Are you annoyed by double YouTube adverts? Frowned at a friend who has YouTube premium? This article is for you. I unpack the freemium business model and the not-so-distant future of the industry.
YouTube, LinkedIn, Google, Headspace, Tinder, Skype and Spotify. Undoubtedly you have heard of some of these companies and may have been irritated by their adverts. These businesses all use a ‘freemium business model’. Freemium is a combination of free and premium (duh). You get some features for free but are required to cough up extra cash to get more or suffer less.
Do you know many people, who pay for LinkedIn or YouTube premium?
If the answer to that is no. You are just like me. Research indicates only 3-5% of users typically ‘convert’ from free to paying customers. So if you answered no, it isn’t actually surprising.
Freemium models count on the likes, shares, referrals, and word of mouth promotions from their ‘free’ userbase. This means freemium business benefit by getting premium users without a large sales force. This is why companies such as LinkedIn and Google are willing to provide free access to their services, take heavy losses at the start, and run an aggressive referral program. More free users mean more paying customers.
Now that your up to speed or had a refresher on freemium. Let’s discuss what the not-so-distant future of freemium may look like.
I believe freemium companies are going to get much, much better at converting free users to paying users. For some businesses, it is the entirety of their revenue. Of course, they need to get better at it. This means getting better at converting free users, like you and me. How? Making the premium version more enticing.
Studies have shown that the greater the difference between the premium and the free version (product value discrepancy) the higher the likelihood a free user will become a premium user. This means the benefits of being a premium user will become more noticeable. Either free users will start getting less or paying users will get a lot more. Let’s hope it is the latter.
Companies may start to spend a lot of time and money, making you feel like being a premium user is a status symbol, and a social ‘must have’.
Banks have already shown success with this and attaching value to the colour of a credit card, getting you to pay more and adding (arguably) very few useful benefits. The $23Bn dollar freemium gaming industry is a good case study for the future of the Freemium industry. Make a game extremely popular and free to play (think Fortnite). When anyone can play the game, and everyone is playing it, premium features like ‘character skins’ becomes the norm to stand-out, or fit in a social circle (more on this in another article). This adds considerable social pressure to pay for something.
If acquiring more premium users fails, freemium business may turn to an abundant resource they have. Non-paying users.
These users will be required to bring in more value. A value which has been calculated to be about $24 a year, of which 65% comes from referral programs (see this research). This may translate into more aggressive, mandatory referral programs, or the utilization of consumer data to bring in more value through smarter advertising on their platform.
More ‘freemium’ businesses who want to cash in on the data of their non-paying consumers create more options for marketers. More options, leads to competition for marketing spend. This means proving that they know their non-paying users well, can target them effectively and their users will engage with the adverts.
This creates a win, win for freemium businesses. Essentially, pay us or pay up. Annoyed by targeted advertising, scared of data breaches and dependent on a platform, consumers will readily convert to a premium user. Studies somewhat back this up and show that consumers are already willing to pay for ‘privacy’ as a premium feature.
I think that markets will respond to these annoyed customers .
Non-paying WhatsApp customers that were annoyed due to privacy changes, flocked to more privacy-centric messaging apps like Signal (read more about this here). This could happen to any business, provided there is an alternative. If there isn’t an alternative, annoying customers creates a market for one.
Freemium businesses that want to last, should focus on building trust, strong relationships with all their customers, and highlighting clear, demonstrable value for a free and premium product offering. Principles which were part of good sales companies before the internet era. I believe these freemium businesses will win the pockets and hearts of customers, like you and me.
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Matthew Hendricks is a Ph.D. researcher at the University of Cape Town, currently focusing on Blockchain technologies and their intersection with marketing. Matt loves writing about tech. and how it might impact the world we live in.