What is Freemium and Does Freemium Work For All Businesses
The term freemium gives many business owners, especially business owners that provide services, a heart attack. Just the thought of giving away free products or services strikes a chord with many business owners. However, over the years I have used freemium services to increase revenue and build a client base.
Over the last 7 years, I have owned a Phoenix based marketing agency. My marketing agency has offered everything from lead generation services, inbound marketing services, website development service, and marketing strategy.
The hardest part of owning a marketing agency is finding new business. There are many businesses, especially small businesses, that have been taken advantage of in the past. These past experiences have made it hard to sell marketing services to these folks. Even marketing services that work.
Small business owners, need to get results. This is where freemium service comes into play. By offering freemium services you give customers a taste of what you can provide. This is how I built my marketing agency.
Before we dive further, I want to ensure we are all on the same page. What is the definition of freemium? Freemium is a pricing strategy by which a product or service is provided free of charge, but money is charged for additional features, services, or virtual or physical goods.
Okay, now that we are all on the same page let’s dive a little bit further into freemium services.
Types of Freemium Services
There are multiple types of freemium services that your company can provide. However, I believe that all types of freemium boil down to three buckets. I know there are others, but let’s try to keep things simple here.
First is the limited use. This freemium service gives you access to a product or service with limited features. Maybe you only get 50% of the product or service. The limited use model is a great way to let customers try your product or service before buying.
The free trial is one of the most common freemium services. In this model, customers are given the ability to use the entire product or service for a limited time. Typically, this time frame is 30-days. This model makes it very easy for your customers to give your business try.
Finally, there is the cross-selling model. In this freemium model the product or service is free. In order for the company to make money, they need to cross-sell and promote other products. These products can help enhance the free version or help the customer in other ways.
Pros and Cons of Freemium Services
Freemium services have become very common in the SAAS (software as a service) industry. To make a decision on whether freemium services are for you business, you need to understand the pros and cons.
- Solid Offer to Customer. Having an offer for your customer helps with conversion. Freemium models give an offer that adds value to your end customer. This help increases conversion and build a user base.
- Attract More Users. Being able to give your customers something to try will entice them to try. This also makes your product or service more attractive. This, in turn, will attract a larger audience.
- Viral Growth and Sharing. We all know how important social media marketing can be for your business. The ability to give away a free sample and provide immediate value is a great way to get more shares and likes. Who does not want to share something that is awesome and free?
- Low Barrier to entry. Making it easy for the customer to try your product or service decreases the chance they say no. This lowers the barrier to entry, making it easy for your customer to get hooked on your product or service.
- Lack of Revenue. The biggest concern about freemium services is the lack of revenue. We all know that it is super hard to run a business, especially without revenue. Freemium services can put your business at risk.
- Run in The Red. You just invested a lot of cash into your business from R&D, new website, and staff, you are already running in the red. Adding a free product or service does not help your business become profitable.
- High Churn Rate. In many cases, freemium services have a higher churn rate. “I will give it a try.” The problem is that once the free-trial or need for additional services come up, the customer finds an alternative. Make sure you are adding value to your customer to help reduce the churn rate.
- Devalue Product. The term free sometimes comes with the perception of less value. Freemium services can give the impression that your product or service is of less value than the competition. Make sure to back your freemium services up with case studies and testimonials.
The Big Question: Does Freemium Make Money?
Okay, here is the big question that we are trying to answer today. Does freemium actually work? Let’s look at a couple cases of each freemium service type.
Being in marketing over the years I have used and love HootSuite. HootSuite is also a great example of a limited use freemium service.
HootSuite is a social media marketing tool that allows you to schedule social media posts to Twitter, Facebook, Google Plus, LinkedIn, and Instagram. Their freemium model includes 3 accounts for free. The problem is that most companies need 4-5 accounts to manage their entire social media marketing.
Their paid plans start at $19 per month. A paid plan gives you the ability to add up to 10 accounts, upload your social media updates in bulk, and access unlimited RSS feeds.
Well, HootSuite has revenue of about $32 million a year and is the largest social media scheduling platform on the market. So, the limited use freemium service can be very profitable.
Keeping in the same industry, let’s look at SproutSocial. Again, Sprout is a social media scheduling tool, just like HootSuite. Sprout is maybe a little more powerful, but it is also more expensive with plans starting at $99 per month.
Sprout has a 30-day free trial that gives you access to all the bells and whistles. You can connect your social media accounts and get moving. During the 30-day trial, you receive emails from account managers and on-boarding specialist to help you “get more out of your trial”.
If you are not hooked at the end of the trial, your login does not work and you are left in the dark. This freemium model gets you using the application in hope that it hooks you and you make a purchase.
Sprout is the second largest social company in their industry with revenue of about $19M per year. Does this mean that the free trial does not work as well? No, but you can see that this model can help you build a large company.
HubSpot recently introduced the free CRM. This free CRM is a great tool for any business that is not taking advantage of the power a CRM can provide. This is a totally free CRM that gives you all the bells and whistles and functions just like a full-featured CRM.
Now, if you want to take advantage of integrating social media, marketing automation, SEO, and their blogging software you are going to have to upgrade. Annual revenue for HubSpot is nearly $280 million per year. Again, this does not mean that the cross-sell freemium service is best.
This is the cross-sell to a paid marketing freemium model. HubSpot uses the free CRM to introduce you to the marketing platform and a paid subscription. The cross-sell freemium service is a great way to build a user base.
Freemium Case Study: How I Landed my First Lead Generation Client
Okay, one last case study for you.
As we started our marketing agency we set out to attract a new customer through inbound marketing and networking. We continued to market ourselves. We would get the impression, meet people, but never close any new business. It sucked. Revenue was lacking and bills were pilling up. We knew it was time for something different.
So, we tried something new and decided to take the freemium model to the service industry. We figured that B2B demand generation was different, we needed to think different. We started creating sales funnels for free, no charge. That’s right, we did work for free. This included a landing page, form, and even provide a CRM for 30 days.
I know, most marketing agencies would never do this.
We would push traffic to the landing page through paid Facebook and PPC advertising ($150 per account, paid by the client). The goal was simple, to generate leads for our clients and increase their database.
Once the sales funnel was in place and the ads produced leads, the client would then agree to pay for our services because they wanted to keep the leads coming in. It was the classic free-trial.
Over the first 30 days, we were able to increase our client base from 0 to 8 paying clients with a 75% conversion rate. This helped us start the growth of the business and helped us eventually use cross-selling to increase revenue further. We became a trusted advisor.
Is freemium a good small business marketing idea that you should take advantage of? Only you can answer this. Just like anything, freemium services are not for everyone, but I think there is something that you can do for free to add value to the customer. From a free estimate to a free service, there is always a way to give value to the customer for free. Just make sure that you have a monetization strategy in place before you start giving everything away for free.