Essay Sample on Freemium Business Models

Introduction

Freemium business model involves a business pricing strategy that applies the concept of free and premium, whereby an enterprise introduces a free primary product or service in the market to attract consumers and create brand awareness, and then offers a non-premium version with features that are not available in the basic model (Kumar, 2014). Freemium has become a dominant model in the digital market, and some common freemium products include Spotify, Adobe, Skype, Evernote, Dropbox, Candy Crush, Temple, and LinkedIn among others. Tech entrepreneurs prefer the freemium model because the marginal cost used by each user is very minimal and it helps increase the users' dependence and loyalty of the product and is considered key for many enterprises' longevity and profitability (Kumar, 2014). The freemium model has been successful over the years because the concept of free product attracts a large user base, with many of the product users willing to convert to the premium version.

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Business enterprises should consider freemium as a pricing strategy when there is a high probability that the users will convert to premium versions; the value of upgrading is well defined to users. The product offered should have low marginal costs and high viral potential from the users already using it (Kumar, 2014). Companies should also monetize their free users through ads and data sales. The marketing mix of freemium is compelling because it attracts higher conversion rates through the larger base and therefore companies benefit from premium. The freemium version balances the features and innovation offered in the basic model and increases the willingness to convert to the premium version. Companies should also be committed to change by increasing the value and features offered in the premium models. Some of the advantages of using premium are that it provides an appropriate market for initial marketing; it secures the user base and offers an opportunity for testing and feedback (Kumar, 2014).

The challenges of using the freemium model are striking a balance between the features offered in the free model, differentiating the free and premium models in a way that convinces users to switch to the premium version. Other challenges include the costs of maintaining free models, value proposition where users only use the apps because they are free. Business entities have implemented a variety of strategies that distinguish between the free and premium models, and these strategies include limiting features, time, capacity, and support, ease of use, customer class, and seating (Evans, 2016).

The freemium model has also been successful because it turns its users to salespeople because they benefit from the premium models by convincing other consumers to use it. For instance, Skype users invite their friend to join Skype to make video calls, and Skype gains more users when the friends download the app. When compared to other business models such as free trial, consumers prefer freemium model because it offers a quality free app that boosts the sales of the paid app (Holm & Gunzel-Jensen, 2017). The freemium model is also successful users can experience the app firsthand, unlike other models that consumers rely on reviews. Some freemium models have failed because the entrepreneurs have not taken into consideration factors such as the total cost required to offer freemium products to users, the time needed for the freemium model to attract new consumers, updating prices, and finally the expected return on investment for providing freemium models (Holm & Gunzel-Jensen, 2017).

Mobile and online apps should use the freemium model by incorporating the freemium tactics to balance the cost of offering free models and at the same time enhance their users to convert to premium models. Companies should consider how their freemium models are priced and designed and keep track of how many users turn to premium models (Holm & Gunzel-Jensen, 2017). Other factors that companies need to understand are how the product is attracting new users, and in cases where it is not, they should improve their basic features. Companies should also change their freemium models when the models are attracting a lot of sign-ups, but few decide to pay, or when consumers do not understand the need to upgrade, the conversion rates are not favorable, or the difference between early adopters who are less price sensitive compared to later adapters (Holm & Gunzel-Jensen, 2017).

Conclusion

In conclusion, the freemium model is still a new concept in the marketing environment, and business entities need to draw a line between offering free products and services and placing products behind paywalls. Companies need to understand the market of potential users before submitting freemium models because the costs of maintenance may cause financial difficulties. Business entities need to do more research because freemium has been criticized for being underdeveloped and underutilized.

References

Evans, E. (2016). The economics of free: Freemium games, branding and the impatience economy. Convergence, 22(6), 563-580. Retrieved from; http://eprints.nottingham.ac.uk/30922/1/Evans%20-%20The%20Economics%20of%20Free%20(Convergence).pdf

Holm, A. B., & Gunzel-Jensen, F. (2017). Succeeding with freemium: strategies for implementation. Journal of Business Strategy, 38(2), 16-24. Retrieved from; https://pure.au.dk/ws/files/113978855/Succeeding_with_freemium_Post_print_2916.pdf

Kumar, V. (2014). Making" freemium" work. Harvard business review, 92(5), 27-29. Retrieved from; https://hbr.org/2014/05/making-freemium-work