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The Freemium Model: Is Acquiring Customers Worth the Cost?

Acquiring new customers and retaining those who have already purchased products or services should be a primary concern for any organization. A great deal of thought goes into developing acquisition and retention methods, including setting the price for the goods or services. The freemium model of pricing is one price method geared toward attracting customers.

What is the Freemium Model?

The freemium model is a hybrid pricing model that starts out free of charge to customers, but the company then offers a premium version available for a price to those same customers. The free version is intended to provide the customer with a large enough sample of the premium product or service that the customer will then feel inclined to pay the premium price to receive the full version.

The freemium model of pricing is not new. It was often used by software companies in the 1980s to sell shareware or lite versions of retail software.

Copying a piece of software for distribution was inexpensive at the time, requiring the cost of a floppy disc or a CD-ROM for distribution. A stripped version of the full premium piece of software would be burned onto the disc. Often, the stripped version would be time-limited or have many more advanced features removed. Some free software versions would retain access to all of the features but not allow users to save anything produced with the software. No matter the approach used, the desired result was to have the customer pay for the premium version containing the full piece of software.

How the Freemium Model is used today

Freemium model pricing is still being used today, largely in the software world, where placing restriction on the use of certain sections of code is easy. Lite versions of popular software still exist, providing enough key features to make freemium users opt for the highly priced premium versions. However, some software companies offer their lite versions at a reduced rate, rather than for free.

Freemium pricing is also gaining popularity in Web-based services such as online productivity software or online games. Many of these services operate like the shareware versions of software once released on floppy disc or CD. Now, however, users are offered a slightly reduced user experience with premium add-ons—or, in some game titles, upgrades—for a price.

Targeting relevant customers

Any company considering a freemium pricing model must determine if there truly is a way of monetizing its free customers into premium users. One popular method is the cross-sell. By requiring free users to accept advertising or emails sent from the product or service provider, the customer base becomes one large marketing pool. Developing a marketing campaign targeted at these customers is easier than going after random individuals, because the company producing the freemium model product already has some idea of the customer's tastes.

Freemium model pricing can be a sustainable and profitable if the free version of the product or service provides enough inherent value to prompt the user into purchasing the premium content. The freemium model is a way to get the product or service into the hands of the customer early on and hook that person without having to face the initial resistance of a buying decision.

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