Venture capitalist Fred Wilson stated his favorite business model: Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base.
Freemium mode: free first, pay later.
The Freemium business model is “free + premium”, which is a hybrid “freemium business model” of free and paid. For example, Skype, Youtube, Newsgator, Webroot, etc. all adopt this model.
The three common modes are:
1. Unlimited Free: No paid service. Some companies like Google and Facebook make profit by advertising.
2. Paid Membership: There is a “permanent free” basic function, and users can also choose to use value-added services (such as more advanced functions, or no ads). Such as Pandora and LinkedIn.
3. Limited Free: Free for a limited time, or free for limited functions. For example, a 30-day trial period is provided, but there is no “free forever” basic version.
Freemium business model analysis
The most important thing in freemium business model is “a lot of customers”. A large number of users form a scarce resource, and then the value-added services provided can be purchased by someone.
The freemium model works best when there are more potential users, because the user conversion rate is not very high. Here are some methods:
1. Avoid choosing “free” products with obvious sales cost variables. It is more effective to choose free software-based services with almost zero marginal cost.
2. The best free services have network effects.
3. Make sure that the free products you choose have matching profitable services.
4. In the best freemium form, users would like to add credit cards when registering.
5. The best complementary product is a service that users are used to paying (convincing users to spend money on new things is not easy).
6. The best free services have a low churn rate because of high user stickiness.
The common characteristics of companies that successfully use this business model are users recognize that it is indeed costly to provide paid services, and that paid services are indeed valuable to users. The key to this model is how to launch paid services after quickly attracting user groups. This depends on three factors related to the user: who the users are, the size of users, and the price of the service.
Another one is completely free of advertising revenue model. The website shares advertising revenue with users. This model is similar to Youtube, a win-win situation is formed: video content producers, visitors, websites and advertisers can all benefit from this model.
Conclusion
Overall, the freemium model is very suitable under today’s market environment because of the ease of use and low price. It has become the most popular business model right now.
