What do apps and services such as Hulu, Hiveage and LinkedIn all have in common? They all use a freemium model, which gives customers access to certain features for free, but charges for more sophisticated or for greater access to the product.
The freemium model answers the question of how new startups and small businesses make money. It seems to be a more reliable way to generate revenue, compared to ad-supported programs. New customers are also more likely to try out a product if they can use it for free, then if they have to pay for it.
Examples of Freemium
In this day and age, the freemium model is all around. One popular example is Hulu, a streaming service. The service was launched in 2007 with the support of major television networks in an effort to stop the spread of illegal downloads of TV shows. With Hulu, viewers get high quality, access to current shows.
While at first Hulu relied on advertising to bring in revenue, it introduced a version of the freemium model in 2010. With the introduction of HuluPlus, viewers could pay a monthly fee and gain access to a wider range of programming, including movies and exclusive shows. By the end of 2013, HuluPlus had five million subscribers and expected to bring in revenue of $1 billion. Although people are choosing to pay a monthly fee for greater access, scads more are still taking advantage of the company’s ad-supported, free programs.
Hiveage, an online billing service for freelancers and small businesses, is another example of the freemium model. The company’s features include a free plan that allows companies or individuals to send invoices to anyone, for free. Paid plans range from $1.95 per month to $49.95 per month.
According to Lankitha Wimalarathna, the CEO of Hiveage, “The ‘freemium’ business model works well for us, because as a small business ourselves we know what it’s like to start out small. It also lets our customers grow with us, and people are of course more inclined to use the service if they can try it first.”
Wimalarathna stresses that the free part of the program will always be free, saying “we have a fantastic free plan with unlimited invoicing, and you’re welcome to use the service for free, for as long as you want. Obviously, there are other features and advantages that come with a subscription, but our core functionality always has been, and always will be free!”
Finally, a third example of the freemium model can be seen in those popular gaming apps, often played on Facebook. Although the games, which include Fruit Ninja, Bubble Witch Saga, and others, are produced by different outfits, such as King and Halfbrick, they use a similar model. A user can download and play the games for free. But, throughout play, people are encouraged to purchase more lives or extra tools to help them succeed at the game, according to the Inquirer.
Benefits to Businesses
A report in the Harvard Business Review confirms the benefits of the model to businesses. One major benefit is that the revenue generated from charging people a monthly fee tends to be a more stable source of income than revenue from advertising.
The freemium model can also potentially reduce the amount a company has to spend on advertising, a particular blessing to cash-strapped startups. Instead, many freemium companies rely on word-of-mouth and social sharing to get other people to sign up for their services. To encourage current users to refer friends, a number of companies offering freemium products provide special incentives. People are more likely to take advantage of the incentive and tell their friends when the service or product is free.
Getting the most from a freemium model is all about creating balance. It’s important for companies to realize that there will always be customers who stick with the free model. It’s also important for companies to realize that the paid services need to be a lot more exciting than what it’s offering for free.
Benefits to Customers
One of the great benefits of a freemium service for customers is the ability to give a new product a try without any commitment. A customer may be incredibly impressed with a new product and decide to upgrade to the paid version. But, as the Harvard Business Review points out, customers are more likely to give freemiuim products a try compared to products offering a free-trial. There’s less hassle with freemium, as a customer can simply walk away if he or she is unhappy with the service.
Design is also big in the freemium world. The free services a company offers need to be impressive, and the paid services need to be even more impressive. The freemium companies that succeed have created a product people want to use and that certain people want to pay for.
Hiveage, for example, has made a big effort to understand its target market and to provide instant access, with no learning curve. ” For freelancers, its all about getting things done quickly and easily, and thats exactly what our simple, intuitive user interface offers them,” Lankitha Wimalarathna said, “we’re sick of clunky applications that require learning, and much prefer our users to jump right in and start doing. If you know how to use a web browser, you’ll know how to use Hiveage.”