A business model that is made for the digital age
A portmanteau is a new word that is created when two different words are combined. Think brunch – a blend of breakfast and lunch, or how smog is a combination of smoke and fog.
Another example the new economy has given birth to is the concept of freemium. It is the result of “free” and “premium” put together. Like with other portmanteaus, freemium is descriptive of what it is about.
Freemium is a business model that provides customers with two-tier user experience. One is free; the other is not. When a business delivers a service for free, it is usually in its most simple, most basic form. The free service allows the business to establish a relationship with customers. It then acts as a gateway for other transactions. In this mode of business, extra features are unlocked at extra cost. Examples of these advanced services are greater usage limits or an ad-free experience.
It is different from a free trial in that the transactions are continuous. In a freemium model, customers get something for free, which anybody can access anytime. They can choose to invest more in it. On the contrary, a free trial allows a person to try out the service to make a choice whether they want to avail of it in the future.
A form of freemium has been around since the 1980s. Software companies offered programs that worked but had limited functions. To unlock its full capacity, the customer needed to pay for an upgrade. In 2006, Jarid Lukin, a corporate workflow professional, came up with the term “freemium” to describe the practice in a blog.
Freemium is favoured by internet-based companies that have long-term value. It is particularly popular for start-up companies. Providing an initial, free service can entice people to try out the service.
A key feature of freemium services is engagement. Common examples are rewards or ranking systems that allow the user to feel involved with the service. This is a technique used by the service to trigger transactions within the business. The amounts asked for by the company are generally small, so that customers do not mind paying for them. Although the payments are nominal, they are recurring to ensure continuous income for the company.
Given the way internet-businesses are thriving, it is impossible not to encounter some form of freemium service. It is offered in practically every sector of the economy.
Communications has Skype, which allows people to make calls over the internet. It is free to download the software and users can take advantage of the basic service for free. However, more advanced services, such as calling to a mobile phone, can only be availed of after paying for an upgraded account.
Gaming is another sector that benefits from the freemium model. Popular games such as Fortnite offer a tiered experience. It is free to play, but players can choose to pay to unlock rewards.
The fitness industry also has its own take on the freemium model. Strava, a fitness tracking app, has made changes in its subscription services. Under this new version, only paid subscribers can access features like route building.
Businesses that adopt the freemium model have several advantages. It can be an efficient way to increase brand awareness and build loyalty to the service. However, just like any other business system, the company needs to convert users into paying customers to make money.