Making Freemium Work Hinges on Math, Motive

First freemium was popular, and then bashing freemium became popular. Today, companies are taking more measured approaches to determining whether this business model makes sense for them and for their target customers. Many are finding that for some business-to-business organizations selling certain products to small companies, freemium is still worth pursuing, as long as it’s implemented well.

A freemium word problem

As of 2009, there were nearly 28 million small businesses in the United States, according to the Small Business Administration, which tracks companies with fewer than 500 employees. That’s a large potential customer base, which is key, because the conversion rates from freemium to paid are modest. On average, companies convert between 3 and 10 percent of their freemium accounts to paid ones. So, if your company wins 2 percent of the market as freemium customers and then converts 3 percent of those accounts to full-featured versions, you’ll end up with almost 17,000 paying customers. Based on what you charge for your product, is that enough to sustain your company?

Before you answer “yes” or “no,” consider the factors that are harder to quantify through basic math. The reason freemium was initially so popular was because it helped unknown companies build large user communities and customer pipelines quickly. The non-paying customers served as focus groups and helped vendors improve their offerings. The backlash against freemium came when some companies realized that by giving their products away, they had devalued themselves in their customers’ minds, negatively impacting conversion rates. These pros and cons have to be factored into the freemium decision, but there’s no simple equation for calculating them.

Know thy customer

Math can only take a company so far in the freemium decision-making process before it becomes essential to focus on motive. How and why do customers use the product or service? Does the product affect the daily lives of users? Does it help them grow their own businesses? What would persuade users to pay for additional features or functionality?

When it comes to very small businesses, several motives compel purchases. These companies need tools that make their teams more efficient, organized and informed. They’re likely working with lean staffs, so productivity solutions can be invaluable. When your service gives customers that can’t-live-without-it feeling, you’re far more likely to get the conversion rates you need to make a freemium model work. Assess whether customers are more likely to embrace a pay-as-you-go model, one based on user licenses, or some combination of the two. Staying flexible in this area can make a big difference in your outcomes.

Freemium business models have survived the pendulum swing from shiny, new favorite to cast-off fad. Free of those two extremes, freemium can now be evaluated based on individual business realities and opportunities. For many B2B companies serving small businesses, the math and the user motives still point to promising returns on freemium.

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