A subscription is an idea to engage the customer on a recurring basis. You must have seen that there are so many applications which are ready to provide their specific services to some specific customers who pay them for that period. But on the other hand, there are some applications which do not charge any money and treat all their customers equally. But why is it so?
The no-fee platforms are based on an advertising-revenue model, which means that the money they get is not from their customers but from the companies that run their ads. A popular quote from former Google Design Ethicist Tristan Harris is “If you’re not paying for the product, you are the product.” – This means that the end product of revenue for them is you.
Many entertainment platforms like Netflix, Amazon Prime, Disney Plus, HBO Max etc. are based on subscription model. However, there is another business model that is in the market, which is called “Freemium”. If you search on google about freemium. It is a business model where some basic services are provided to customers for free, while more specialized services are provided on a paid version. Some examples of businesses based on the freemium model are iTunes, Spotify, Dropbox, etc.
Today we will be discussing the advantages and disadvantages of both premium and freemium models.
As in the introduction, we gave you a definite clue about the freemium business model and how it differs from premium or ad-based revenue models. This business model is suitable for online businesses that have low customer acquisition value but high lifetime value. It is said that this model is in business since 1980 when the services were given free of cost but with some limitations. Users who wanted to go unlimited were offered their premium plans.
Since, in the initial stages, the services are free but with some restrictions and limitations, it makes the consumers curious and prepares them to buy the premium subscription. But make sure your business premium adds reasonable value to the price and reflects cost-effectiveness. With this exercise, more and more customers will be willing to buy the subscription.
Platforms like Adapty come to your aid while tracking consumer response to your plan. It shows a complete record of accurate analysis on consumer behaviours.
Pros of the Freemium Model
- Brand Notoriety: Brand notoriety, also known as brand awareness, refers to how much of the population is aware of your brand. We all know that most consumers want to save as much money as possible on the services they want. So, if your brand is providing the basic version of that service on freemium model, it will definitely be popular among the masses.
This technology is used in practice by various businesses, which makes this model more reliable and trustworthy. This quality also saves money on advertising your brand as users will be promoting your brand through references.
- Competition Killer: With this marketing strategy, where you will not have to spend as much money on your ads as compared to your competitors, you will definitely have an edge in the market. Always have one feature as the USP that makes your product different from the competition.
A primary example of this case can be YouTube. YouTube has certainly cornered the market with its astute marketing team and clever management. It offers people to watch videos for free while other platforms like Netflix or Amazon charge for the same. Moreover, the viewers who are financially capable get exclusive features like zero-ads and many more thanks to YouTube Premium.
- conversion rate: The term conversion rate refers to how much of the population you are able to convert into your premium customers. Customers who have paid for your service. The freemium business model serves as a demo of their services to users. Free services are provided to the users, and if you are able to satisfy the customer, it will take no time for him to buy your premium package and become your recurring customer.
You can take Spotify as an example for this case. Free services are provided to its users but with some limitations like advertisements will be shown to them and no download etc. But since it offers the best audio quality and playlist collection in the market, most of the population agrees to buy premium. Plan for a long time to get those exclusive features.
Cons of the Freemium Model
- No Guaranteed Conversion Rates: In the previous section, we calculated the conversion rate on the positive side of Freemium. But it can also lie on its negative side. Don’t know the reason? Well, there is no guarantee that many people will buy a premium subscription to your service.
This is great for the big players who already have a huge and loyal clientele in the market that they don’t need to worry much about this problem. But if you are the owner of a start-up, the journey can be a bit tough for you.
- High rate of cash burn: Cash burn refers to how much money you are investing in your firm to operate. Sometimes this can be overkill for running simple daily tasks. You never know how many customers you’ll have who just use the free service.
The maintenance and operation costs for those “free clients” can be passed on to you. And to that end, there’s no guarantee that those people will convert into your recurring subscribed customers.
- Limited Features: Since you cannot access all features for free, they are locked until a premium subscription is purchased. This can lead to boredom with 0 conversion rates.
These were some of the advantages and disadvantages of freemium business. For the next section, we will have similar discussions but for premium models.
Unlike freemium, there is nothing you can get without paying any money. Netflix and some other streaming platforms can be examples of premium model of business. The following is a brief summary of the advantages and disadvantages of the premium model.
Pros of premium model
- Steady and Recurring Income: With a pay-premium business model, it is easy to predict or secure a fixed income for your business. If you can visualize the income that you will generate in the recent future, it will become easier for you to plan strategies and campaigns for your growth.
- High Customer Retention: The customer is more likely to return to you for availing the service in the long run as compared to the freemium model. In a freemium model, many users are comfortable with limited features. This is not the case with subscription-based businesses.
Cons of the premium model
These were some of the advantages and disadvantages for both premium and freemium business models. We hope that by reading this article, we will help you to some extent in shaping your strategy.