Why a freemium / premium business model doesn’t work
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Photo Credit: Shutterstock, Vector infographics depicting freemium business model

Companies using freemium/premium business models often fail to achieve what they set out to accomplish while exhausting precious resources in the process – Here’s why:

The freemium/premium business model still exists as a valid way of making money for a company, though if we take a closer look into what it really entails, we would see that a company using such a model not only does not really benefit from it, but also exhausts its resources. Here’s why:

In its basic form, the virtual business model of Freemium and Premium was meant to tell the users that basic features of a certain product or service are given for free and later, should the user wish to explore the higher aspects of the same product or get additional benefits, it would come at a cost as stated in advance.

The inherent understanding is that the free version of the product is offered in exchange for examining the product or for its limited use. That is the quid pro quo.

The problem is that Free or Freemium is no longer perceived as really free.  We live in an era where companies want much more in return for providing us a free a product.  In today’s world, a free use of product is understood as “free of cash payment,” not free from other payments. We do pay for “Free”, but with other means; with information for example, often valued much higher than a cash payment.  When companies offer a product at a “freemium”, they’re hitching a ride on the use of the word “Free”.  They expect users have the product for assessment purposes.  But user’s basic conscious understanding is that they pay for “free.”  Alas, the problem of Freemium/Premium is rooted when companies use the word “freemium.” By doing so, they inadvertently ask users to change their acquired belief of the word “Free”.

In his bestselling book “Free” published in 2009, Chris Andersen speaks of a new era. An era where companies become multi-billion dollar giants by riding the free business model.  The main reason is that the word Free went through a transformation.  When applied to business models, it means different things.  Here are a few examples Andersen provides: “Buy one, get one free” really means a 50% discount when you buy 2; “free shipping” means that the price of shipping was incorporated into the product’s prices; a “free sample” is simple marketing that intended to introduce the product and trigger a slight feeling of moral debt that may encourage you to buy the full price item; free trial is for a limited time and opting out may be difficult.

The thing is – users get it.  And they pay, primarily because the set of expectations is understood by both parties.  When no cash is asked, the alternative payment in the form of the information we provide is self evident: from name, first and last, email address, location, friends we have, social networks we belong to, place of work, colleagues, school we went to, jobs we held, knowledge that we are willing to share, and maybe even our most closeted secrets.

There is more. Today we also provide our patterns of use of certain tools and elements – and for companies, this is just gold. All you have to do is read Charles Duhigg’s Power of Habit, where he describes how Wallmart knew ahead of time that a teenager was pregnant.  Through its coupons, the company notified the father before the teenager had a chance to tell him.

It has come to a tipping point that users now understand the real value of information they provide and this is causing the tables to turn.  Just recently, a new Unicorn (a billion dollar club member), Slack, a real-time messaging, archiving and search for the work place, is offering its users $100 to answer 6 questions.  I’ll say it again, a new company that has made it to a 1.1 Billion dollar valuation with its free product being in the market less than a year, is paying users for information.

We may even be seeing a new evolution of the word “free.”

Upgrading to Premium

Once users use the Freemium version of the product, it is in their mindset that they paid for it.  When companies are attempting to upgrade us to their premium package, suddenly a shift of mindset is not really received favorably.  This is because we already paid with our information and maybe also shared our knowledge.  When a company wants us to take real dollars out of our pockets, a premium price seems expensive and maybe even unfair. It’s not about the price.  It is the shift of the quid pro quo consciousness that occurs.

That leads companies to begin a process of “funneling,” meaning targeting and re-targeting those potential users that show some type of intent of using the product’s premium features. The purpose: converting as many users as possible to paying customers through any means necessary and at the lowest cost possible. We are used to seeing this through pop ups, targeted ads, re-target ads, emails, banners and friend suggestions.  This is essentially saying to the user, ‘I will do anything in my power to chase you down until you give up and upgrade.’  Users who finally upgrade do so more often than not because they succumb to the chasing, not because they really enjoyed the product or service. Others, become banner blind and pop up rejecters.

Suddenly, the agreed upon freemium relationship that the company had with its users turned into a relationship of a “chaser and a chase-ee.”  Let’s call it a linear relationship, because it is one side desperately trying to persuade another.

The amount of energy via means of time and money that is spent on chasing down users is thus directed at unfavorable relationship conditions that will not lead a company into exponential rapid growth. This is because a one time “convincing” is sporadic and does not guarantee users positive and willing engagement over time (“retention”).

