Hopefully, no one is. It might seem unavoidable; either the business is losing out on profit by letting customers use their products for free, or consumers are paying for a product they could be getting for free. Yet big names like LinkedIn, Dropbox and now Youtube use a freemium business model. So, it must work, right?
Spoiler: it does.
As with any business model, the key lies in offering customer value. Spotify is a great example of this.
Spotify free provides basic functional value: people can listen to music, podcasts, and audiobooks. It is entirely sufficient if you just want the fundamental auditory experience, but what Spotify Premium offers is added functional value and experiential value.
Being able to listen offline and choose tracks create a higher level of product performance. Higher music quality and the removal of advertisements, which allows for more seamless listening, improve the sensory experience. Therein lies the value that earned Spotify €1,790M in Q3 of 2020.
But is it enough?
Gu, Kannan & Ma found that extending the premium product line improved sales of the ‘less premium’ of the premium products. Theoretically, if you had a tiered premium subscription, where Tier One was cheaper and had greater access than the free version but had limited access compared to Tier Two, and Tier Two was more expensive but allowed for full access to the product’s functions, consumers are more likely to pay for Tier One.
Customers tend to ‘compromise’; showing customers low-end and high-end options is an age-old sales tactic to get customers to settle for the ‘middle ground’.
In conclusion.
People love free stuff. Freemium pulls customers in to use the product, and after seeing the value that the premium product offers, they decide to go premium. 90% of Gen Zs and millennials already pay regularly for cultural content.
However, it is hard to get that conversion rate. Deciding what to make free, making sure that customers can see the value in paying for a premium product (sorry Canva, I don’t), committing to continuous product improvement – the list goes on.
I believe freemium is a sustainable model and will continue to be one of the most popular. What do you think? Is freemium is the way to go? Or are you an advocate for another business model?
A Digital Marketing Blog 
Hi Joan, great article! Love the comics again. Anyway, there used to be a time where people had to pay for everything, from music CDs to watching movies. Today, many millennials try to get free access to these applications simply because it was available legally. Although they might face some compromise such as interrupting advertisements, there is a market who wouldn’t mind. However, using Spotify as an example, this freemium model has certainly affected artistes’ ability to earn less than before. Do you feel it might be unfair that their work is undermined this way?
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Hi Kevin! I do agree that it is unfair that artistes’ livelihoods have suffered as a result, though Spotify is making music more available to the masses. I feel that it then comes down to Spotify to exhibit some corporate responsibility and ensure that the artists that contribute to making the platform what it is are properly compensated.
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Nice article 🙂 I notice that freemium products tend to be a bit more unpopular among certain users, but it’s used because it works, right? The way customers ‘compromise’ between low- and high-end that you mentioned is a super interesting psychology that I’m learning about, knowing customer psychology is definitely very useful in marketing.
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Hi Kerry, glad to see you like the post! Users will definitely have their favoured business models, and it will be up to the business to keep that in mind when determining the best model for themselves. Super cool to see that you’re studying that right now as well!
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Hi Joan, I was attracted by your post content as I have a keen interest in the freemium model – one of the most popular digital business models for social media platforms. Yes, I strongly agree with you that it is becoming harder and harder to convert a free users into a paying customer. A number of companies are stuck with free-forever customers or even face their content being stolen with Internet hacks by never-want-to-pay customers.
A good point you have mentioned is the use of consumer psychology “settling for the middle if being provided a low-end and high-end option” to strategize different tiers of subscription plan. Besides this, other platforms like Spotify also triggers customer demand by provided another free trial period for freemium customers to try premium features before actually paying. Furthermore, I would suggest building robust business models instead of a single focused models. For example, some free-from-the-beginning platforms have opt for monetization from customer data (such as targeted advertising for brands and publication of consumer reports). What do you think about this?
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Hi June! The concept of free trials of premium entirely slipped my mind when I was writing this post, and I entirely agree that it helps to trigger consumer demand; giving consumers a taste of the capabilities of a well-designed premium product is far more effective than any description.
Regarding multi-faceted business models, I do feel that the freemium model by itself stands to lose out due to the ‘free-forever’ and ‘never-want-to-pay’ customers you mentioned. Perhaps one way businesses can handle the freemium model is integrate the advertising model for the ‘free’ part and the subscription model for the ‘premium’ part, ensuring the ‘free’ part of ‘freemium’ remains sustainable and helps to maximise profit margins. I believe the data monetisation methods you mentioned can also be used, though I strongly believe that companies who use their customer data must be careful to respect individual freedoms and privacy (see the recent fallout over Whatsapp).
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Hi Joan, thank you for an insightful post! I do agree with you that freemium is a sustainable model.
However, other than the freemium, I also thought that the subscription model can be a sustainable model as well. If companies provide unique service/product to the consumers it can help to ensure that consumers stay subscripted to their service/product. An example is Netflix, where they provide users with movies and series that are exclusive to its platform (Netflix Original) What are your views on the subscription business model?
