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The Freemium Business Model — Best Practices for App & Plugin Developers


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Web Development

Summary (TL;DR): The freemium business model lets users download your app or plugin for free, but with limited access. If they want the full experience, they’ll need to upgrade to a premium version for a monthly or annual fee. This is often a lucrative investment for app and web developers, as it makes their app available for a wider audience, builds brand awareness and helps in converting free users into paying users. 

The heart of app and plugin development is creating great and useful apps. But, it’s also about finding new ways to acquire customers, which can be a laborious, time-consuming, and expensive process. To ensure enough people purchase your app, you need to:

  • Educate users on how it will improve their life
  • Demonstrate its value
  • Build a relationship based on mutual trust

More often than not, this means stretching your marketing and sales budget further than what’s reasonable. 

One possible solution that could help you in this endeavor, is using a freemium business model. Offering basic app features for free, then giving users the option to upgrade to a premium account for an annual or monthly fee is a way to take this burden off your shoulders. The users learn to use and experience the app for themselves with no risks, and once they do, they will be more inclined to convert and become paying customers. 

In this article, we’ll discuss everything you need to know about offering a freemium app to your target audience. Keep reading to learn more!

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Table of Contents

What is a Freemium Business Model?
>> Definition
>> How Does a Freemium Model Work?
>> Freemium vs. Free Trial
The Advantages & Disadvantages of the Freemium Model
>> Advantages of the Freemium Model
>> Disadvantages of the Freemium Model
How To Build a Freemium Model for Your App
>> What Should Be Free?
>> What Should Be Limited?
How To Optimize Your Freemium Model & Increase Conversion Rates
>> Set the Right Product Limitations for Your Free Account
>> Help Users to Discover the Value of Your App
>> Provide Support for Free Users
>> Place Visible Upgrade Reminders Inside Your App
>> Set Target Conversion Rates, Measure and Improve
Good Examples Freemium Models
>> Spotify
>> Zapier
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What is a Freemium Business Model?

The freemium business model is becoming more and more popular in the app and plugin development world. It’s a low-cost way to increase brand awareness & product familiarity and to boost conversions. 

Freemium is especially effective in the technology world. As of 2019, 54% of all app developers reported using the freemium revenue model!

Definition

As you might be able to tell, the word “freemium” combines two other words: “free” and “premium.” It’s a two-tiered customer acquisition model that aims to establish trust between your company and your customer base by splitting users into free and premium tiers.

Users can download your app or plugin for free, then create a basic account to access limited features. If they choose to upgrade to a paid, or premium, account, they’ll be able to access everything your app has to offer. This opens your customer base to a wider audience, who can then use the basic features to decide if they want to upgrade. 

How Does a Freemium Model Work?

The freemium business model works by offering a free basic product to users, with the option to upgrade to a premium version for a monthly or annual fee. This revenue model opens your product up to a wider range of people, letting them experience and understand exactly what it offers and how it can benefit them in their everyday lives. If they like what they see in the basic version, users may choose to upgrade in order to enjoy premium-level features and services. 

The ultimate goal of freemium apps is to decrease a business’s or developer’s customer acquisition cost by giving users a taste of what your product is all about before making any kind of purchase. This reduces pressure and expanses on both sides.  

Freemium vs. Free Trial

Most people are familiar with the concept of a “free trial,” but fewer understand what exactly “freemium” means. Let’s discuss the difference between the two revenue models.

Free trials allow customers to enjoy the full range of an app’s offerings at no cost for a set period of time. However, a credit card payment is required upfront, and if a user does not feel that the features are worth paying for once the trial period is up, they’ll have to cancel their membership to avoid being charged. If a user does not continue subscribing after their free trial, they’re likely to abandon the software altogether. 

The freemium revenue model, on the other hand, eliminates any pressure on the user’s end. They can access your basic features indefinitely, with the option to upgrade available at all times. This gives them more time to experience the app from a sort of “trial” standpoint, then upgrade if and when they’re ready. Because there’s no stress of deciding within a certain amount of time, they’re likely to continue using your app for much longer. 

The Advantages & Disadvantages of the Freemium Model

As with all business models, there are advantages and disadvantages to using a freemium revenue model. It’s your job to weigh the pros and cons, then decide if creating a freemium app would be in your best interests.

