Software developers popularized freemium pricing during the 1980s as their main revenue model and part of their marketing strategies. It remains prevalent across the modern software industry, the specific video gaming industry, and other service-oriented markets due to its potential impact on raising brand awareness and attracting the target consumers.
Pros: Advantages of Freemium Business Model
The term “freemium” is a portmanteau of the words “free” and “premium.” It is fundamentally a business or revenue-generation model and a pricing strategy that involves offering basic products to target consumers at no cost and then charging them a premium for advanced product features and benefits or to access supplemental product functionalities.
Below are the specific advantages and applications of this business model and pricing strategy:
• Market Entry and Product Introduction: One of the major advantages of the freemium business model is that it is a market entry solution or a specific tactic for introducing a new product in the market. Offering a product free of charge can attract consumers while opening the possibilities for converting them into paying consumers.
• Generating Leads and Building Userbase: Furthermore, it can also help a business organization populate its list of leads for possible consumers, thus allowing it to pursue the other stages of the sales process such as lead nurturing, pitching the paid versions of the products to the contact list, and closing a sale.
• Suitable for Service and Digital Products: Another advantage of the freemium business model is that it is suitable for services and even digital products such as software and content. Companies do not need to manufacture and maintain an inventory, thereby reducing the costs associated with giving these products for free.
• Using Other Revenue Stream Options: Certain businesses can still earn from this business model by monetizing their userbases through advertisements. Examples include video game developers and content publishers that place digital ads or utilize digital advertiser networks to monetize their digital products.
• Market Research and Product Testing: The model can also be used to push a concept or idea, prototype product, or beta product and features to the market for the sole purpose of getting relevant market insights from the target user and actual userbase. Remember that offering a product for free eliminates the usage barrier.
Cons: Disadvantages of Freemium Pricing Strategy
A freemium business model is not for everyone due to the obvious reason that it is unsuitable for certain products and particular markets. Producers of tangible products would not benefit from manufacturing a large batch of basic products intended to be given for free in hopes of converting the recipients into actual consumers.
Below are the specific disadvantages and limitations of this business model and pricing strategy:
• Requires Effective Marketing Strategy: A notable disadvantage of a freemium business model is that it is not a standalone marketing tactic and revenue model. The entire marketing mix should be coherent and the general marketing strategy should be comprehensive enough to supplement its benefits.
• Dependent on the Relevance of the Product: It is also impossible to maximize the aforementioned advantages of this model if the product is not relevant to the target consumers or if it does not provide pertinent features and benefits, as well as a strong and unique value proposition that sets it apart from the competition.
• Can Be Deceiving and Exploitative: Some companies have been criticized for their alleged exploitative tactics. So-called free-to-play video games have been labeled as play-to-win games for giving an unfair advantage to gamers who pay more money while disadvantaging those who spend their mere time and effort.
• Associated Incremental Overhead Expenses: Another disadvantage of a freemium business model is that it can leave a business bleeding with cash. For example, software developers would not be able to sustain running their businesses and maintaining software support for a growing large pool of free users.
• Issues with Conversation and Churn Rates: The fact remains that several freemium products never achieve market success as evident from their inability to convert free users to premium-paying customers. Furthermore, some also suffer from high churn rates, especially if there are alternatives and product substitutes.