometimes neglected by the market, so they’re “starving” for a particular product.

In addition, freemium is meant to help achieve economies of scale. If you make a mobile app for learning several languages – for example, English, German, Spanish and Mandarin – you’ll have that chance. But you won’t get the same effect if you enter the market with an app for learning only Kashubian.

Factor #2. Freemium and free samples give you a competitive advantage

If most players in the market are charging for access to all versions of their products or services, you can go in a different direction and expand your product portfolio so that it has a chance of appealing to less affluent customers or customers with fewer needs. After all, not everyone needs a premium package.

According to Dan Martell, this is exactly what the MailChimp team did. When they entered the market, they came in with an offer that allowed users to use the email marketing platform for free until they reached two thousand email addresses. Martell mentions that at the time, this was much more than what other providers of such services offered. This practice is now essentially the industry standard—not only in the marketing industry but also in others.

Factor #3. A simple and understandable value proposition

If potential customers can immediately see the benefits of your product and can purchase it without having to go through a complex buying process, then freemium may be an effective user acquisition model for you.

On the other hand, if the purchasing process in your company is complicated — and you know it because it requires involvement from the sales team first and then the customer service department— according to the CEO of SaaS Academy, in such a situation, it’s worth considering other models of acquiring and monetizing potential customers.

Factor #4. Keeping non-paying users is cheap

The last factor on Dan Martell’s list is the cost of maintaining free accounts. According to him, you can afford the freemium model if your product is so good that non-paying users “pass it on” and recommend it to their friends.

Then their satisfaction and recommendations act as a magnet for new customers. So, this form of marketing can pay off and increase the growth rate of your business. However, if you can’t count on referrals, and it takes a good portion of your budget to handle and maintain non-paying users, again – freemium may not be for you.

Before implementing freemium…

But let’s say you have decided to build your business around this very user acquisition model. What should you do to make it work in your case? Finally, we would like to leave you with three points to consider.

1. Get to know your users and the value you provide to them

   What problems do your customers face and how do you help them? How does your offer impact their lives? These are fundamental questions that will help you find a value proposition for your business. And that proposition is the sum of the benefits resulting from what you do in response to customer problems, thus contained within your product or service.

   For instance, “real-time data synchronization” isn’t a value proposition—it’s just a product feature. The real value is what it does for users. Like when two team members work on a file together, seeing each other’s changes instantly. This helps them understand and share information better. So, focus on your value proposition.

2. Set price metrics – “what should customers pay for?”

   In the article “How to choose price metrics for your business?” we wrote, “A price metric is a unit of consumption for which the customer pays.” Depending on the business, product, or service, these metrics will vary. However, understanding them is necessary to “dress up” the aforementioned value proposition into an attractive offer for customers, which could take the form of packages, for example.

   To better understand how to use price metrics, we suggest reading the mentioned article. Here, we’ll just mention an example that, hopefully, will help you grasp what price metrics are all about.

   Imagine you’re selling software for business data analysis. What are customers paying for? Are they paying for a predetermined amount of processed data, for example, 2GB or 10GB? Are they paying for the number of users who can collectively process data within one account? Or perhaps they’re paying for the way you report data or the data refresh rate – real-time or with an hour delay?

   These are all examples of price metrics. Choose the ones that best fit your value proposition and allow you to most effectively monetize your customers.

3. Find a strategy for converting free accounts to paid accounts

   The more free users start paying for access to the product or service, the better—that’s obvious. However, what’s less obvious is the way to get them to do so. One way is through the aforementioned price metrics. Establishing the right price metrics for individual packages (including free ones) motivates users to upgrade, meaning they move to higher-tier packages.

   But that’s not all. What else can you do besides setting price metrics?

   You can take care of the UX Design and usability of your product. You can also make the process of onboarding users as convenient as nowhere else. This is where tutorials come in, for example, internal e-learning platforms with instructional videos.

   Moreover, you can (and actually should) regularly remind your non-paying users about the possibility of upgrading to a paid version. Here, marketing automation tools and a thoughtful communication and promotion strategy will do.

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