Advantages of the Freemium Model

The biggest advantage of the freemium revenue model is how well it works as a customer acquisition tool. There’s no risk in downloading or installing a free app or plugin, so you’re much more likely to get a larger number of initial downloads. Once they’ve installed your app, customers have all the time in the world to learn about and understand what exactly the product does. Then, they can decide on their own time whether or not they’d like to upgrade.

Similar to the above point, the freemium model takes all the marketing responsibilities off your company’s hands. There’s no need to “sell” users on your product – the functionality and user experience can speak for themselves. As they begin to use the app or plugin, they’ll see exactly how it can fit into their personal or work life. They might even start referring their friends, family members, or co-workers, generating more leads for you!

While the benefits of paid, premium customers are obvious, you shouldn’t discount the value of free users! These potential customers still allow you to collect valuable information on your users’ habits and interests, which you can then use to tailor your targeted advertisements and enhance your product. 

Disadvantages of the Freemium Model

Now that we’ve highlighted the argument for the freemium business model, let’s discuss the argument against it. First, you’ll have to prepare for the server space and customer service needs the freemium model creates. 

The majority of people who use your app, at least at the beginning, will be free users. This means a lot of your resources, including customer service representatives and server space, will be used for people who aren’t paying for your products. So, before choosing a freemium model for your app, make sure you have the resources to make up for this potential loss. 

Another disadvantage is that freemium tends to have a low conversion rate. While there are steps you can take to increase it, the average conversion rate is around 2-5%, meaning the majority of your free users may not decide to upgrade. However, you can increase this rate by carefully balancing the features you offer in both the basic and premium versions. 

How To Build a Freemium Model for Your App

If you’ve decided that a freemium business model is an ideal way to market your app or plugin, the next step is deciding how it will work. Examine the features, usage terms, and support levels you want to offer, then decide how you’ll divide them between your free and paid users. 

Expect to make adjustments over time. It might take a lot of tweaking before you get things just right. And, remember — your ultimate goal is to attract new users, then convince them to convert to a paid account. 

What Should Be Free?

One of the first things to think about is the features you’ll offer to users who haven’t upgraded to the paid version of your app. Make sure to consider this carefully. You need to be sure the features you’re offering for free are enough to attract users, but not so compelling that they don’t choose to upgrade.

As time goes on, you might need to tweak the features you offer for free to maintain a good balance between attracting new users and attracting paying customers. However, you don’t want to take away too many basic features at once. Otherwise, users may begin abandoning the app altogether.

What Should Be Limited?

Now that you have the basic features down, it’s time to consider the things you’ll only offer to your premium users. What features are worth paying for? Will you impose any usage limits? How much customer support will they receive compared to basic users? 

While you want to make sure you have enough basic offerings to draw people in, you don’t want to give the best parts of your app away for free. Now, let’s discuss how you can leverage the following things to increase your conversion rate: 

  • Features
  • Usage
  • Support

Features

Certain features of your app or plugin should only be available to premium users. While you may have to sacrifice one or two of your best features by making them free to draw in an audience, don’t give all the best parts away for free. Think about your target audience: what do they need most? How can you leverage these needs to make your app exciting enough for them to pay for?

Usage

In addition to feature limits, you can also impose usage limits on free users to convince them to upgrade. Perhaps you’ll only allow one device to be logged into the account at one time, or maybe users will have only a few hours of screen time available per day, or perhaps there will be limited usage, storage or bandwidth. At the same time, however, you want to be sure these limits aren’t so restrictive that your basic users stop using the service. 

Support

Some businesses choose to offer two levels of customer support: basic and priority. Basic customer support could mean longer response wait times and fewer contact options, while priority support often means live chats with representatives, quick responses, and more. Limiting the amount of support you offer to free users could encourage them to upgrade. 

How To Optimize Your Freemium Model & Increase Conversion Rates

The freemium revenue model is dependent on free users converting to premium users. To make sure you can do this successfully, you need to use the right strategies that encourage people to upgrade. Your app should make it very clear that customers will benefit from upgrading, because they need to know exactly what they’re missing out on. 

A few ways to increase your conversion rates and optimize the freemium model include:

  • Set the right product limitations
  • Help users discover your app’s value
  • Provide limited support for free users
  • Create visible upgrade reminders
  • Set conversion goals, measure and improve regularly

Set the Right Product Limitations for Your Free Account

You should have enough features available to free users to make using your app worthwhile, but not so many that they don’t see a reason to upgrade. At the same time, you have to make sure the premium features are worth paying for. Too few basic features or too many premium features could lead your customers to abandon the app altogether. Do your research by looking up products similar to yours that offer a freemium model, and see what makes them successful. 

