The App Economy Freemium and Premium Business Models
Young entrepreneurial venture employs freemium business models, in the initial life-cycle states to for the following reasons, opportunity recognition, market entry and market exploitation. Free users are important for network building, exploration and exploitation and growth over time.
The freemium business model, where basic products or services are offered for a price of zero, has become an extremely popular model. Deployed by with internet companies, digital start-ups, and companies that develop applications for smartphones.
To quickly acquire and monetise new customers leveraging digital tools to scale their marketing and sales activities.
Conversion rates with this model tend to range between 2% - 7% hence it is important that the number of freemium users is relatively high. The variables that determine the success of a freemium model included
Demographic factors such as age
Level of engagement
Retention rate
A freemium strategy needs to be tailored specifically for each firm, with many factors such as a strong product catalogue, focused customer acquisition engine, referrals, social and community features, a continuous data testing driven approach and commitment to continuous innovation.
The word Freemium is a blend of the words “free” and “Premium” and describes a business model in which a service or product is offered free of charge. However, there is a fee, for the premium features and functionality of related products and services.
There are a multitude of examples of business to consumer products, that leverage the popular freemium model to acquire new customers.
Some example of the brands includes LinkedIn, Hootsuite, Trello, Flair, Zapier, Mailchimp, WordPress, Canva, CandyCrush, Freshbooks Microsoft Azure, Dropbox, Spotify, Skype, Last.fm and Evernote.
There are four common app business models, these include in-app advertising, freemium, paid apps and subscriptions.
The freemium model enables start-up’s with exceptional products, sales, marketing and advertising resources. To leverage social networking and referral programmes, to drive customer acquisition by amplifying their freemium product value proposition.
However, it is commonplace for applications with this business model to host only 10% of paying users and over 90% of free users. The risk for companies adopting the freemium business model is that the percentage of paying customers is not high enough to both subsidise all the free users and make a profit for the company.
Hence it is imperative, to find a balance, between growing the customer base, through the freemium value proposition and maintaining premium services that incentivise upgrades and ultimately earn additional revenue and profits for the owners of the application.
““Freemium pricing strategy can successfully attract users to download for personal experience, help users better understand the function and quality of an App.” ”
The freemium model is also responsible for increasing product visibility and increasing demand in competitive markets. By enabling users to experience the product prior to paying for it.
Free users benefit from the presence of paid users for the sustenance of the business or product. Whilst paying, customers benefit from reduced uncertainty associated with the product. Through product testing early adopters and free users engage in to enable product enhancements.
The freemium business model for e-business is best describe using the typology proposed by Baden-Fuller, Haefilger and Mangematin based on the following four dimensions, 1) Customer Identification, 2) Customer Engagement 3) Value Delivery and 4) Monetisation
Tactics Deployed by SaaS Firms to Increase User Conversion Rates
Companies the use freemium models deploy a range of activities for consumers to complete to migrate them from a free user to a subscriber of their product. Listed below are three brands with distinct methods of converting free users to subscribers.
DropBox
Dropbox is a cloud storage service used for file sharing and collaboration.
Objective
Get the user to understand the product & its features (simple tutorial on how to use the product)
Get the user to engagement with the product
Get the user hooked on the product
Turn the user into a premium buyer.
Reward programme:
At each stage the user is rewarded with additional storage space
Refer friends = 16GB
Get started with Dropbox = 250 MB
Connect to your Facebook account 125MB
Connect to your Twitter Account = 125 MB
Follow Dropbox on Twitter = 125 MB
Tell us why you love Drobox = 125 MB
Integration with other applications
This is common place now with the majority of apps offering integrations with other applications.
Microsoft office
Adobe Acrobat
Vimeo
Skype
The freemium element of the application. Enables skype users to organise online conference calls with up to 25 users. With over 600 million users this is a very successful example of the freemium model.
Objective
High level of usability since the free version of the Skype platform provides features which helps the user to conveniently keep in touch with friends and family.
As a small business it is not necessary for the company to start a subscription. It all depends on the number of users.
However, should a company need to make physical calls to landlines and mobile phones they will need to pay for Skype credits.
