The freemium model has been a huge part of the success of apps like Spotify and Canva. Is it the right acquisition model for your app? Let’s find out.

In a world where consumers expect more value for less money, the freemium model has become an increasingly popular way for businesses to attract and retain customers. 54% of app developers use this model (closely behind 56% of developers who use a subscription model for their apps).

By offering a basic, stripped-down version of a product or service for free, businesses can hook users in and encourage them to upgrade to a premium version with more features and functionality. 

But what makes the freemium model so successful, and how can businesses effectively leverage it to grow their customer base? 

In this article, we'll explore:

• What is the freemium model?
• Why is freemium so successful?
• Is freemium the same as free trial?
• 3 successful fremium model examples
• How to maximise your freemium conversion rate

What is the freemium model?

The freemium business model is an acquisition strategy that offers users a basic version of a product or service for free, while charging for additional features or functionality through a premium or paid version. The term "freemium" is a combination of the words "free" and "premium."

This model came about during the rise of the internet and digital technologies, which allowed for the distribution and scaling of software products at a low cost. Freemium was popularized by companies such as Dropbox, which offered users a certain amount of free storage space, and then charged for additional storage and features. Other well-known examples include LinkedIn, which offers a basic profile for free, but charges for premium features such as messaging and job postings, and Spotify, which offers a free, ad-supported version, but charges for an ad-free and feature-rich premium version.

The freemium model is popular in industries where the cost of distribution is low, and where users can easily try out the basic version of a product or service before deciding whether or not to upgrade. This includes software and digital services, such as mobile apps, online tools, and cloud-based software. The model is also increasingly used in the gaming industry, where games are offered for free, but players can purchase additional features or in-game items.

Why is freemium so successful?

Some of the key reasons why freemium is successful include:

1. Lowers barriers to entry. Offering a free version of a product or service lowers the barriers to entry for potential customers who might be hesitant to pay for a product or service they are unfamiliar with. By providing a free version, companies can encourage users to try out their product or service with no risk or upfront cost.
2. Reduces customer acquisition costs (CAC). With freemium, it’s all about acquisition, not revenue. With freemium, there’s no faster way to get as many potential customers in the door. And while CAC has been steadily increasing over the last few years, the CAC for freemium products is growing at a slower rate than paid. Meaning it’s a much more cost-effective way to acquire customers.
3. Built-in upsell is easier. Remember: free users are just as important as paying ones. They're already part of your world, which makes it easier to upsell them on your paid version. So instead of neglecting your free users, use tactics to encourage them to upgrade to your premium version. For example, you can showcase premium features through helpful tips in your user interface or highlight them in your email newsletters. By showing them what they're missing out on, you'll increase your chances of converting them into paying customers.
4. Other monetization opportunities. Looking to make a profit from your free users? There are several ways to do it, but two of the most popular methods are in-app advertising and in-app purchases. By integrating ads into your app, you can earn revenue from ad clicks and impressions. On the other hand, in-app purchases allow users to buy one-time, non-committal upgrades without upgrading their entire plan. This monetization strategy is especially popular among mobile game developers.

Is freemium the same as a free trial?

Not exactly. The main difference between freemium and a free trial is the duration of the free offering and the intent behind it.

Freemium offers a permanently free version of a product or service that may have limited features, functionality or capacity. Users can continue to use the free version for an unlimited time, but they can choose to upgrade to a paid version to access additional features or to remove limitations.

On the other hand, a free trial is a temporary period of time during which users can try out the full version of a product or service for free. After the trial period expires, users are prompted to either pay for the full version or lose access to the product or service.

The intent behind each approach is also different. Freemium is generally used as a long-term customer acquisition and retention strategy, while a free trial is typically used to provide a limited-time experience of the full product or service in order to entice customers to make a purchase.

Click here to see how Nomad launched a new freemium model in just 2 weeks using Purchasely’s subscription growth platform.

3 successful freemium model examples

Time to look at some real-world examples of successful apps that use a freemium model:

1. Spotify

Spotify is an excellent example of a B2C app that has nailed the freemium model. With 456 million monthly active users, nobody can argue with them. As a music streaming service, they offer a free, ad-supported version of its service alongside a paid version with additional features.

Free vs paid features:

• Advertisements - The free version of Spotify includes advertisements that interrupt the music listening experience, while the premium version is ad-free.
• Unlimited Skips and Repeat - The free version of Spotify has a limit on the number of times users can skip tracks or repeat songs, while the premium version allows for unlimited skips and repeats.
• Offline Listening - The premium version of Spotify allows users to download music to listen to offline, while the free version does not.
• High-Quality Audio - The premium version of Spotify offers higher-quality audio streaming, while the free version streams music at a lower bitrate.
• Access to Full Catalogue - The free version of Spotify only allows users to access a limited selection of songs, while the premium version gives users access to the entire catalogue of music on Spotify.

2. Mailchimp

Mailchimp is a B2B email marketing platform that uses the freemium model to great effect. Mailchimp’s market share of the email marketing industry stands at a whopping 60.51%, and the freemium strategy has played a large part in getting them there. 

Their strategy involves offering users the ability to create a free account with basic features, which includes a limit of 500 subscribers and 1,000 emails per month (this has been reduced in recent years from 2,000 subscribers and 12,000 sends). If a user wishes to access additional features, they can do so for a monthly fee of $10. Pricing then scales according to how many users you have.

