Customer acquisition and retention using freemium strategy

Key Takeaways:

  • To know about customer acquisition and
  • To understand freemium strategy and how is it beneficial in acquiring new customers.
  • Steps that make a freemium model strategy successful in business.
  • A quick insight how the freemium model strategy led to a great success for few SaaS companies.

In today’s dynamic business world every company not only strives to maximize revenue but also considers customer acquisition and retention as its important goal. To reduce its acquisition cost and retain its customers, the company keenly keeps modifying its marketing strategies apart from the traditional way of marketing.

One such strategy to implement the customer acquisition and retention for reducing the cost and maintain the loyalty of the existing customers is the freemium model. As every business aims to lower its cost of customer acquisition, this strategy helps the business to capture more customers through its various offerings. In fact, the freemium model strategy has a positive impact on customer acquisition and retention. For more information on customer acquisition click here. 

As the word itself suggest free and premium, customers tend to get attracted to the free offerings more, resulting in a boost in customer acquisition and retention for the organization at the start of its marketing campaign. Once the product of the company using the freemium strategy becomes popular, free tier users will eventually approach the boundaries of their free account and elect to upgrade to a premium account to have access to the complete set of features and value that your product offers. Businesses must impose constraint features on the product to successfully execute the freemium strategy by adding up the following to premium service that is:

  • Offering new features: better functioning of available features or ad hoc paid upgrades.
  • Storage limitations: under free version and to expand the storage facility one has to upgrade to the premium version which in turn can have data processing quotas.

Thus, this creates friction for the free consumers by limiting access or usage in the product which motivates them to upgrade it to premium service. The most crucial factor is that these constraints will make consumers desire more, but not to the point where they lose sight of your product’s primary value. Hence the firm must strike the correct balance, which necessitates a thorough grasp of the customer’s demands as well as the value they derive from your product. One might be wondering as to why the businesses should offer Freemium products and services? Here are the following points for the same.

  • In today’s dynamic and ever-growing business world, businesses are in search of creative strategies to gain new customers while keeping their expenses on a lower end.
  • Customers are always keen to know what value would they fetch from the given product or service before making any purchase decision and hence imparting education to the customers in this regard and building relationship with them requires a huge amount of expenses in the form of advertisement, sales demo and marketing campaigns which are in turn traditional marketing campaign.
  • However, using the Freemium strategy model one can reduce the cost of acquiring new customers wherein the customer can educate and learn by himself the use of the product or service through the free offers made available.
  • This shifts the education burden from the sales and marketing team to the customer himself which is beneficial to both the parties that is the freemium approach establishes a natural lead nurturing process by allowing the customers to investigate independently the product or services offered and for the business, it’s beneficial as it reduces the cost on acquiring new customers.
  • It attracts a lot of customers to use the product or service availed them by the company using the freemium. As the freemium model offers free stuff people know that they won’t have to commit to a subscription plan so at least they shall sign up for the service and give it a try. 
  • The trick here involves offering the users just enough access to begin the product and service and then start gaining the benefits. 
  • The premium plan should be offered only when the user seems to be too involved in the product or service provided or is on verge of quitting the use of the service by letting them know about the additional benefits, they would fetch which will make you identify the products scalability and the threshold at which they are willing to pay.
  • Increases social media attention with the help of bloggers. A large number of bloggers enjoy writing about their experience with the service or product but they need not necessarily opt for the premium plan just to write about them but by offering the free plan the bloggers who are keen to write about your product can do it for free, even though they may not be the regular users but at least their followers and readers might become the regular users thus building a great chain of networking. This will in turn help to identify the product or service gap and areas of improvement by reading about their reviews on their blogs. 
  • Increase in products awareness through word-of-mouth marketing by sending the users of free plan with an email inviting them to submit a quick tweet or post on social media about how much they appreciate and enjoy the free offerings in the service provided.
  • It helps to create customer loyalty in the business that is when the user does not convert to a premium plan even after using the freemium version, at least they will be accustomed to your product or service and when they feel the need to get subscribed to some additional functions, they shall choose your product over the others which they are unfamiliar with thus creating customer loyalty and recommend your product to their peers, thus leading to marketing your product and increase in the demand for the product or service.

How the freemium model strategy can be successful?

To successfully implement the freemium model strategy, one should keep a certain key point in their mind.

  1. The freemium strategy when implemented in the business should provide some value to its users by giving them the appropriate reason to upgrade their services to premium. While it is critical to assist customers in finding what they are searching for in the freemium, businesses must equally remember not to give too much to them. If businesses give people more than a taste of the value of your product, the business shall be disappointed with its freemium conversion rate.
  2. Ensure to collect feedback as a part of the user onboarding which will help the business to understand what the expectations of the customers are and hence provide a much better experience further which will give them a reason to convert into premium version. Through the freemium model, you can collect the user’s data. With this collected data businesses can understand the consumer’s behaviour and accordingly segmentation can be done after looking at the user’s product engagement.

