How can anyone succeed using the freemium model?
In this article, we will offer a new view on the basic premises of how a freemium model actually works. The freemium model has emerged as a popular pricing model in a wide range of software categories: from games, to business software, music players, productivity apps, and more. It basically means offering your basic product for free, and taking money for additional, premium features.
We will suggest that the most successful freemium offerings today rely on two basic premises:
- Waste the user’s time
- Annoy the user
These are the two pillars that allow the most successful freemium services to convert their users at a high rate, and make them pay. The most important process that this method causes takes place in the users’ mind: the price to be paid is no longer measured against the value of the software. The price is valued against the user’s own precious time and how the product can it. Why is that? Because the product is already free. The price is paid to avoid the time-wasting distractions.
We will illustrate these 2 basic concepts with real-world examples from popular freemium services encompassing widely different categories: Candy Crush, Slack, Spotify, and Crowdfire. We only consider examples for which there are millions of paying customers.
Freemium in a nutshell
Freemium has emerged as a popular distribution model as it allows for high virality of the product, since anyone wants a free product.
A freemium product must obey 2 basic principles:
- The product must be frequently used.
- Don’t offer too much for free.
The secrets to actually succeed in freemium
The 2 basic principles above are not enough. The conversion rate from freemium to paying users is usually in the low single digits. That is, around 2%-3%. And that is for a “successful” freemium. For some products it can even be less than 1%, and rates of around 0.5% are common for many (even successful) products. And of course, some products don’t convert at all and need to rethink their business model.
We’ve identified several popular online services and found two key elements required for success in freemium:
1. be annoying.
2. waste the user’s time.
We will start with a classic example.
While Candy Crush is not exactly a SaaS (software-as-a-service) product, this once highly popular mobile game from King has found its own way towards success in the freemium model. Once grossing $850k PER DAY (and an insane $1.5 BILLION in 2013), it is certainly annoying and time-wasting. How did it do it?
Candy Crush is match-three puzzle video game. In Candy Crush, after you’ve used 5 lives and failed to pass a level, it puts you in “timeout mode”. This time out mode means that you cannot keep playing for the specified amount of time (e.g. 30 minutes).
Whenever you’re out of lives, you have two options –
- Wait around 30 minutes to continue playing
- Pay a small amount and continue playing immediately
This is a sure-fire way to make at least some people pay the small amount ($1 or so) and continue playing immediately. And these micropayments add up! Some people have paid more than $100 in these micropayments.
How does the above obey the two basic secrets of premium as outlined above? Well, waiting is certainly annoying. And waiting is, well, a waste of time. So Candy Crush is indeed annoying and time-wasting.
This digital music service boasts over 140 million active users, of which 50 million are paying users. This super-high conversion rate does not come easily. Besides having a great and addictive product, the usual ingredients of a successful freemium model apply here as well.
Spotify is a music, podcast and video streaming service that was launched in October 2008. Spotify pays royalties to the rights holders of the artists, based on how much of their creations are streamed using the services. The rights holders then pay the artists based on individual agreements.
So how did Spotify convert so many users into pay customers? By becoming annoying.
The free plan allows you to create your own playlist and listen to it in Shuffle Mode. This means that you can’t control the order in which the songs are played, as they’re played in random order. This is only bearable at the beginning. When you have only few songs in your list, it doesn’t matter that you have to wait a bit to get your favorite song. But once you have 100 songs in your list and want that one song, what can you do? Click Next, Next, Next and hope that your song will come up in the randomized list. And that is both annoying and time-consuming – the winning formula. Besides that, the free version also includes some ads, to further annoy your already aggravated experience.
Crowdfire is a highly popular tool to build your following on social media.While being a great tool to manage and grow your following on various social media outlets (Twitter, Facebook, Instagram, Pinterest, Youtube, etc.), its creators also knew how to make for an addictive experience that will convert their users to paying customers (a great product isn’t enough!).
It started originally as tool to automate tasks like friending and unfriending on Twitter, and has evolved over the years to support many more social networks. It also allows you to automatically schedule posts on social media and even recommends interesting content to share on your channels. Crowdfire boasts millions of paying users.
It starts with their homepage, which, by the way, has no mention of their pricing anywhere. After signing up you start experimenting with the software as it provides recommendations on how to grow your audience on social media.
Crowdfire has some addiction built-in. You just need to tap the plus button to follow new friends, tap plus to unfollow others, and tap a button to publish new posts. Super-easy and fun, takes just 5 minutes a day. Yet after getting addicted, you start to get blocked. Suddenly it tells you you’ve passed the free account limits, you can’t make more follows today. Come tomorrow. Or upgrade.
So where do we see the formula here? While Crowdfire is annoying, it does not explicitly waste the user’s time. The user will invest 5 minutes a day using the tool, regardless of whether he/she’s paying. However, if the user does pay, then his/her time becomes more effective: he/she can achieve more on the platform, at roughly the same amount of time. Then the choice of buying the product boils down to whether the user will invest $5/month to make his (already used) time more effective. And it boils down to a simple decision. It’s not about buying the product, the user is already using the product for free. It’s about a better use of your time.
Slack is the super-popular, super-fast-growing team chat app. It allows the users for a great way to communicate with their team in real-time. Users organize themselves in teams and groups and chat with each other across the organization. All that is said in Slack is saved forever. All files attached in the chat rooms are saved. And all data is searchable. Such that Slack actually becomes a knowledge base for the organization. And all that is free.
Slack has found an ingenious way to make their users pay. It limits the search capacity to only the last 10,000 messages in the chat rooms.
That way, if you don’t pay, you can still keep using Slack throughout your organization. However, you lose the ability to find old data quickly. And a knowledge base must be searchable, or else you’d have to manually go over all the messages to find what you’re looking for. And that is annoying and time-wasting. Bingo! We have a winning formula for freemium.
To recap, we have demonstrated the paradigm shift that the freemium model enables. The price paid is no longer the price for the service. The service is for free anyway. This price is quantified as the value to pay to save the user’s time and annoy him less. Everybody values his time as his most precious resource. And he’s already using that service or app and it’s great. So the payment is to save that person’s time. And that is a worthy investment, since everybody considers his time to be of a very high value.
Last words of warning
These secret tips will not be applicable if you don’t consider the following possible drawbacks:
- When your freemium version doesn’t live up to expectations, consumers may not consider upgrading at all. At first, aim for product-market-fit. Aim for happy users. Aim for paying, happy users. If you don’t have a great product, no technique will make users pay you.
- If your users decide not to upgrade, your company may not be able to recover the cost involved in offering your free products/services. So you must make sure that there’s a value in upgrading beyond eliminating the pesky elements.
- If the product or service is not good enough, or too annoying, it may result in negative consumer reviews and comments which can tarnish the image of your company and product, thus affecting the overall outcome of your company.
- Your users may find similar premium features at a lower cost or even for free somewhere else. That is why we mentioned above that this monetization model is likely to be disrupted as new entrants provide the same level of service, without the peskiness.
- Do not despair – conversion from free to paying takes time.
The idea of getting your users to better know your offering and even get addicted to it is inherent to the concept of the freemium model. Give them a taste of your product and don’t take it away. Let them get used to it, and charge them when they need something more.
Alright, that’s it, now get back to shipping your product!