Why Freemium Pricing Is So Popular

Monday, February 7th 2022

Freemium pricing is a business model that has seen A LOT of success within startups. It’s most often used when looking to grow a user base before focusing on revenue or to allow users to experience software for a longer period of time than just a trial.

But what is freemium pricing and will it really be beneficial for your business? Let’s take a look at what freemium pricing is, why you should consider using the freemium model, and when it’s right for you.

What is Freemium Pricing?

Here's a question for you business owners: what if you made your product or service available for free? Sounds crazy right! Well, that's freemium pricing! Freemium pricing is one of the most popular models for Internet businesses, and it's growing in popularity outside of the digital world as well.

A simple definition of freemium pricing is breaking down your product or service into multiple versions, instead of making your product or service available in one big package. The freemium pricing strategy includes one free version and a premium version/s that costs money.

With freemium pricing, your company will get to scale its customer base rapidly with little or no additional cost for each new customer gained (assuming no incremental marketing expenses). Then—and here's the important part—you can charge customers for additional services as they experience the value your service provides!

This model is so popular because it works well with the digital environment, where basic services can be provided at close to a zero variable cost.

From providing media to hosting websites to developing software, many companies use this pricing model as one of the quickest ways to get off the ground and start increasing their user base.

Difference Between Free Trial and Freemium Pricing

Let’s make a quick distinction between these two pricing models for a moment. A free trial is when all features of a product or service are available for a limited amount of time. After that limited amount of time, the customer will be charged for the product.

Freemium pricing is unlimited use of the most basic version of the product or service a company is selling. So remember — typically, it's like this:

Free trial = (Mostly) unlimited features for a limited amount of time.

Freemium = Limited features for an unlimited amount of time.

Benefits of Freemium Pricing

There are many benefits to using the freemium pricing strategy as your business model. The top three include a “no stakes” usage barrier, customization for your customers, and cost savings.

No Stakes Usage Barrier

With the chance to try out the most basic features of a product or service for free, your customers can be at peace knowing they won’t lose anything. Since they’re not paying anything to use your product, there is quite literally nothing to lose.

Psychologically, this makes it an easier decision for people to subscribe to what you’re selling. If there’s nothing to lose, and everything to gain by trying out a product, why not try, right? That's an easy decision!

By providing a free version for customers to use indefinitely, you will likely see your user base want to add more features to your service, and this time, you’ll get paid for it!

Gaining a Quick User Base

Because there are such low stakes for customers giving your product a chance, you will gain a user base quickly. You will have more people who want to give your free product a try, as opposed to paying for a product they don’t yet know they will like.

You will want to be sure that you have a great first-level product. To maintain your user base, you need to be providing a needed product or service. The free version of your product can’t be useless or else people won’t want to keep using your service or see what additional paid features they could benefit from.

Customization for Customers

This is one of the greatest benefits to using the Freemium model. Many of your customers won’t need ALL the features you have to offer. Many will only need a few. The freemium model is great because it allows your customers to pay only for what they need.

If they only need your most basic free plan as they start their business, then great! When their business scales and they need more features, they can simply add on the features they need. The further they scale, the more features they add, and the more money you’ll make. Freemium allows for the scaling of the customer’s needs.

When creating your plans, consider having 3-4 plans minimum. The more plans you have, the more needs you can meet. In addition, consider using a price/feature model and let customers add whatever features they want when they need them. This way, if one of your packaged plans isn’t right for them, they can still receive the customization they need all while increasing your profits.

Cost Savings

Let’s say you’re just getting started with your new business. You likely won’t have measures in place, or the budget, for providing customer support to your customers. The more features your product has, the more likely your customers will need support.

The freemium plan model allows you to gain a large customer base and gives you time to find the funds to create a support team. As the user base of your product grows, your profits grow and you can in turn afford a customer support team to support those using your premium packages.

When to Use Freemium Pricing

Freemium pricing is used in all sorts of businesses! Think of a create-your-own ice cream shop. Here, you pay nothing for trying flavor samples, even though it’s the same quality ice cream! Then you pay $4.00 for a simple ice cream scoop and one flavor add-in. For each additional flavor, topping, or syrup, you have to pay an extra $0.50. This is freemium pricing in action!

Freemium pricing is best used in online businesses, specifically the software industry. Freemium pricing allows users to test the basic functionality of your product, determine if they need it, and add features accordingly. As already mentioned, freemium pricing is the quickest way for online businesses to get an active user base.

Freemium Works!

In summary, freemium pricing works, and it works well! There are many notable examples, including Dropbox, Netflix, Evernote, and more. Freemium gives you a chance to try out a product or service for free while also allowing you to grow your user base substantially.

Freemium pricing allows for low up-front costs for the company but still keeps money flowing in from users who love the product and want to pay for more features. Consider using freemium pricing as your startup’s business model.

If you want to simplify your software licensing and entitlement system, we have our own free plan (freemium in action!) at Keygen that you can sign up for today!