Help Users to Discover the Value of Your App

People are much more likely to pay for something they see value in. For this reason, you need to demonstrate this value if you want more users to convert to a premium account. Make sure you’re always highlighting the best, most useful aspects of your app, and consider creating a user tutorial or other knowledge base containing all the product features. 

Highlight the App’s Best Features

Now’s the time to use the data you’ve collected from all your premium users to your advantage. What features are most popular? Where are they spending most of their time while using the app? Use this information to highlight your app’s best features in upgrade reminders, online advertisements, or other promotional materials. 

Create a Knowledge Base of All the App’s Features

Another surefire way to increase conversions is by making sure all your users are aware of just how much you have to offer. Consider creating an app or plugin tutorial for new users, complete with all the premium features they can upgrade to use for real. If a tutorial isn’t an option, create some kind of knowledge base in the Help or Support section of your app that explains each feature to users.

Provide Support for Free Users

Offering support to your users who haven’t upgraded yet is essential in turning them into paying customers. Many developers find success using a tiered support model, which offers limited support to free users. There are a couple of ways to incorporate this. Some of the things to consider offering paid users include:

  • A premium live chat option
  • A priority support phone line
  • Shorter team response times

This tiered system still offers help and support for free users, but premium users receive a higher level of this support. If a user will be reaching out often enough, this may create just enough friction to encourage them to upgrade. 

Place Visible Upgrade Reminders Inside Your App

While you don’t want to be excessive about it, reminding your users of the benefits they’ll enjoy by upgrading may convince them to convert to a premium account. You can do this through in-app pop-ups or email reminders. Entice your users by mentioning the features that are most popular with paid users, as well as what exactly these features can do for them. 

Set Target Conversion Rates, Measure and Improve

If you want to increase conversions, you first need to have a goal in mind. Set a target conversion rate, then work towards reaching it. Look at your usage data to see where users are getting the most value from your app, then adjust your upgrade reminders, features, and customer support system in a way that will encourage more people to convert.

You don’t want to make too many changes at once, because you need to be able to tell what’s effective at increasing conversions. Make one change, then review your conversion rates over the next couple of weeks to see if it’s made a difference. Then, adjust accordingly. 

Good Examples of Freemium Models

Maybe you aren’t sold on the freemium model just yet. Perhaps you want more information on just how valuable it can be! If so, keep reading to learn about some great examples of successful freemium apps. 

Spotify

Spotify is a music streaming service, and perhaps one of the world’s most popular examples of the freemium business model. With a 45% conversion rate, Spotify is a prime example of how to get the freemium model right. 

Spotify is free to download, and users can stream music from different radio stations, albums, and playlists. However, free users will hear ads between every few songs and can’t freely skip through songs they don’t like. When customers decide to upgrade to Spotify Premium, they can listen to whatever song they want ad-free, and they’ll have an unlimited number of song skips. 

Zapier

Zapier is a web application that allows businesses to use a variety of digital automation tools to streamline their workflows and integrate different web applications. It uses a tiered system, with several membership levels available, including a free one. Free users have a limited number of “Zaps,” or automated triggers they can set, as well as limited syncing intervals.

Upgrading to a paid account increases the number of Zaps you have and increases your syncing intervals to streamline operations. In addition, it also increases the number of users you can have on the same account, making a premium account a popular option for teams. 

Build Your Apps With Common Ninja & Let Us Take Care of Subscription & Billing Management

Creating apps on Common Ninja’s Developer Platform comes with great benefits, one of which is the subscription and billing management tools you will get. These will enable your apps to be sold and monetized on different platforms with varying pricing plans and subscription models. 

Take advantage of Common Ninja’s Developer Platform — it’s FREE!

Make Your App Freemium for Improved Brand Awareness and Conversions

Offering a freemium app is an excellent way to increase the number of people who pay to use your apps, plugins, widgets, and more. Like all revenue models, however, it comes with advantages and disadvantages. Make sure to carefully weigh these pros and cons before deciding whether or not you’ll offer freemium apps. 

If you do choose to offer a freemium app, you’ll need a plan for which features are included in the free version and which you’ll limit to premium users. Make sure your basic users get enough out of their experience to entice them to upgrade, but not so many that they don’t see the value of doing so.