Let there be freemiumDecodings
While the flexibility culture continues to rule, the “freemium” business model is coming to epitomize the “paying” business model for services.
It’s common knowledge that, thirty years after the founding of the World Wide Web, it’s hard to resist the lure of free goods or services. For us, the consumers of content, this type of prospect appears to be more open and require less involvement.
Whereas the Web’s development was primarily driven by the fluidity of access to information in general, the popularity of the freemium model – which offers basic services for free but charges for premium services – is shaking things up.
This strategy works equally well for B2B (e.g. Box, Yammer and Splunk) and B2C, providing a subtle commercial solution to build adhesion among prospective paying customers and ultimately generate higher value-added.
Attract, engage & retain
In France, the model of the PagesJaunes digital yellowpages directory pioneered this differentiating approach, listing names for free but charging for extra services to attract more attention.
The democratization of this digital phenomenon (e.g. Linked In, Evernote, Leboncoin, Adobe, Spotify, Deezer and Candy Crush) has been covered by the specialized media, including in a recent article posted by the online U.S. publisher TechCrunch noting “a momentous 15-month stretch [of IPOs] for freemium SaaS businesses”.
In the wake of Dropbox, DocuSign, SurveyMonkey, Zoom and SmartSheet, Slack raised 1.4 billion from venture capital firms, including Andreessen Horowitz, one of the first to invest in Facebook, Twitter and Lyft. In addition, Spectrum Equity, the well-known growth equity firm, has invested in Bitly, Prezi and Litmus, all of which deployed a freemium strategy. Last but not least, Dropbox (500 million users, including 11 million paying customers in 2018) has inspired several other success stories, such as that of WeTransfer.
Whereas some experts note a downside in that the customer retention rate for this strategy is 10 to 30 points lower than for conventional business models, the SaaSes that have adopted freemium have registered average annual growth of 56% for revenue and 10% for the operating margin, substantially outperforming non-freemium models.
A model that transfers well to media, online games and social platforms
In this day and age of flexibility in which consumers expect ease and simplicity across the board, other sectors are seeing a similar shift. According to the Harvard Business Review, “The Wall Street Journal famously proved this strategy by expanding digital content, adding new paper sections such as Mansion, and introducing events, which created a membership experience that has quadrupled prices in less than a decade, ending the paper’s previous reliance on heavy discounting.”
Not only has this model won over major news vehicles like The New York Times, Le Monde and The Guardian and more specialized media (e.g. Wired, TechCrunch and Les Echoes), but it is also making its way into the video games ecosystem as well as social platforms.
In July, Wattpad, a social community of 80 million readers and writers, introduced paying options. Since last year, YouTube has also been offering subscriptions. The idea behind its YouTube Music Premium offer is to generate other earnings besides ad revenue – knowing that many users have an adverse reaction to advertising – and improve the user experience.
Personalization, the hallmark of freemium
Why is this model doing so well? According to Harvard Business Review, it is largely due to more effective branding and sales management.
On average, freemium models spend 10% less on marketing, brand reputation and sales than conventional models posting a comparable growth rate. They capitalize on the acquisition of prospects better qualified for the service, which facilitates subsequent conversion towards a paying offer.
The model is also attracting interest for another reason: it lends itself to the personalization of the product/service offer and improves the user experience, heralding the demise of ads and the return of the much-criticized “if it’s free, you’re the product” model, relying on subscriptions to ensure longer sales cycles. These factors, taken together, provide companies with an incentive to reconsider their brand image and investigate the possibilities of a differentiating user experience.