Freemium

Posted in Finance, Accounting and Economics Terms, Total Reads: 179
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Definition: Freemium

It is a business model where both free and premium services are provided. The free service is generally for basic features while for more advanced offerings one has to pay a premium. This is generally followed by companies that have just started their business and want to lure customers to use their product or service.


An example of this kind of offering is Skype whose basic features that is calling people on the internet is free whereas other higher services are offered on pay. Almost all companies have software as a service as free option but the goal is to have most of the customers to pay for their services.


The two reasons that companies opt for freemium as business model are marketing and network effects. In case of marketing one’s product if it is free, it will be able to attract customers easily. The marginal cost of acquiring this customer on the internet makes it very attractive because it is very low. Because of better marketing lot of people will be able to know about the product/service and will cause the product/service to become more valuable if more people start using it.


But this business model has its drawbacks also. Some of these drawbacks are:-

• Company needs lots of users: - This model will work if lot of users are benefiting from the product and it has potential to reach a lot of customers.

• Company also needs lots of returning users: - The model is sustainable if and only if the users already present are sticking around and using the offering more and more.

• Company takes a lot of time to be profitable: - The users take longer to convert towards premium and the value to them takes a lot of time to be realised hence it would take longer to reach breakeven point but once it does revenue per user is a lot more as cost per user is less.

 

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