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Using the Freemium Model for Your App (or Software)

Using the Freemium Model for Your App (or Software)

Most apps in the App Store are free to download, and the freemium model is a proven one. It might seem a bit counterintuitive, but building a free app can be a great way to make money. But offering your app for free requires being strategic with how you monetize the app. In this article, we’ll discuss how to use the freemium model effectively. 

What Is the Freemium Model?

The freemium model is a popular pricing and customer acquisition strategy. Freemium apps are downloadable at no cost, allowing users to access basic features. If the user wants access to additional features, they must pay for the app’s premium version. Typically, freemium apps will provide a short trial of these premium features to demonstrate the value and get users in the habit of using the additional features. (If a user doesn’t wish to upgrade, they can continue using the free version.)

5 Freemium Model Examples

The freemium model has been used successfully by many apps. Here are some popular freemium apps.

  1. Dropbox — Cloud storage platform offering a premium plan to buy additional storage space.
  2. Evernote — App for note-taking and organizing that offers premium features like the ability to search, annotate PDFs, and scan business cards.
  3. Spotify — Platform for streaming music and podcasts with an upsell for ad-free listening and exclusive content.
  4. Zapier — Task automation app with a limited number of tasks available for free.
  5. LogMeIn — App that provides remote access to your computer with an upsell offering remote access to multiple computers and the use of LastPass, a password management app.

Freemium Model Pros and Cons

As with any monetization strategy, there are pros and cons to using the freemium pricing model. Here are some important points to consider for your app.

Pros of the Freemium Model

  • No Barrier for Usage — There are a lot of apps available on the market today. Free apps attract potential customers seeking a solution to their problem that they can try without cost or commitment.
  • Faster User Growth — When you offer your mobile app for free, you have a better chance of getting more people to try it. Once you demonstrate your app’s value, you can then build brand awareness while converting users to paying customers. 
  • Cost Savings — You have the option to offer support as an upgrade, reducing operational and maintenance costs for your free app users.
  • Develop a Loyal Following — When people are comfortable with using your free product, and it’s part of their routine, they are less likely to change to an unfamiliar product. 

Cons of the Freemium Model

  • Greater Time to Break-Even Building an app costs money. Users aren’t paying for the free tier, but you are. You have to build and maintain the app, provide data storage, etc. 
  • Users May Not See the Value of Premium — For a freemium software to work, enough users must see the value of the premium version and want to pay for it. Unless they have a compelling reason to buy up, they won’t. 
  • ROI Requires Volume — In order to make money, you need a significant number of users to upgrade. A compelling reason for users to buy the premium is essential.
  • Pricing Limitations — Offering a free level may limit what you can charge for the paid tier. If you need a higher subscription price to make a profit, this is something to consider.

When Should You Consider Using the Freemium Model?

Though there are several compelling reasons to consider a freemium model, it’s not the right choice for all apps. The free version of your app must solve a user’s problem(s). For a person to want to upgrade, they must first see value in the free model. If they aren’t pleased with the usability or the value of the free model, they likely won’t want to upgrade to the premium.

Additionally, the value proposition of becoming a premium user must be clear and convincing. Premium features must offer users something they want but cannot get in the free model.

Finally, the numbers have to back up the freemium model approach. Take a look at your marginal costs of providing your app to each additional customer, your paying customers’ lifetime value, and your conversion rate. Determine the pricing you will need in order to be profitable. If your marginal costs are low, a freemium app may be a good way to go.

What Types of Apps or Software Does the Freemium Model Work Best With?

The freemium model will work most effectively with apps that have a large market opportunity and are low-cost to provide to users. Freemium conversion rates will vary by the type of app, but they generally are in the low single digits. A niche market will have limited opportunity for success with a freemium model. The larger the potential market, and the lower your development costs, the better for this approach. 

Freemium Model vs. Free Trial

You might be asking what the difference is between the freemium model and a free trial, and you’re not alone. Free trials give users complete access to all of a product’s features for a limited time. In contrast, freemium offers this full access to features for a limited time, but with a basic-access-for-free plan that users can stay on forever if they choose. At the end of the free period with a freemium app, users can either pay for premium to continue using the features associated with the tier they choose or continue using the app for free with a limited feature set.

The Freemium Model Is Ideal in the Right Situations

The freemium model can be an effective monetization strategy when used in the right situations. It’s most effective when there’s a large potential market, your customer acquisition costs are low, the free app is engaging, and there’s a compelling value proposition for the premium version. If all of these align, you may have a winner!

In our SolutionLab workshop, we help you think through monetization options for your app. Want to learn more? Get in touch, and we’ll schedule a call.

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