Freemium Vs. Paying Users: Where to Draw the Line?

Freemium pricing has taken the digital community by storm and is now one of the most popular digital business models. What makes companies wary about adopting it, however, is that it delivers no direct profits and no clear guidelines on where to draw the line between free and paid content.

In this article, we’ll shed some light on these concerns and provide tips on how businesses can successfully adopt the freemium model and make it work.

What Is Freemium?

Freemium, also known as freemium pricing and freemium business model, is a pricing model that revolves around a company offering part of its products and services free of charge to its customers.

The model was invented in 2006 by Fred Wilson, a New York venture capitalist, who named it his favorite business model and described it like this:

“Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value-added services or an enhanced version of your service to your customer base.”

The name “freemium” was suggested by one of Fred Wilson’s blog followers and is a combination of the words free and premium.

Why Is Freemium Good if It Brings No Direct Profits?

You can think of freemium as the best kind of advertising. What copywriting guru Gary Bencivenga once quoted as the most important 9-word sentence in marketing history, applies here with full strength:

“A gifted product is mightier than a gifted pen.”

Cover copywriting and skillful marketing are great. However, nothing can show your customers how great your product is better than trying it themselves.

Of course, businesses don’t actually enjoy giving out stuff for free, but they still do. Because they know that people won’t be able to get enough of it. And convincing the customer to try something new and unfamiliar is much more of a hurdle if you are asking them to pay for it.

However, with Freemium you create an opportunity for them to become familiar with your product and fall in love with it. Once that happens, it’s much more likely for them to consider upgrading to a paid version, rather than starting all over with a different solution.

Some of the other undeniable benefits of the freemium model are:

• Creates Trust and Builds Reputation. If customers are happy with your products, it doesn’t matter whether they are paying you or not – in both cases, they‘d be equally enthusiastic to share their positive experiences with others.

By encouraging UGC, reviews, and testimonials by Freemium clients, you consolidate your online business reputation and make your brand more trustworthy.

• Spreads Brand Awareness. Nothing makes a brand more popular than a lot of people using it and talking about it. Freemium users may spread the word and allow you to establish a market presence for your brand faster, as well as contribute with the best kind of word-of-mouth marketing.
• Increases Demand. When you give the good stuff away for free it may become easier to convince people to pay for what’s behind the paywall. Free products that are of top quality, may attract more customers who want to learn how much better the paid upgrade is.
• Boosts Customer Acquisition. Non-paying clients are still clients and if taken good care of and nurtured properly, they can be a valuable investment in the future.
• Improves Lead Generation. Freemium users are high-quality sales-ready leads that, with the right upselling strategy, can be turned into loyal paying customers.
• Provides Market Insights. Having more customers gives you a chance to monitor their usage behavior, and learn about their habits and preferences. Leveraging this information you can improve your products and services, craft a better marketing message, and boost sales.

So what’s the catch? Well, obviously, with Freemium, you are not getting any direct profits from users. Furthermore, deciding where to draw the line between freemium content and the paid upgrade can be tricky.

You have to make your free offer attractive enough for your customers, manage to retain them, and create paid plans that are lucrative enough to convince them that they need more.

Where to Draw the Line? The Key to Making Freemium Work

All in all, the key to making freemium work is to give more value for free. Although it may sound counterintuitive, this is how this business model makes money for you.

If what you offer without charge is not good enough, it will not be compelling enough for customers to convert. However, if you put all the high-quality content and top features out there for free, what would people be paying for?

SaaS Companies

The best way for SaaS companies to make the freemium model work is to combine it with another SaaS pricing model and balance how both you and the user benefit.

Adding a freemium option can make your products and services accessible to individual users and small businesses. These clients may not be able to afford the pro version right now but may have the resources in the future. Setting a limit tied to adoption or usage will allow you to support both free and paid accounts.