Free vs paid features:

• Contact Limit - As mentioned, the free plan of Mailchimp allows up to 500 contacts, while the premium plans offer increased contact limits, depending on the plan.
• Email Sending Limit - Free users can send up to 1,000 emails per month. Any more than that, you need to pay.
• Marketing Automation - The premium plans of Mailchimp offer marketing automation features that allow users to create automated email campaigns based on subscriber behavior, interests, and other criteria. This is a critical aspect of email marketing, so it makes sense they put this in the premium plan.
• A/B Testing - Premium users also get access to A/B testing features that allow users to test different versions of their emails to see which performs better.
• Advanced Reporting - The premium plans of Mailchimp offer advanced reporting features that allow users to track their email campaign performance in real-time, and gain insights into their audience's behavior and engagement.
• Customer Support - Free users get email support for 30 days. After that, there are a variety of self-service guides and tutorials to rely on, but no customer support. Premium users get access to email support, live chat support and phone support. Premium plans of Mailchimp offer priority customer support, which includes phone support, live chat, and email support.

3. Canva

Canva is a web-based graphic design platform that allows users to create a wide range of visual content, including social media graphics, presentations, posters, logos, flyers, and more. It has disrupted the graphic design space with its simple drag-and-drop interface, which makes it easy for users to create professional-looking designs without needing advanced design skills. They now have a huge community of over 100 million monthly active users! And yes, Canva have also mastered the freemium model by giving users access to a free version of the app with a limited set of features.

Free vs. paid features:

• Design elements - The free plan of Canva provides access to a limited number of design elements, while the premium plan offers an expanded library of design elements including photos, illustrations, icons, and more.
• Customizable branding - Users can save their brand's colors, logos, and fonts for easy access and consistency in all designs, while the free plan doesn't have this feature.
• Team collaboration - If you upgrade to Canva's premium plan, you'll get some cool team collaboration features, like team templates, shared folders, and the ability to work together on designs in real-time. Unfortunately, if you stick with the free plan, you're limited to just one user.
• Export formats - Canva’s premium plan allows users to export their designs in additional formats such as PDF, PNG, and SVG, while the free plan only allows for JPEG and PNG exports.
• Animations - Want to add some pizzazz to your social media graphics and presentations? With Canva's premium plan, you can create awesome animations that'll take your designs to the next level. Sadly, the free version doesn't have this feature, so you'll have to settle for static designs.

How to maximize your freemium conversion rate

Are you worried that your freemium conversion rates are not hitting the mark? Don't worry - a conversion rate of 1% is pretty standard in the industry. But if you're seeing numbers between 2-5%, you're definitely doing something right. Believe it or not, a sky-high conversion rate may not always be a good thing either. 

In any case, there are some tried-and-true tactics you can use to boost those numbers and make the most of your freemium model.

1. Nail your user onboarding

So many companies still make way too many mistakes when it comes to their user onboarding. They add unnecessary friction to the signup process, drag their users through a product tour they’re not interested in, adopt a one-size-fits all approach, or don’t bother collecting any feedback on what they could do better to get their users to value faster. In short, there’s a huge opportunity for apps and products that do get their onboarding right. Especially given 65% of customers say that user onboarding is a crucial aspect in their buying decision.

We’ve written an article all about what makes the best app onboarding experiences with lots of examples, too.

2. Don’t leave users wanting

This is an important point. Of course, you want free users to upgrade at some point to your premium plan. But if they feel shortchanged by a sub-par freemium product, it will damage your customer relationship and they won’t be coming back. So you need to provide enough value upfront to make the freemium model work.

Take a look at all the examples above. The reason each of them works so well is that they give enough of the product that early users can get to know the product and see its benefits and started to form a habit. Once they’re ready to take the next step, the logical thing to do is to stick with the same product and upgrade. Simple.

It’s a fine line, so make sure to get lots of user feedback to understand how your freemium app is landing with customers.

3. Collect feedback

Collecting feedback is an important part of the freemium optimization process because it allows you to understand how users are interacting with your product or service, what they like, and what they don't like. By gathering feedback from both free and premium users, you can identify pain points and areas of improvement in your product, and use that information to make meaningful changes that increase user satisfaction and drive conversions.

Feedback can be collected in various forms such as surveys, user interviews, focus groups, or through customer support channels. Some pointers on how best to collect feedback:

• When it comes to collecting feedback, less is definitely more! Don't go overboard and ask for unnecessary information - keep it simple and only ask for what's necessary. 
• Timing is everything, so if you want feedback about a specific feature, make sure you ask for it right after the user has used it.
• How do you encourage users to actually give feedback? One way is to offer some rewards every once in a while. Who doesn't love a good incentive?
• Use Net Promoter Score (NPS) surveys to get the ultimate product feedback. This type of survey gives you a clear picture of how likely users are to recommend your product to others, which is a powerful indicator of success.

Is freemium the right model for you?

If you’re an app looking to get more potential customers in the door, the freemium model could be the key to unlocking growth. With CAC for freemium companies only 25-30% higher than 5 years ago (compared to B2B and B2C which is up nearly 50%), it’s clearly a cost-effective acquisition model. But don’t just wing it! To truly succeed, you need to arm yourself with the right data and tools to build a winning freemium strategy.

Here at Purchasely, we’re all about helping apps take their freemium game to the next level. We specialize in paywall personalization, A/B testing, no-code paywall building, and provide real-time subscription analytics so you can get to know your subscribers better and track the key metrics that fuel growth. Whether you’re a big-time app or just starting out, we’ve got the tools and expertise to help you turn your free users into paying subscribers.

Get a first-hand look at Purchasely and discover how we can help you increase the success of your subscription app.

Additional tips and resources

• Finding the sweet spot with the right subscription app monetization and pricing strategy
• App pricing models: How to choose the best pricing strategy for apps
• How Nomad launched a new freemium model in 2 weeks