Over the past decade, digitally native companies have demonstrated the benefits of a ‘freemium’ business model.
A combination of free and premium content, users can get basic features at no cost and can access richer content for a subscription fee. If you have ever streamed music on Spotify, watched a YouTube video, read a New York Times article, swiped right on Tinder or made a connection on LinkedIn, you have been exposed to the freemium business model whether you realised it or not.
The freemium model is a great tool for marketers, as it allows the platform to build a substantial user base, with the idea to convert many of these users to paid subscribers. The benefits of this is that many users are exposed not just to the brand’s messaging, but the brand’s products and are able to experience them first hand.
The freemium model is not to be confused with the ‘premium service with a free sample’ model that many SaaS (software as a service) companies adopt. The goal of SaaS businesses using this model is to have the free option available to give users a small taste of the software but have a majority of the users as paid subscribers. An example of this would be the photo booth app, Hula Booth, where a free sample is available on the App Store but to fully utilise the product a subscription is required.
The hardest challenge for businesses using the freemium model is to identify the value of their product to ensure that they don’t give away too much for free so that users still want to upgrade. If most users can continue on the free plan, what incentive do they have to upgrade? I have found this with LinkedIn, I don’t understand how their premium service will better my experience on their platform as the average user.
A company that I believe has nailed the freemium model is; Spotify.
According to Spotify as of December 2018, it has 207 million monthly active users (MAU) with 96 million of those MAU paid subscribers. Whilst paid subscribers accounts for 46% of Spotify’s MAUs, these users contributed to 88% of the company’s revenue in Q4, 2018 or €1,320M, whilst Ad-supported (free users) contributed just €175M.
Find more statistics at Statista
Personally, I don’t know many people that are still using the free version of Spotify. Whilst most have come from the free option, they have seen the value of Spotify Premium and are prepared to pay for the full version of the service.
Spotify have identified where their target audience view value in their features and have curated these to part of Spotify Premium. These paid features tap into Smith & Colgate’s customer value framework, where they emphasise the importance of four major types of value that can be created by companies;
- Functional/Instrumental value – off-line listening, access to over 40M songs ad-free
- Experiential/Hedonic value – personalised and customised playlists
- Symbolic/Expressive value – collaborating with friends and family, social sharing
- Cost/sacrifice value – convenience and access
It may have taken them the best part of ten years, however by understanding the value of their product to their target audience, Spotify have been able to make this freemium model extremely successful.
There are many other companies that have used the freemium model well and have built successful businesses. Let me know your thoughts on freemium below and any other companies that you think have used this model well.
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