Are Freemiums Worth Offering?

Freemiums offer ecommerce companies a great option to onboard a large number of leads to their sales funnel. But while having a large number of users is great for promoting your brand, they are of little value if they don’t generate revenue. So, is supporting a limited version of your service for free to a large number of users worth it?

The usefulness of freemiums really comes down to the number of users that can be converted into paying customers. And the number of conversions depends on whether freemiums make sense for your product or service.

Ecommerce subscription giants like Evernote, Dropbox, Gmail and Spotify have all perfected high-converting freemium models for their niches. But how do you know if you should offer a freemium product versus a free trial or an exclusively paid product? If freemium is appropriate for your business, how do you optimize conversions?

Benefits of a Freemium Model

The obvious appeal of a freemium model is that you can more easily get users engaged with your product. For prospective users, it takes away much of the anxiety and extra steps that come with a paid plan, making it an easy decision to give your product a try.

However, not only does the freemium conversion process take longer, it’s a balance between how much “free” value is provided to users to sign up versus what they are willing to pay for.

Offering customers limited features and capability is a great way for them to get to know your service and see the value. But the goal is to leave customers wanting more so they will sign up for that premium option. To do that, the key is to give just enough access so users receive some real benefitsbut keep the most sought after features exclusively for your paid plan.

Consider what features of your product will get people onboard and what features people are willing to pay for. Here are some great examples:

Evernote — Free to use and free of ads. If you want more storage, security or editing features you can opt for the $10 per month tier.

Dropbox — Free file storage with an option to upgrade for increased storage.

Gmail — Free email service, with a premium option to unlock more storage space and a variety of customization options.

Spotify — Free music streaming, subject to ads. Premium level eliminates those ads, giving music lovers options that are important to them, such as better music quality and unlimited song skipping.

Are Freemiums Right for You?

Free plans have helped the companies above grow tremendously fast into big players. Freemiums can obviously help your company grow quickly but only if it’s done strategically; you can attract large numbers of users and your service can be effectively tiered.

Compared to time-limited free trials, freemiums impose the cost of supporting free users indefinitely. Therefore, the price paid by your premium customers not only has to exceed the costs of supporting themselves, but also the cost of supporting and attracting free users.

To put it another way, Michael Mullany devised the following formula:

Profit Per Premium User = Price Paid by Premium User — Cost of Providing Service to Premium User — [(1/ Premium:Free Users Ratio) * (Cost of Supporting Free User + Cost of Attracting Free User)]

If the formula results in a negative number, you may not have enough overall users, your conversions may be too low, your costs too high or your price too low. Freemium models are are only effective if they help you to achieve your ultimate goal: onboarding large numbers of paid subscribers so that you can overcome your overall costs.

Consider Evernote’s success. The company expected to convert 1% of free users to premium, but was actually able to reach almost 6%. Despite this, its CEO maintained that the company’s paying customer base be 5% or less because their strategy hinges on attracting a lot of new users.

Know Your Product, Know Your Customer

The freemium model has the potential to significantly grow your company and revenue. You may convert only a small percentage of a large customer base (usually 1–5%) , but it can turn into huge profits as time goes on. To be successful, you must completely understand the relationship of your product’s value to customers.

Know who your users are and understand what they’re willing to pay for. This means identifying and creating solutions that users will inevitably want and need while keeping the features that super-users want in the paid version. Then focus on what it takes to get them to that tipping point.

If you’re looking for tips on how to make your freemium more effective at converting paid users, click here.

Originally published at www.kiwaluk.com on November 12, 2015.