When It Comes to Online Services, Do You Speak “Freemium”?

freemium online business model with services

Online service providers have been exploring and deploying freemium business models for years. Freemium, of course, is the business model where you offer at least two levels of service.  The first level is a free version. Then you add one or more paid premium levels that include more functionality, additional features or add-on services.

It’s a combination of free and premium offerings — hence the name “freemium.”

The term was popularized starting in 2006. That’s when venture capitalist Fred Wilson wrote about it on his influential blog:

“Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base.”

Wilson called it his favorite business model and asked his readers if there was a name for it.  A few days later Jarid Lukin of Alacra named it freemium.  The name stuck, and startups and established companies alike have been all over it ever since.

But how popular is the freemium online business model with those who count, i.e., the buyers?

According to research by by the Amsterdam-based, technology platform provider Avangate, online services are popular with U.S. consumers — and freemium is a potent attractor.   Consider this:

  • 63% of U.S. consumers use online services everyday.
  • More than half pay for those services.
  • More than half like freemium models.

Consumers also like plain old free — as in free trials.  In the survey, among the factors that increased the chances of consumers buying an online service, 58% chose free trials.

Of course, it’s not just free that attracts people.  Other things matter to consumers.  They want the flexibility to choose the parts of the offer they want.  They also expect good customer support.

For startups and established companies new to providing freemium online services, there’s more than immediately meets the eye with the business model.  For example, do you know exactly what it will take to convert free-version users to buyers of premium services?  Do you have the kind of smart technology that encourages people to upgrade to premium and makes it easy to do so?

If you don’t, you could end up giving away a lot for free.  Those premium level(s) you offer may not get many takers.

“Freemium is an entry point to start proving the value of your online service,” says Ed Chuang, a spokesman for Avangate.  Intelligent automated reminders, grace periods and incentives to upgrade are among the techniques that service companies can use to encourage people to purchase the premium level.  

It’s also about flexibility, speed and experimentation.  “The important thing about offering a freemium model is not only that consumers expect to be able to try before buying in the new services economy, but that you have to be able to rapidly experiment, tweak and continuously optimize,” Chuang adds.

Avangate’s survey was conducted with over a thousand respondents across the United States in May of 2014.  A visual representation of the survey results are below.  You can find more analysis about the survey and its implications, on the Avangate website here.

Freemium online business model data


Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.