Achieving rapid expansion

Expansion and growth occurs rapidly when all parties enjoy the transaction of using a certain product or service.  I’ll go as far as to say that a business can rapidly expand when it is based on the ultimate gain of all.

Thus, the starting point is to shift towards a positive enjoyable business transaction, as users are more willing to pay cash when they enjoy a certain product or service.  Just take “Toms” as an example.  “Toms” started with the motto “for every pair of shoes you buy, we will donate a pair to needy children.”  Today, the same transaction is applicable to many types of products that Toms provides.  Users purchased shoes because it felt good to give another pair to a needy child.   The company achieved exponential growth mainly because users enjoyed paying for the goods and feeling good when they were thinking about how their purchase just affected another human being.  They weren’t worn down to the point of doing so.  More so, many parties benefited from the purchase of the shoes.

That means if a company can divert it resources towards creating an enjoyable transaction for its users, it would be directing its time and money towards positive growth rather than towards a linear relationship that may or may not grow over time.

How to apply

Let’s take for an example a company in the presentations business.  The company’s product is a presentation tool and it is offered as “freemium” when a user provides her name, email and knowledge via sharing her presentation publicly.  The “premium” is for extra features such as keeping the presentation private, using the company’s logo and obtaining additional designs that are not included in the freemium package.  Once the user agreed to these terms and used the product “freely,” almost immediately the company starts to use its resources to persuade the user to upgrade.  This is the turning point in the relationship.  The user expressed her will, but the company engages is constant convincing.  This is leading the company to constantly calculate how much a user ‘costs’ until either the user upgrades or until the company will abandon chasing her down.  The company’s energy is kept in a state of a constantly ‘convincing’ relationship with the user and the user absorbs it as such.

Another way of approaching this maybe the following: allowing the user to use the presentation tool for free when the ‘upgrade’ is to offer additional services such as special fonts or images designed by an outside designer, help by others in enhancing the presentation, a special unique design of the presentation, or a reviewer’s suggestions.  In other words, this may become a marketplace with small transactions when the benefactors are all parties – with one main focus: users who will purchase specialized goods to enhance the delivery of their knowledge upon the presentation tool would feel good when paying.  Not only did they make their presentation better and specialized, others benefited from their purchase. This is a different mindset from the user when buying.  The benefits of a greater good create a different mindset than ultimately being convinced to upgrade.

Getting hands on

When thinking of the freemium/premium business model or of a direction to a new business model, think of ways that users would enjoy paying.  The company’s focus should be the user’s enjoyment; the result of which would be cash payment.

We enjoy paying for things that make us feel good and that have us ‘doing good’.  These are often manifested as paying for enhancing self-worth, enhancing appearance (of person, product or knowledge ), others benefit when I benefit, being perceived as socially positive, help with creating or manifesting a personal idea or product.  The focus on these services is on the personal manifestation through the product rather than the blunt offering of design services or extra features.

Should you still wish to continue and perfect your freemium/premium services, then to optimize them I suggest the following:

  1. Make sure that you articulate your offering very precisely.  Meaning, the user should know upfront what ‘freemium’ means to you as a company.  What do you expect the user to pay when getting the free version of the product?
  2. Think of ways for the premium package to include offerings that make the user feel good (Evernote is a great example).
  3. Divert your resources on letting the user feel good when using your product rather than on persuasion mechanics.

Ultimately, a company that engages in a business transaction with its virtual consumers is in the business of selling a mindset.  Once users ‘feel’ that the company works towards providing them with a true benefit, they will be more likely to positively engage with the company, and that will lead to prolonged company growth. This can be better achieved via providing the user with a benefit that would make him feel good when paying or engaging with the company, rather than sparks of ‘convincing points’ that provide the company with momentary wins.

Photo Credit: Shutterstock/ Vector infographics depicting freemium business model

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Emma Butin

About Emma Butin


Emma Butin is a technologically challenged geek. She loves everything that that is served in a no brainer effort. Emma’s obsession is to take big ideas and compile them into one button. That’s why she is working with start-ups right from their early stages distilling products to one button. In 2008 Emma Founded Kryon System, an international award winning software company with patent pending technology. In June 2013 Emma released her first book (in Hebrew) "About Economics and Love.” Today, Butin also teaches “strategic entrepreneurship in hi-tech” at the IDC Herzliya and engages in speaking around the world. Find out more at www.EmmaButin.com Find out more at www.EmmaButin.com

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