A subscription is an idea of appointing a client on a recurring basis. You might have noticed that there are a lot of applications that are ready to offer their exclusive services to some of those unique clients who pay them for that tenure. But on the other hand, there are some applications that don’t charge any money and treat all of their clients equally. But why is this?
Platforms that do not charge any money for you are based on the ad-revenue model, which means that the money they are getting is not from their clients but from the companies running their ads. There is a popular quote by former Google design ethicist Tristan Harris “If you’re not paying for the product, you are the product.” — This means the ultimate product of revenue for them are you.
A number of entertainment platforms, like Netflix, Amazon Prime, Disney Plus, HBO Max, etc., are based on the subscription model. However, there is another business model that is in the market, which is called “Freemium”. If you search on Google about freemium. It is a business model where the clients are provided with some basic services for free, while the more exclusive services are provided on a paid version. Some examples of businesses based on the freemium model are iTunes, Spotify, Dropbox, etc.
Today we will discuss the advantages and disadvantages of both premium and freemium models.
Freemium Model
As in the introduction, we gave you a certain hint about the freemium business model that how it is different from the premium or ad-based revenue model. This business model is suitable for online businesses that have a small client acquisition value but a longer lifetime value. It is said that this model has been in business since 1980 when the services were put-out for free but with certain limits. The users who wanted to go limitless were offered their premium plans.
Since, at the initial stages, the services are free but with some restrictions and limitations, it makes consumers curious and makes them willing to buy a premium membership. But make sure that the premium of your business should add proper value to the price and introduce cost-effectiveness. With this practice, more and more customers will get willing to buy the subscription.
While tracking consumers’ response to your plan, platforms like Adapty comes to your help. It shows the complete record of precise analytics on consumer behaviors.
Pros of the Freemium Model
- Brand’s Notoriety: Brand’s Notoriety, also known as brand awareness, means what volume of the population is aware of your brand. We all know that a majority of consumers want to save as much money as they can on the services that they desire. Therefore, if your brand is providing a basic version of that service on a freemium model, it will surely get popular among the public.
This technique is used by various businesses in practice, which makes this model more reliable and trustworthy. This quality also saves money on the advertisement of your brand since the users will promote your brand for you in terms of references.
- Competition Killer: With this marketing strategy, where you do not have to spend that much money on your advertisements compared to your competition, you will certainly have the upper hand in the market. Always keep one feature of yourself as a USP which makes your product different from the competition.
A primary example of this case can be YouTube. YouTube has certainly captured the market with its clever marketing team and cunning management. It offers people to watch videos for free while other platforms like Netflix or Amazon charge a fee for the same. Moreover, the audience that is financially capable goes for YouTube Premium to get exclusive features like Zero-Ads and many more.
- Conversion Rate: The term conversion rate means how much of a population you are able to convert into your premium clients. The clients who have paid for your service. The freemium business model serves as a demo of their services to the users. The free services are provided to the users, and if you are good enough to satisfy the client, he or she will take no time to buy your premium package and become your recurring customer.
You can take Spotify as an example for this case. The free services are provided to its users but with some limitations like they will be shown ads and no downloads etc. But since it provides one of the best audio quality and playlists collection in the market, the majority of the population agrees to buy the premium plan for a long time to get those exclusive features.
Cons of the Freemium Model
- No Guarantee of Conversion Rate: In the previous section, we counted the conversion rate on the positive side of Freemium. But this can also lie on the negative side of it. Don’t know the reason? Well, there is no guarantee that many people would buy the premium membership of your service.
It’s great for the big players who already have a large and loyal customer base out in the market that they do not have to worry much about this problem. But if you are a start-up owner, the journey can be a little harsh for you.
- High Rate of Cash Burn: Cash Burn means how much money you are investing in your firm to carry out the operations. Sometimes it may get overhead to run out the simple daily operations. You never know how many customers you will have that will just use the free service.
The cost of maintenance and operation for those “free customers” may cause a burden on you. And up to that, there is no guarantee that those people will convert into your recurring subscribed clients.
- Limited Features: Since you cannot provide all the features for free, they are kept locked until the premium membership is purchased. It can lead to boredom with a 0 conversion rate.
These were some advantages and disadvantages of the freemium business. For the next section, we will have the same discussions but for premium models.
Premium Model
Unlike freemium, there is nothing that you can get without money. Netflix and some other streaming platforms can be examples of premium models of business. Following is a brief summary of the advantages and disadvantages of the premium model.
Pros of the Premium Model
- Steady and Recurring Income: With the Paid-Premium business model, it is easier to predict or secure a certain amount of income for your business. If you can get the income that you will likely generate in the recent future, it becomes easier for you to plan the strategies and campaigns for your growth.
- Higher Customer Retention: The chances of a customer returning back to you to avail service for a longer time are higher than the freemium model. In a freemium model, many users get comfortable with the limited features. That is not in the case of Subscription-based businesses.
Cons of the Premium Model
- Impact on Operations: In this business model, the actions and decisions are completely based on the inflow of money. In the end, the amount of cash flowing into your enterprises will shape your decisions.
- Trends: A number of subscription-based business models take birth from trends that are going on. But we must keep this thing in mind that time keeps on changing, and trend keeps on evolving.
To make your business thrive in the future, diversify your business model and make it future proof. Keep your one step ahead of everyone and build your own Unique Selling Propositions (USPs).
These were some advantages and disadvantages for both premium and freemium business models. We hope by reading this piece of writing, we help you to some extent in shaping your strategy.
John is a crypto enthusiast, Fintech writer, and stock trader. His writings provide guides to perform your best in the crypto world and stock planet. He is a B-Tech graduate from Stanford University and also holds a certification in creative writing. John also has 5 years of experience in exploring and understanding better about the FinTech industry. Over time, he gained experience and expertise by implementing his customized strategies to play in the crypto market.