Let us look at the examples of some SaaS (Software as a service) companies that succeeded by using the freemium strategy:

  1. Candy Crush: We all are aware of the very popular game candy crush but have you ever wondered about how it earns revenue and its marketing strategy? If not, then here is the information about how candy crush makes huge revenue by using its freemium model strategy. Earlier candy crush adopted the advertising strategy i.e., the traditional way of marketing but later on, in 2013 it abandoned this strategy and started using its freemium model strategy. Candy crush just like any other game can be downloaded and played for free of cost, users are never compelled to spend a penny to participate in the game. It has been created in such a way that the users can complete each level in the game but with certain limitations such as restricted moves and a set of five lives which are made available for free. As the player moves ahead in the game the level of difficulty increases and it is designed in such a way that the player shall need beyond five lives and move to complete the levels ahead and that is when the users are given an option of in-app purchases of extra lives and moves and a free option to substitute this premium payment is to send a request to Facebook friends to subscribe to the game. This shows that even at this stage the users are not forced to pay. As sending a request to friends on Facebook and waiting for their acceptance to subscribe to the game is time-consuming, users generally tend to prefer the in-app purchase option at this stage and this becomes an addiction to the user who remains consistent in the long run and hereby the company earns huge profits. On whole, the game has attracted many users which leads to good capturing of the market and in turn earns a good amount of revenue from the same.
  1. Canva:  This is one of the popular graphic designing software as a service (SaaS) application that allows the users to create and edit visual content like posters, logos, infographics, presentations, and many more. Let us have an insight that how an application-based company makes money through its freemium strategy. Canva was first released as a free application tool and the main aim behind this technique was to attract users and establish a loyal following. With this strategy, the user base increased through word of mouth and the high quality of product offered. Over the past few years, Canva began to add a variety of revenue streams ranging from subscriptions to business solutions. Despite this, the company’s core remains focused on its freemium business strategy. As a result, the majority of its tools are still free to use. Users will only have to pay for more advanced features if they want to utilize them. The premium feature that is Canva pro a premium subscription plan unlocks some features like creating a brand kit, access to premium animation, unlimited folders to save the work done, etc., and these features hold key importance, especially to the graphic design professionals. Canva for Enterprise is another professional premium plan which has to be subscribed to monthly and is mainly targeted towards businesses. Canva print is another revenue-generating plan which allows the user to print out various designs on physical materials like T-shirts, posters, business cards, etc. Here the pricing is based on the article chosen, order volumes, and residing place as well as the extent of customization needed by the user. This made the company attract many users thereby earning profits using its freemium model.
  1. Spotify:  Spotify is a music streaming service that provides customers with access to a massive music library. It runs on a freemium income model, with a free, ad-supported basic service and a monthly fee for an unlimited premium subscription. Spotify’s premium experience is heavily reliant on its music algorithms and user and artist community. Its freemium model strategy has led the company to capture a large user base, convert the free users to a premium value proposition, also manage customer retention leading to a reduction in acquisition cost, it also maintains a balance between the cost of free and premium services provided. This is how the company earns huge profits and a significant portion of its profit is paid to the music labels in the form of royalties.

Ways in which the risk under the freemium model strategy can be handled:

Just like any other strategy, even the freemium model has its own risk when the product is offered under freemium, the premium users have higher expectations and if their expectations are not met by providing worthy services for the price which they paid, the company tends to lose a huge amount of its profits and the free users may be less inclined to give positive feedback about the services as they tend not to subscribe to the premium version and enjoy the additional benefits and in this process, the company may lose its customers.

Thus, the real trick under the freemium model strategy is to keep the customer retention game on going and acquire the new customers in such a way that they must be persuaded to use the free offerings and upgrade later because they believe in the product. They are more likely to stay premium indefinitely if their decision to upgrade is based on genuine trust in the product and a belief that their money will be well spent in terms of increased access and features. The article thus clearly explains the importance of freemium strategy apart from the traditional ways of marketing which bear more expenses to acquire and retain customers. The article depicts that the decision to upgrade is the result of a more thorough cost-benefit analysis than the decision to keep the premium subscription. It also suggests that attribute-level value perceptions such as ubiquity and social connectivity influence the intentions to keep the premium subscription, whereas the intention to upgrade is driven by the benefits of the premium subscription, such as enjoyment and price value. Overall, freemium can assist the business in achieving its objectives. However, for a business to be successful, the freemium strategy should be implemented correctly in the right way. A successful freemium model may be exactly what the businesses require, from lowering client acquisition expenses to enhancing product virality.

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Shikha Nagar

Content writer

Nikunj Solanki

Graphic designer

Vrunda Bhatt

Website Editor 

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