Subscription is the idea of naming customers on a recurring basis. You may have noticed that there are many apps that are willing to offer their exclusive services to a few unique customers who pay them for that authorization. But on the other hand, there are some apps that don’t charge and treat all their customers equally. But why is this?
Platforms that don’t charge you are based on an ad revenue model, which means they don’t receive money from their own customers but from the companies that serve them ads. There’s a popular saying from Tristan Harris, former Google design ethicist: “If you’re not paying for the product, you’re the product.” — This means you are their ultimate income product.
Some entertainment platforms, such as Netflix, Amazon Prime, Disney Plus, HBO Max, etc., are subscription-based. However, there is another business model in the market, called “Freemium”. If you search for freemium on Google. This is a business model in which some basic services are provided free of charge to customers, while more exclusive services are offered on the paid version. Some examples of companies based on the freemium model are iTunes, Spotify, Dropbox, etc.
Today we will discuss the advantages and disadvantages of the paid and freemium models.
free model
As in the introduction, we have given you some indication of the freemium business model as it is different from the premium or ad-based revenue model. This business model is suitable for online businesses with low customer conversion value but longer lifetime value. This model is said to have existed since 1980 when services were free but had certain limitations. Users who wanted unlimited use were offered their premium plans.
Since the services are free in the early stages, but with certain limitations, it makes consumers curious and ready to buy a premium membership. But make sure that your business premium adds appropriate value to the price and provides profitability. With this approach, more and more customers are willing to buy a subscription.
As you monitor consumer reactions to your plan, platforms like Adapty come to your rescue. It displays a complete record of accurate analysis of consumer behavior.
Advantages of the Freemium model
- Brand awareness: Brand awareness, also known as brand awareness, means what percentage of the population knows about your brand. We all know that most consumers want to save as much money as possible for the services they want. Therefore, if your brand offers a basic version of this service under a freemium model, it will surely become popular with the masses. This technique is used by different companies in practice, which makes this model more reliable and trustworthy. This quality also saves money on promoting your brand as users will promote your brand as a referral instead of you.
- Competitive killer: With this marketing strategy, when you don’t have to spend as much money on advertising compared to your competitors, you will definitely have an edge in the market. Always keep a feature of yourself that is the USP that sets your product apart from the competition. A good example of this might be YouTube. YouTube has certainly conquered the market with its clever marketing team and astute management. It offers people to watch videos for free while other platforms like Netflix or Amazon charge the same. Furthermore, financially capable audiences choose YouTube Premium to get exclusive features like No Ads and many more.
- Conversion Rate: The term conversion rate means what percentage of the population you can convert into your premium customers. Customers who have paid for your service. The freemium business model serves as a demo of their service to customers. The free services are offered to the customers and if you are good enough to satisfy the customers, they will not take time to buy your premium plan and become your regular customers. For this case, you can take Spotify as an example. The free services are provided to the users but with some limitations like they will be showing ads and not downloading etc. But as it offers one of the best playlist collections and audio quality. The best in the market so most people agree to buy paid for a long time plan to get these exclusive features.
Disadvantages of the Freemium model
- No Conversion Rate Guarantee: In the previous section, we calculated the conversion rate on the positive side of Freemium. But that can also be its negative side. Don’t know the reason? Well, there is no guarantee that many people will buy a premium membership of your service. For the big guys who already have a large and loyal customer base in the market, it’s great that they don’t have to worry much about this problem. But if you’re a start-up business owner, the journey can be a bit daunting for you.
- High Cash Burn Rate: Cash burn is the money you put into your business to run operations. Sometimes, using up simple daily activities can lead to excessive costs. You never know how many customers you will have that will just use the free service. Maintenance and operating costs for these “free customers” can be burdensome for you. And even then, there’s no guarantee these people will become your regular subscribers.
- Limited Features: Since you can’t give all the features for free, they remain locked until you purchase a premium membership. It can lead to boredom with zero conversion rates.
These are some of the advantages and disadvantages of the freemium business. For the next section, we will discuss the same but for the premium models.
premium model
Unlike freemium, you can get nothing without money. Netflix and several other streaming platforms can be examples of high-end business models. The following is a brief summary of the advantages and disadvantages of the premium model.
Advantages of the Premium model
- Stable and recurring income: With the Paid business model, it is easier to predict or guarantee a certain amount of income for your business. If you can establish the revenue that you are likely to generate in the near future, it will be easier for you to plan strategies and campaigns for your growth.
- More customer retention: The likelihood of customers returning to use your service for a longer period of time is higher than with the freemium model. In the freemium model, many users are comfortable with limited features. This is not the case with subscription-based companies.
Disadvantages of the Premium model
- Impact on business: In this business model, actions and decisions are completely based on cash flow. Ultimately, the amount of money flowing into your business will shape your decisions.
- Trends: Several subscription-based business models are rooted in ongoing trends. But we must remember that times are always changing and trends are evolving. To keep your business thriving in the future, diversify your business model and make it future-proof. Be one step ahead of everyone and build your own Unique Selling Proposition (USP).
Here are some pros and cons to premium and freemium business models. We hope that by reading this, we will help you somewhat in shaping your strategy.
Categories: How to
Source: newstars.edu.vn