The Freemium model - a combination of the words free and premium - takes place when a business offers basic services free of charge while providing advanced or additional features at a cost.
Free trials are a prime example of freemium, which are built on the assumption that leads will become customers when the initial trial period is over.
Dropbox, one of the most popular cloud storage applications, has grown to over 400 million users from 50 million users in 2010 using the freemium model. The company gives users 2GB of free space and offers paid plans to upgrade the storage capacity, which start at $9.99/month or $99/year.
In 2011, it was reported that only 4 percent of Dropbox users were paid subscribers, which sounds minuscule, but if that percentage has stayed constant to date, this means the company has earned over $1.18 billion dollars in annual revenue.
Another company that has seen success with the freemium model is the online education company Lynda, which was acquired by LinkedIn. Instead of a continuously free offer, Lynda allows any new user to get a 10-day free trial of any of their plans.
With Lynda, when users sign up for a free trial, they are required to enter a credit card for automatic billing once the trial period ends. This allows people to get comfortable with the service, so they continue using it even after the trial is over.
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The Power of Free
Why is the freemium model so powerful?
MIT professor Dan Ariely decided to test out the power of free and shared the results in his book Predictably Irrational. In one classic experiment, participants were given the choice between a 26-cent Lindt chocolate and a one-cent Hershey’s Kiss. 60 percent chose the more expensive option.
However, when both chocolates were lowered a mere cent, a whopping 90 percent went with the Hershey’s freemium offer. The reason is obvious. People find it hard to resist the idea of getting something for nothing.
The Goal of Free
In the case of freemium, the ultimate goal is to get at least some of the free users to convert.
So why buy the cow when you’re getting the proverbial milk for free? There are three main reasons:
1. You Need More
This is the most obvious reason. If you are only getting a limited version of a tool but you need more features or functionality, you’ll pay to get it.
2. Loss Aversion
If we already have something in our possession, we don’t want to give it up. It already feels like we own it, so we do what’s necessary to keep it.
If the tool or service has done something for you, you naturally feel that you must return the favour or support them in some way.
As great as this mean seem, “free” can also be detrimental if used in the wrong context.
The Danger of Free
There's more to free than meets the eye.
While it's tempting to assume that this principle applies to all marketing, it might not be the case. For example, using the word free in your email marketing efforts might actually hurt you. The first problem is that free is a great way to get blocked by spam filters. Deceptive marketers use the free tactic so often that it has now become an almost clear identifier junk.
Secondly, HubSpot recently showed that free can negatively affect how some audiences respond. They tested two versions of the same email offer and got some astounding results. The email that did not use the word free in its call-to-action performed 17 percent better than the one that did!.
It seems email filters aren’t the only ones being cautious.
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The Test of Free
Though HubSpot’s tests returned conclusive results, your audience may react differently to your specific product or brand. The only way to know for sure what works and whether using free offers or a freemium model is the right fit for you is to test it.
There is a variety of different testing methods for free versus paid offers. A/B testing emails, as well as landing pages (such as your pricing page), can both be done with automated tools like MailChimp. Using an integrated tool that allows you to track both email performance along with the landing page it links to is key; otherwise, you’re only getting half the picture.
For a larger operation, for example an online store, dynamic-pricing tools such as Wiser, Semantics3 or Prisync automate the actual testing of a price. The important thing here, as the screenshot illustrates, is to carefully track how different prices and free offers affect both your sales as well as repurchases and upsells down the line.
The bottom line is that value of free comes down to the audience and the product. Make sure to use free wisely in your marketing efforts.