Reward
There is not really a reward programme as such. Users are free to choose which features are relevant to their needs, from an app provider that does not engage in advertising as a tool to acquire new customers or cross sell additional features.
Evernote
Evernote is a cloud-based workspace for instant access to notes, documents and photos.
Established in 2007, the company serves more than 100 million users. The platform is a multisided business model serving both b2c (private) and b2b (enterprise) consumers.
Objective
Freemium model is concerned with increasing the perceived value of the application. By educating consumers on the benefits of having a” second brain”. As consumers migrate from using the application intermittently to habitually. To the point where they are willing to become a subscriber of the product.
The success of the freemium model is closely tied to the users perceived value of service increasing over time. Evernote provides individual users with a
Basic Plan
Plus Plan
Premium Plan
Business Plan
This plan enables teams of up to 25 subscribers to collaborate across the application. Share information send notifications and manage different projects.
The application is accessing across platform which includes mobile platforms, iOS, Android and Windows Mobile. By enabling consumers to have instant access to their content.
All features that are available on the desktop version is also available on the mobile OS. Increasing the utility of the product to the user. As they can engage more often with the product.
In terms of data storage users are not limited by the amount of storage they have access to but the amount of content they can upload every month. When they reach their monthly upload limit, they are directed to purchase the premium model.
““The more users invest time and effort into a product or service, the more they value it” ”
The purpose of the reward programmes is to increase the virality of the product in conjunction with increasing user engagement.
Since access to storage is the core feature of DropBox, the provision of extra storage space as a method of driving certain user behaviours that, increases stickiness, but is also, mutually beneficial to both users and the owners of the application.
Is one method of driving conversions, the goal through a combination of reward schemes and relevant features, users can reach a point where they will realise the value of subscribing to the service.
Ultimately the goal is to ensure that the quality of the applications features will make it difficult for users to end their subscriptions.
Deploying Behavioural Analytics to Drive Product Development
When designing a freemium product canvassing the opinions of users, may provide valuable information to further product development. However, metrics on the interactions of consumers with the product, and insights about the user behaviour can be used to accelerate further product development.
Free users of freemium products provide a treasure trove of data which may be used to drive product improvements and new product development.
Behavioural analytics may be deployed to track users’ behaviours and predict which users are most likely to convert into paying subscribers.
The timeframe over which a user migrates from freemium users to paying subscribers ranges from weeks to years. Also, as the freemium model operates under a high margin low volume condition. Only a small majority of the total users will eventually pay for the product.
Hence if an organisation can capture a large user base, with a freemium product they have a greater probability of capturing users that match the profile of consumers with the highest potential to convert to paying customers.
Key Freemium Metrics
Retention: A high retention rate is achieved when users spend long periods of time within the product, and frequently return to use the application, regularly during the day, weeks and months. Retention metrics communicate how well the product meets the needs of users. Some key metrics include, Cost per Acquisition, Churn Rate, Net Revenue Churn Rate, daily number of users (DNUs), and Daily Active Users (DAU).
Engagement: High engagement is characterised by recurring, daily and deep interactions from users. Apps with clearly defined interactions, associated with different levels of engagement can track how engaged users are. Metrics include session length, session frequency, and event counts
Virality: is a measure of the number of new users acquired through referrals from existing users.
Monetisation.
- Freemium Conversion
- Freemium Web Analytics
- Web Analytics
Factors that Migrate Users from Freemium to Paid Services
An app users’ intention to pay is determined by perceived value, a comparison of the benefits and sacrifices and the trust of the developer. Perceived value is influenced by perceived effort, and perceived usefulness.
Perceived value enhances the consumer switching intentions, by lowering sacrifices and increasing interest, and cognitive locking. Indirectly reducing the switching intentions, by influencing perceptual benefits positively and perceptual sacrifices negatively.
When users deploy the perceived cost benefit analysis, the higher the benefit and the lower the cost the higher the probability of switching.
Hence building clearly defined personas, of your consumers, with distinct pain points and empathy maps to provide an insight into the value drivers of potential paying users is critical.
Tying this closely with historical data on the behaviours of consumers that converted to paying consumers and building profiles of such user for acquisition purposes will enable organisation to accurately predict conversions rates and target the right types of potential customers.
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