How Startups Use Freemium Models To Acquire Paying Customers
Freemium models seem like an easy way to get new customers to fall in love with your product. But freemium models aren’t for every business.
When they work, they work like magic, locking the customer into a value proposition that’s harder to give up than if they never experienced it at all.
When they don’t work, those same models can become an economic albatross of costs that don’t generate any revenue, and eventually sink the company.
The important thing is knowing which camp your product is going to fall into before you carve out that tricky free tier.
Should your product even have a free tier?
First, let’s dispel the conventional lure of the freemium model.
The truth about free is that it’s actually harder to convert a customer from free to paid than it is to convert that same customer from nothing to paid. Once you give someone something for free, you put yourself in the losing position of constantly having to ask them to pay for that thing.
So the decision to include a free tier comes down to four factors.
The mechanics of your product. Right away, most products that have a physical element, like hardware or a retail product, should not be in the free tier business.
The economics of your product. You’ll need to answer this question: Is there enough capacity in the functionality of your product such that you can carve out a free tier that minimizes costs to you while maximizing perceived value to the customer?
The lure of the trial for the customer. This is the other side of that question: Is the free tier going to move the customer towards purchase? Your free tier is worthless if nobody wants it.
The use cases. Last and most important question— Are the primary use cases of your product complex enough that they require the customer to be hands on before they discover the value in your product?