The attraction of free service offers is undeniable. From Facebook to YouTube, Spotify or numerous other digital services providers, free digital services are common place and even an expected norm. However, for many companies, the challenge is to convert free users to paying users. Recent research highlights the importance of consumer perceptions in order to successfully implement a ‘Freemium’ (free + premium) service strategy.
“Many companies in digital sectors are struggling to be profitable with freemium business models that simultaneously offer restricted free options and full featured premium options. These business models are very successful for attracting users, however conversion rates for premium services are quite low,” explains Robert Mai, a full professor in the department of marketing at Grenoble Ecole de Management. “As free services already offer a high value in proportion to their zero price tag, it’s difficult to convince users of the need to upgrade their subscription.”
Digital equals free?
One of the challenges faced in particular by digital sectors is the rather widespread idea that digital services are or should be free. “Freemium offers play into this perspective and tend to encourage the idea that digital services are free. In a way, freemium offers can work against the end-goal of a company’s strategy, namely to convert paying users. Free offers are not only free, they also require users to pay nothing. It’s a small play on words, but the impact of free versus a 0.01 euro price tag is huge. Although it doesn’t make sense in rational terms, consumers are much more willing to participate in a free service than even the cheapest of offers,” adds Robert.
Quality creates conversion
What is the key to improving conversion rates? According to Robert’s latest research, intuitively triggered thoughts about quality are an essential factor. “Many consumers accept the idea that quality goes hand in hand with price. This is a key factor companies can leverage to increase conversion rates in freemium strategies.”
Consider the example of virus scanners versus content providers
A virus scanner is meant to protect your computer. Free versions are designed to simply catch common viruses and premium versions are supposed to catch the majority of viruses and offer greater support services—a clear difference in quality. On the other hand, a provider of streaming content might differentiate free and premium accounts simply by limiting access to content. In this case, the change in quality for premium content is negligible. “If a company can underline the difference in quality between free and premium services, they can have a stronger impact on conversion rates. For example, YouTube ads lower the ‘quality’ of its free streaming content. By playing on factors such as ad removal, streaming speed or resolution, content providers can highlight the quality of their premium offers,” says Robert.
Know your market expectations & needs
Last but not least, Robert cites the importance of understanding your sector. “When choosing to implement a freemium offer, companies should consider their market. What are the quality expectations? For example, several WhatsApp competitors offer paid messaging services. They’ve taken into account that their target audience cares about privacy and this ‘quality’ is something their willing to pay a premium for,” concludes Robert. To summarize, companies can consider three key factors in implementing a freemium strategy:
3 factors to consider for a freemium strategy
- Does your target audience expect a free service? If so, converting premium users can be a challenge especially if other competitors also offer free services.
- What added value can you offer in terms of quality? Significant differences in quality can be the key to selling a premium offer. How do you integrate this into your strategy?
- How important is quality in your sector? Privacy concerns, protecting valuables such as one’s computer or home, sectors where speed is important (e.g., gaming), etc. Identify what aspects of your sector require high quality service and how you can sell this quality service through premium offers.
Full article
The Zero-price Effect in Freemium Business Models: The Moderating Effects of Free Mentality and Price-Quality Inference (March 2019), published in Psychology and Marketing Journal.