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Hi Xiang Jun! I agree that the subscription model can be a sustainable model too; businesses may see subscriptions as a form of guaranteed revenue (https://www.forbes.com/sites/forbestechcouncil/2019/08/12/whats-behind-the-rise-of-the-subscription-model/?sh=508006fb35c3). The differentiated benefit of the service/product is definitely what keeps consumers subscribed, and the exclusive quality content on Netflix Premium is a good example. I believe subscription models may face a barrier of entry, unlike freemium models; one generally must subscribe to experience the product. However, many businesses have managed to overcome this by offering free trials, Netflix being one of them. This runs parallel to the freemium model, and Spotify uses a combination of freemium and subscription which I find to be very interesting as it significantly lowers the entry barrier for consumers by not limiting the duration of the ‘trial period’ and maintaining the ‘guaranteed revenue’ aspect of subscriptions.
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Hey Joan!
I really enjoyed your article, especially your point on the shared psychology of most people to settle for the middle ground in picking Tier 1 premium services over Tier 2 services. To add on to what you have already said, I suppose this mindset is also based on a weightage of losses and gains, in which people compare and balance between how much they spend and how many extra features they can get in return.
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Hi Dominy, glad you enjoyed the blog post! Indeed, consumers make decisions based on perceived value (benefits – cost); the psychology of the ‘middle ground’ is obsolete if a business is unable to provide value to its consumers in the first place.
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Hi Joan, thank you for sharing! This article most definitely inspired a few thoughts in me and I would absolutely love to hear more about your thoughts.
“Customers tend to ‘compromise’; showing customers low-end and high-end options is an age-old sales tactic to get customers to settle for the ‘middle ground’.” Here, I struggle to find what the “middle ground” in a freemium model would entail, or what you’re referring to, I might need some clarity on this end.
I do however agree with you that the freemium model is a sustainable one, and probably has lasted for quite a while. In fact, as I was reading, I started to think of video game models in which many of the most popular video/mobile games are free – Call of Duty, League of Legends, Player’s Unknown Battle Ground. I believe that revenue is generated from purchase of Upgrades, or, as they the freemium model would put it: premium features. Much like streaming services where an Upgrade entails gaining access to more features, it struck me when reading your post that video games do the same.
On that note, I would further argue that the precise element which entices people to purchase premium features is convenience. In games, I imagine it to encompass higher probability for winning, and in streaming services, clearly, access to more varied (if not unlimited) content. Circling back to the “middle ground” then, would you suggest perhaps that the Freemium model eliminates the “middle ground” entirely, which allows for a two-tiered model that further encourages people to, for convenience’s sake, purchase the Upgrade? How do we, as Gen Zs and millennials, determine our “just right” (if any)? Would you think that there are any other factors, apart from convenience, that determines our pattern to purchase premium features? Could you also go as far as to say that subscribing to premium features in these days is liken to an act of conspicuous consumption in our culturally omnivorous society? I would love to hear more from you about this!
– Rachelle
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Hi Rachelle! To clarify, the ‘middle ground’ is with reference to the findings of Gu, Kannan & Ma; it refers to how when offered with three levels of offerings (the free but limited option, the moderately priced and less limited option, and the expensive option that has full access) they tend to compromise and go for the moderately priced option. They are willing to pay for more functions but unwilling to go for what they perceive as unnecessary and expensive. Hope that this helps!
Indeed, many businesses position convenience as one of the greatest sources of value for consumers who purchase freemium options. Eliminating the ‘middle ground’ option does increase the convenience by removing the hassle of having to consider their options, yet I would suggest a multi-faceted model that increases the options for consumers instead. Making individual features premium and allowing consumers to select which options fulfill their needs the most holds much appeal as we move into an age of personalised products (https://www.forbes.com/sites/stephanieburns/2020/01/10/why-product-customization-will-position-your-brand-to-win-in-2020/?sh=55d221662911). This is similar to what many video games do as well, with individually priced upgrades for certain aspects.
There are definitely other factors besides convenience that determines consumers’ purchase of premium features, but this is varied and highly subjective to what the individual perceives as valuable, though personalisation is a common one. Consumers purchase based on perceived value, after all. This also relates to your question about conspicuous consumption; the flaunting of one’s social status may constitute part of the symbolic/expressive value it brings to consumers, but consumers’ definition of value differs between individuals.
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Hello! Joan, I do agree with your opinion that freemium is a sustainable model. Although, it is a bit difficult to find out how much to give away for free so that online users will not stop using it and wish to upgrade to a paying plan. But, once users feel that free-version is effective, they will pay money to upgrade to a premium version.
And to be honest, I’m one of the victims that paid money to upgrade the premium version in the mobile game. However, I want to say that the freemium model is definitely good especially in mobile games because I’m one of those people who have to experience the game to see whether I like the game or not.
So in my opinion, the freemium model will continue to be one of the most popular models, especially in mobile games.
Have you ever spend money to upgrade the premium version?
Thanks~!
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Hi Seung Won! Indeed the crux of the freemium model is balancing the attributes that are restricted to the premium version; I use Spotify premium because the skip function is useful when I’m practicing songs, but the free version of Canva is sufficient for my design purposes when combined with other programs. This article by Forbes (https://www.forbes.com/sites/sujanpatel/2015/04/29/7-examples-of-freemium-products-done-right/?sh=7c6b44d96f15) shares several good examples of how companies have structured their freemium model. The companies have either let users have a sensing of the full potential of the product, effectively enticing them to upgrade to the full version, or due to the nature of their product, users will find themselves having to scale up to the premium version.
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