Freemium model for software sales

Monetization of a software product is key focus for any software company. The big question is “how?”. Gone are the days when you could make a software, burn it into a CD and sell the CD for a price - making the intangible tangible. It was great while it lasted, as it was an easy concept to comprehend, consumers are used to buying a product that they can hold or touch. A CD would give them that feel and then installing the software just felt like part of setting up the tangible product. In the mental model of consumers the CD was the product.

CDs don’t make sense anymore. Even downloads and installs are outdated. Consumers expect software to be online and ready to go and worst of all “free”. Can you imagine paying for a basic email service? The likes of gmail, yahoo and hotmail has destroyed the concept that you have to pay for a thing like an email. So the direct “here is your product give me the money” days are out. What’s come in are new and innovative ways of selling software services. Freemium is one such model that has gained grounds as the main model these days for monetizing software products.

What is Freemium?

Freemium model is a process where users get basic features of a software for free and can access special or upgraded features for a subscription fee. The “FREE” part attracts users to the software, so it is essentially a marketing spend for the software company and the “premium” part of the freemium word is the part that actually gets the software company the money. Most of the services around us are essentially one form or another of freemium e.g. networking with LinkedIn, shared files through Dropbox even emailing with gmail are all freemium models in action. “Gmail?” you say, that’s not freemium, but it is. As soon as you reach their limit on storage (which I promise you will reach one day) you get this:

Which eventually lead you to this:

Why Freemium?

Several things make freemium the perfect model for selling software. Free features are a powerful marketing tool, essentially an immersive advertisement for your software that draws customers in. The model is great because it allows a new software company to scale up and attract a user base without using resources on costly ad campaigns or a traditional sales force. Under a freemium, a software gives away a service, that obviously costs money for a company, at no cost to the consumer as a way to establish the foundation for future payments. So in essence it can be thought of as deferred payment. By offering basic-level services for free, companies build relationships with customers, eventually ensuring payment from them for advanced services, add-ons, enhanced storage or usage limits, or an ad-free user experience. It’s a great win-win. Companies win because they can get customers onboard easily without huge marketing spend, and customers win because they get to use the software before buying.

Does it work?

Definitely. That’s the sole reason for it’s wide adoption. If you want to look at results do a search on google and you’ll probably find a thousand sites that prove that it’s a working business model. Dropbox is a great example. When it launched, in 2008, it was mainly a service for backing up files. It then began offering shared folders, making it a collaboration tool. Newer features allow for automatic syncing of smartphones and other devices and for automatic uploading of photos. Over time the user interface has improved as well. Each new feature has increased the value of the premium offering. And in their 2018 filing they showed that they had more than 500 million free users and they were earning more than $1 billion in revenue!

As consumers ourselves we would also agree that freemium is a great model for software. It lets us explore a software without making financial commitments right away. It let’s us compare multiple services and select the best one. So if you are thinking of software monetization think of the freemium model before you consider anything else.