Freemium pricing

Freemium pricing is the practice of offering a basic set of services for free, and enhanced features and/or content for a fee. This approach will result in a large proportion of customers using the company's offerings for free, and a smaller proportion paying for additional services. This approach has had notable success on the Internet, where basic services can be provided by the seller at close to a zero variable cost.

The concept allows a company to scale its customer base rapidly with little or no incremental cost for each additional customer gained (assuming no incremental marketing expenses), and then charge for additional services. 

A key point with freemium pricing is that the initial "free" price in essence is the marketing that the provider uses, since word of the zero price point will likely spread quickly among potential users.

Freemium pricing can be applied to the following circumstances:

  • Customers can use a service for a certain amount of time for free, after which they will be charged for any continuing provision of services. This approach convinces customers of their need for the service, after which convincing them to pay is easier.
  • Customers have access to a version of the service that has few features, and can scale to an expanded version by paying a price. The key issue is ensuring that key functionality must be paid for, while still giving free customers a taste of the service provided.
  • Only students are allowed the free service, with corporations paying the full price. This approach assumes that students will become hooked on the service, and later demand that companies they work for buy it. Since it takes time for students to enter the workforce and be in positions to demand to use the service, this is a long-term strategy.
  • Only allow a certain amount of usage per time period, such as one download per month, without paying extra. As users become more enamored of the service, they are more willing to pay for greater volume.

Example of Freemium Pricing

The accountingtools.com website offers several thousand pages of accounting information for free. If you are interested in more comprehensive information about any topic, the site offers accounting books and continuing professional education classes.

Advantages of Freemium Pricing

The following are advantages of using the freemium pricing method:

  • Low marketing cost. The absence of a price becomes the key marketing tool of the company, which relies upon word of mouth to spread news about the company.
  • Potential paying customer base. There will likely be a large pool of users of the free service at all times, any of whom represent the obvious sales funnel for additional paid customers.

Disadvantages of Freemium Pricing

The following are disadvantages of using the freemium pricing method:

  • Fixed cost coverage. Any business has a certain amount of fixed costs, and if the premium-priced packages do not generate enough revenue to offset the fixed costs, then the business will fail.
  • Value perception. Since the basic package offered by the seller is free, customers might get the perception that all versions offered by the seller are worth very little.
  • Competition. The freemium model is one that any number of competitors can also use, which may increase price competition for the premium version of the service provided.

Evaluation of Freemium Pricing

This approach is extremely common on the Internet, where customers can be attracted to a website at zero incremental cost per person. The approach is much less economical in situations outside of the Internet, where a seller must incur a cost when a customer uses its free services. Also, if you use this model, you must be careful to price the premium services to offset all fixed costs and generate sufficient cash for continued growth.