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Making “Freemium” Work

Summary

This article discusses the freemium business model, which is a combination of free and premium offerings. It has become a popular model among internet start-ups and smartphone app developers, and it is also used by B2B companies. The article outlines six questions that start-ups should consider when using this model, such as what should be free, what is the target conversion rate, and how can users become evangelists. It also examines how four companies use the model and provides advice on how to increase the odds of success.

Q&As

What factors drive the appeal of the freemium model?
The appeal of the freemium model is driven by its ability to scale up and attract a user base without expending resources on costly ad campaigns or a traditional sales force, its sustainability as a source of revenue, its use of social networks to incentivize referrals, and its indefinite free access which is more compelling than limited-term offers.

How can freemium companies ensure they are offering the right balance of free and premium services?
Freemium companies should monitor their conversion rate (the percentage of free users who have upgraded to a premium plan) to ensure they are offering the right balance of free and premium services. If the conversion rate is too low, it may mean that the free offerings are not compelling enough and more or better features should be provided free. If the conversion rate is too high, it may mean that the free offerings are too rich and should be cut back.

What is a reasonable target conversion rate for freemium businesses?
A reasonable target conversion rate for freemium businesses is generally 2% to 5%, although if targeting a small market, a higher rate should be aimed for.

How can freemium businesses use referrals to spur user upgrades?
Freemium businesses can use referrals to spur user upgrades by carefully managing referral incentives and communications.

What ongoing innovations should freemium businesses consider to increase the value of their premium services?
Freemium businesses should consider ongoing innovations to increase the value of their premium services, such as offering new features, improving the user interface, and providing better customer service.

AI Comments

👍 This article provides great insight into the freemium business model, providing questions that start-ups should consider when determining the right approach.

👎 This article is overly technical and makes it difficult to fully understand the complexities of the complex freemium business model.

AI Discussion

Me: It's about the popular business model of freemium, which combines free and premium services. It talks about the advantages of this model and the six key questions that start-ups should consider when using it.

Friend: That's really interesting. What are the implications of this article?

Me: The article suggests that freemium models are a great way for start-ups to scale up and attract a user base without spending a lot of money on advertising or sales. It also emphasizes the importance of understanding the value proposition of your free and premium offerings and being aware of the conversion life cycle. Finally, it stresses the importance of ongoing innovation and of leveraging referrals to drive usage and upgrades.

Action items

Technical terms

Freemium
A combination of “free” and “premium”, a business model where users get basic features at no cost and can access richer functionality for a subscription fee.
Pricing Strategy
The process of setting prices for products or services.
Conversion Rate
The percentage of free users who have upgraded to a premium plan.
Referral Incentives
Rewards given to customers for referring friends to a product or service.
Viral
Refers to a product or service that is quickly and widely spread by word of mouth.

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