Freemium: Music to my Ears

Over the past decade, digitally native companies have demonstrated the benefits of a ‘freemium’ business model.

Freemium: Music to my Ears

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.

Freemium model

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.

Spotify subscription options

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.

Statistic: Number of Spotify premium subscribers worldwide from 1st quarter 2015 to 4th quarter 2018 (in millions) | Statista

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;

  1. Functional/Instrumental value – off-line listening, access to over 40M songs ad-free
  2. Experiential/Hedonic value – personalised and customised playlists
  3. Symbolic/Expressive value – collaborating with friends and family, social sharing
  4. Cost/sacrifice value – convenience and access
Understanding the value of curated features

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.

Check out my LinkedIn profile – Vicki Brown

9 Replies to “Freemium: Music to my Ears”

  1. Hello Vicki, great article! I like how you combine the theory with Spotify’s example, which you actually paid for it. I strongly agree with you the importance of determining what should be offer for free or paid, so that people are willing to pay for certain services. Since price has always been a determinant when it comes to installing apps, the first thing that comes to my mind is the challenge of making people move from installation to paying, as well as retaining them from cancelling the subscription. Sometimes, I ended up deleting the apps where it asks me to pay for unnecessary offers. However, it seems that Spotify has done well on this where people have been enjoying the premium services. Looking forward for more posts!

    1. Hey Joyce, thanks for your comment! Yes, I totally agree with you. Some apps I end up deleting when they relentlessly ask for me to pay to continue to use their service, and that’s why I believe a freemium model works well, especially when the product is worth it!

  2. Hey Vicki, I think that companies have utilised freemium business models really well to draw in consumers. Spotify especially have done it really well because although you get the product of listening to any song anytime, it is extremely annoying to listen to ads and not be able to skip songs, making consumers want to pay for the premium version.
    Many companies such as Tinder, Youtube, Linkedin do not have as much of an appeal to pay for extra services, also making Spotify ahead of the freemium model game because they do have logical reasons to purchase their subscription.

    1. Hey Jasmine, thanks for your comment! Completely agree that some companies or apps just don’t have the product that people want to subscribe to, but Spotify managed to capture the market well. Interesting that you mention YouTube, I’ve been very against paying for their premium service for a while, however, the number of ads that appear on videos might just drive me to sign up!

  3. Very interesting and illustrative blog post, Vicki! I think you picked a great example, as Spotify is doing extremely well in the freemium field. In this article I found online (https://www.process.st/freemium-conversion-rate/) they state that Spotify’s conversion rate –free to paid– is around 27%, which is way above the average for this particular business model, which is 1%. However, a freemium model might not be the most suitable for other businesses, even if they are part of the same sector. In fact, in this article (http://mktg.meaningfully.digital/was-it-a-smart-decision-by-apple-music-to-avoid-a-freemium-business-model/) I try to justify why I consider that Apple Music took the right decision by avoiding a freemium business model. Feel free to check it out and let me know what you think about it 🙂

    1. Hi Elies, thanks for your comment! And yeah I totally agree that a freemium model is not for everyone, as you explained in your fantastic post. I’m intrigued to see what other companies look to adopt the freemium model in the future.

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