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Pros and Cons of a Freemium Software Strategy

6 minute read
David Roe avatar
Many vendors are using freemium software to attract and retain users with the hope they can get them to pay for premium versions afterwards.

Microsoft has released a new and free Windows 10 app that is designed for anyone who uses its Office suite, either the paid or free version. The app gives users access to their Office desktop apps and comes preinstalled with Window 10. What’s even better, unlike most Microsoft products now, you don’t have to be signed up to Office 365 to use it.

Why Use the Freemium Business Model

While this is one of the more visible free apps in the enterprise at the moment, it is not the only one. There is, of course, Slack and Microsoft’s freemium version of its collaboration tool Teams. There is free encryption software, email apps, the LibreOffice free productivity suite that continues to add functionality and there are a bunch of companies like Dropbox or Box or Hubspot that offer freemium offerings to users in the hope that the users will move to the paid version. Is it sustainable?

Everyone out there is looking for the most effective, efficient way to get business done,” Juuso Lyytikkä, head of growth at said. However, from the business side of a technology company, offering a free trial before requiring paid sign-ups has been what works best for conversions. It's important to let people see the value they can gain from tools. It helps on the front end because people become impressed with the service that the company is able to offer, which in turn improves customer retention and satisfaction.

Related Article: 7 Free Enterprise Intranet Solutions (That Aren't Really Free)

Freemium Models

Using the freemium methodology for SaaS, web apps, cloud and technology, in general, is growing more popular. Old models are disappearing and new models are emerging. Using the so-called classic freemium — the idea of a free version of a top product is losing popularity, and other freemium models are coming into play. This also applies to startups and established companies that are already using freemium, according to Jeremy Rose of Certa Hosting. Many companies, he said, don't use a single freemium model. The most successful companies use a hybrid approach that combines multiple models. He identified four main types:

  • Traditional/Classical Freemium - A limited, but always usable version of the premium product, such as Dropbox. This freemium model is the one most people know, and the one with the biggest revenue problems. It contains functions that most users will never buy.
  • Free With Ads - A fully usable version with space for advertising products. Ads can often be purchased with a vendor at the bottom of the screen. It's not expected that many customers will switch to the premium version, and ads will be taken for granted.
  • Ecosystem Freemium Models - A free, always available basic product. Think of iTunes, for example. Revenue is generated by third parties, such as add-ons by third-party vendors. Many commercial open-source projects use this freemium revenue model.
  • Data Collectors - Generate revenue with aggregated behavioral data and other data such as Google ads. The idea is that if you do not pay for the product, you are the product yourself. Behavioral data is collected to show targeted ads. This freemium form may be contrary to the privacy policy.

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Retaining Users

Ajay Prasad, founder and president of GMR Web Team, argued that the freemium business model has provided tech companies with the capability to retain their users by releasing free apps or having a freely accessible platform such as Spotify. Although there have been problems with this model including, low conversion rates, high costs and longer time in loss rather than profit, the freemium model has worked well in SaaS businesses. “Over the last two decades, the growth of cloud services and accessibility of the internet has made subscription-based applications more popular than ever,” he said. “Freemium subscriptions have allowed companies to release their products to the public and receive feedback almost instantly.”

He cites Slack as an example of a successful freemium SaaS app. The company invested heavily in user experience and saw massive growth. It now has around four million users and 1.25 million of those are paying for a higher-end subscription. “It's important to understand what kind of product or service your venture will be providing. Startups that offer services in messaging and deliveries are in a good position for the freemium business model,” he added.

Learning Opportunities

Recently, marketing services such as Urban Airship have been experimenting with freemium. They've come to an understanding that opening up a free channel dramatically expands the addressable market; small or new businesses can easily grow with this strategy. These solutions are also applicable to larger organizations as well if they are firm about their goals and customer relations. The major key to a successful freemium strategy is: it's critical to carefully align your business goals with those of your customers, otherwise freemium can end up costing you.

Freemium Can Be Successful

Despite possible problems with conversion rates the freemium business model can be extremely successful depending on how it’s done, said Matt Bentley, CEO and co-founder of CanIRank, which pairs a freemium SEO software and a digital marketing agency.

One tip is to use the freemium model to guide users into purchasing a service rather than just an upgrade. What makes it work well is that the freemium software attracts a lot of business owners looking for a free tool to learn SEO. When they start using and liking it, they also see the amount of work and time it takes to run a successful campaign.

In respect of the CanIRank freemium model, he says it naturally leads users to hiring consultants which in turn saves them time and increases their digital marketing results. In short, freemium can be a great way to get people in the door, as long as you're offering a great experience that doesn't feel incomplete, but leaves people wanting more.

Not All Freemium Is Good

Jeff Chamberlain, a research director focusing on software application product marketing at Gartner, warns potential users to be careful. In a blog post published last year he wrote that if you are marketing a SaaS software product you have probably been asked about or considered offering a free trial or “freemium” version of your product. There is no doubt it has been a very successful approach for a number of companies.

He cites one example of a company that had been offered a one month free trial. Unfortunately, it was taking more than a month to get the product up and running so the user actually didn’t interact with the product during the free trial. “There are clearly products that aren’t a fit for free trials because of the length and amount of implementation services required to get going. These might be better opportunities for a proof-of-concept demo or conference room pilot using some dummy data to help people get that valuable taste of your product,” he wrote.