We are experiencing an incredible revolution of new Internet-based business models that aim to attract the attention of a large number of customers and consolidate a product or service as an alternative to the traditional model. One of the most popular is the freemium business model, which is already used by many companies.
This term, popularized in 2006 by Fred Wilson of Union Square Ventures, consists of offering the basic part of a service or product for free, with the option to choose an advanced service with access to advanced features and functions after paying a subscription fee or subscription fee. The term “freemium”, later coined by Jared Lukin, is the result of combining two aspects that define the commercial model: “free” and “premium”.
This business model is not new: it was already used in the 1980s with restrictions related to time or features. The floppy disk illustrates some of the first examples of the use of a shareware version with limited software. By definition, offering a free product makes it easy to attract new customers, and the Internet is the perfect place to find thousands of them. On the other hand, even if a free customer does not upgrade to premium, he or she can invite other users who might be interested in the product’s premium service.
For the freemium model to work, it must survive with less than 10% of paying users. In other words, a percentage of less than 10% paying users must support more than 90% of free users and still be profitable. But there are many ways to approach this model depending on the service or product offered. Among the most commonly used restrictions of the freemium model, we find:
- Time limit: This restriction is one of the most commonly used in the software and video game industry. It consists of using the product for a trial period, after which it is blocked and a payment is required to reactivate the product.
- Usage limit: It consists of offering a limited number of licenses with the possibility of expanding their number after payment.
- Functionality limited: This is where access to the main functions of a service or product is restricted, with the ability to access advanced features, functions, and additional services after payment.
It should be noted that this classification does not characterize a specific freemium model and usually two or more restrictions are used depending on the type of business or service offered. Therefore, the ways in which the freemium business model is used are very diverse and do not always have the expected success. And to illustrate this business model, let’s look at a few examples.
Spotify
The Swedish music streaming platform began its journey as a completely free service, requiring no costs or advertising. Instead, as the number of registered users grew, the platform included advertising and limited the number of views of each song for a free account. A Spotify Premium account offers unlimited ad-free playback for a monthly fee. Other formulas will offer a Spotify Premium account at a 40% discount to all their customers, offering customers who are already Premium the opportunity to cancel their subscription to enjoy the service.
Spotify currently has over 240 million Premium subscribers, with a total of 620 million users worldwide.
Premium smartphone apps, which are free to download but allow you to get additional content through micropayments within the app itself, are leading the current mobile landscape.
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Read also: Spotify AI Will Clone Voices.