If you are using one of the 4 most popular SaaS pricing models, you can consider the following approach:

• Flat-Rate. In this model, you charge all your customers equally and they all have access to the same features. The easiest way to adapt it to freemium is to offer a limited-time free trial or change your model altogether and adopt a different one that allows more flexibility.
• Tiered. In this model, you group your product’s features into packages and charge a higher price the more advanced the pack is. It’s the easiest model to adapt to freemium because all you have to do is make the base-level free to access. A different approach here is to have a free entry-level package and charge per added feature.
• Per-User. As the name suggests, in this model, customers are charged per user or per active user. Depending on your buyer persona’s profile and their business type, you can make the product free for one up to a number of your choosing of users. This will make it accessible to small operations, but you will still generate profits from big-game clients. The model allows you to upsell more easily to entry-level accounts when they increase adoption.
• Usage-Based. Customers are charged depending on how actively they use the products. Depending on the specifics of your software, this can be calculated over time, gigabytes, actions performed, and so on. Adapting the model to freemium will consist of setting a usage limit that users have to stay below if they are to take advantage of the service for free.

Where exactly you draw the line between free and paid depends largely on the type of SaaS product you are selling and the customers you are targeting. However, what’s important is that what you give out for free should have value to the customer and should clearly show the benefits of using your product over others. Otherwise, it will be tough to acquire new customers for free, and even tougher to upsell upgrades.

Digital Publishers

With the downfall of cookies and the uncertain future of display ads, subscriptions are becoming more and more important for digital publishers. However, it’s not easy to convince readers to pay for news when they can get them elsewhere for free. Although the price of quality journalism is evident to everyone in the industry, we can’t say the same for the everyday reader online.

Setting a paywall can guarantee you some profits from the content that remains behind it. But how much those profits are, depends on where you position the paywall. Furthermore, it may be defined not only by what users pay for but what they receive for free.

Similarly to SaaS companies, digital publishers have a few options they can explore when trying to make freemium work and make profits:

• Removing the Ads. People are more than willing to pay for content without ads and offering them the option can be a win-win situation for both sides. This way, you can make all your content accessible in a freemium plan supported by ads, and capitalize on ad-free subscriptions.
• Added Value. This approach is similar to the tiered pricing model. Publishers can make it work when they provide all of their content, or a significant portion of it, in the freemium plan but offer a paid upgrade. The premium package can offer added value to the core news – exclusive interviews and footage, bonus information, entertainment content like crossword puzzles and short stories, merchandise, and etc.
• Limited Usage. The most popular paywall publishers are using is limited usage. Customers have access to a set number of articles per week or per month. This method allows you to give your readers the freedom to set the boundaries of their freemium plan themselves, because they have access to all the content you publish, but have to choose only a number of pieces to read. The upselling potential here is substantial. When people start to reach their limit but trust and enjoy your content, it will be easier for them to cross the paywall and switch from freemium to premium.

The key to freemium success for digital publishers is to offer quality journalism to their readers, without depriving them of trustworthy news. Meanwhile, they can still capitalize on the additional value they provide, or simply switch from ads to subscriptions. This may increase the audience’s loyalty and will make it easier to upsell without losing customers who can’t afford to pay at the moment.

Content Creators

Experts, who run business information blogs, often have the same dilemma with free and paid content as publishers and SaaS companies – wondering what to keep behind a paywall and what to give away for free.

The simple answer here is that, as intimidating as this sounds, all your content should be available for free. This will help you build your reputation as a competent expert and an authority in your field and will make people trust you. Once you build brand awareness and popularity, you can leverage your image to promote the content behind the paywall.

Your free content should be available on your blog directly or through freemium subscriptions. Meanwhile, you can still capitalize on your knowledge by taking your paid content to the next level and offering depth, organization, and personalization.

Your paid content should be an upgrade to the freemium information, where you tailor-make solutions for your customers and adapt the information to their individual cases. You can do this by selling online courses with structured and comprehensive know-how, personal consultations, and developing individual strategies.

How you organize, pack, and sell the content behind the paywall depends on your niche and qualifications. But the point is that it should be targeted at the high-end user who’d rather pay for a ready solution or outsource, instead of wasting time looking for the answers themselves.

Bottom Line

In a competitive marketplace, the freemium model can be your ticket to building up a brand from scratch and establishing a reputation as a thought-leader and an expert in your field.

Without a loyal audience who values your free advice, praise your expertise, and recommend your brand, users may not hear about you or even if they do, they may not find you trustworthy.

Once you’ve gained the audience’s trust, it will be easier to upsell to them and capitalize on the efforts you’ve put in so far.