Is the freemium strategy too costly for some businesses? According to the Wall Street Journal, giving away products for free to build a user base “is turning out to be a costly trap, leaving them with higher operating costs and thousands of freeloaders.”
While selling advertising was once the most common way for a digital start-up to make money, the freemium model has taken off as companies like Dropbox, LinkedIn and Skype have implemented it successfully.
“The freemium approach doesn’t make sense for any business that can’t eventually reach millions of users,” explains the article. “Typically only 1 percent or 2 percent of users will upgrade to a paid product, said David Cohen, founder and CEO of TechStars.”
“The strategy also often isn’t effective for businesses whose range of products is limited in scope, because paid users generally expect to get better or different versions of what they’ve already received free of charge,” notes WSJ. “And it rarely makes sense for companies that sell products or services mostly to large businesses. Enterprise clients typically have budgets for buying goods and services, thus, they aren’t as drawn to free products.”
Yet the reach of the freemium model is expanding. “About 77 percent of the top 100 grossing mobile apps inApple Inc.’s App Store use a freemium pricing plan, up from just 4 percent in 2010, according to Velti PLC, a mobile advertising and marketing company,” says the article.
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