The Freemium Model, or “Give away the razors and sell the blades”
This popular monetization model for app developers means that they give away their products and services free to build a customer base. Afterwards, the app developers try to sell premium features to their new customer base.
Some of the more popular companies using a freemium model are, for example, Skype or Dropbox.
An old model, which was made popular by Netscape in the 90’s. Back in time, this model wasn’t called Freemium, but related to a much older role model from another industry: “Give away the razors and sell the blades”.
The freemium approach doesn’t make necessarily sense for any business that can’t eventually reach millions of users. Typically only 1% or 2% of users will upgrade to a paid product, says the CEO of Techstars.
Here the basic steps to making Freemium work (as described by WSJ here):
1. Limit free offerings to avoid cannibalizing your paid customers. Expect your free-to-paid conversion rate to be less than 5%.
2. Promote both free and paid offerings, rather than focus just on acquiring paid users.
3. Create an incentive for free users to refer their friends to your service or product.
4. Clearly distinguish between free and paid plans, so users can see value in paying for more.
5. Create a natural progression from free-to-paid features, such as the option to buy extra storage space on a cloud service once a user runs out of free space.
Dig into Chris Anderson’s Book “Free - The Future of a Radical Price” to learn more about Freemium.