For many tech companies, the freemium model has become the preferred way to build a business. From social media companies like Hootsuite and LinkedIn, to cloud-based productivity tools like Freshbooks and Asana, tech firms of all sizes have embraced this model. Freemium business models are built to attract a greater pool of customers—betting some will eventually pay for premium service.
Not all companies that employ freemium models succeed. Cloud-based note-taking software Evernote, for instance, has not been able to convert many of its 200 million users into paying subscribers. As a result, the company was recently forced to placed more limitations on its free service—a move that did not please its end users.
Evernote’s story isn’t unique. Dropbox still struggles to monetize the 500 million users of its file-storage service, with less than 10 percent upgrading to a premium subscription. Other smaller companies like Chargify and Baremetrics almost went bankrupt after failing to turn a significant number of users into paying subscribers.
To make freemium work, companies need to better understand the needs of their users and what would motivate people to upgrade. Here are five ways engagement with customers can help you increase conversion and build a profitable freemium business.
Pique user interest.
Tech giant Microsoft is a master of the freemium model. According to CIO.com, 50 percent of the 18 million users of Office 365 are paying subscribers, while commercial Office 365 seats grew by 66 percent compared to last year.
Chris Capossela, the chief marketing officer of Microsoft, recently said “if you are going to be successful in the cloud, you need to provide a service that anyone can get started with, they can sign up for in 30 seconds and be blown away within the first five minutes and then they start using the thing.”
Figuring out which features to open up for free has been key to Microsoft’s freemium strategy. “You can get people to fall in love with the product by making an important set of the functionality free,” adds Capossela.
“You can get people to fall in love with the product by making an important set of the functionality free."
Focus on what CEO Satya Nadella calls ‘customer love.’ Do this by building products that people love. This requires investing heavily in customer engagement, which helps explain why the tech giant has been using customer feedback to refine its existing products, including Windows 10.
Prioritizing authentic customer engagement can help product managers and marketing organizations design freemium models that get people’s attention, while delivering profits to the company.
At the 2015 Customer Intelligence Summit, market researcher Lori Iventosch-James shared how Adobe used customer intelligence to increase conversion for an initiative called Project Hello. The project delivers content directly within two of the company’s biggest products, Illustrator CC and Muse CC.
“The hypothesis behind Project Hello,” said Iventosch-James, “is that serving relevant and personalized content to our ‘trialists’ or free members as they’re using the product will drive deeper use, more active use and, eventually, conversion.”
In determining which content to surface, the company engaged its Adobe Customer Advisors insight community to test the type of content that users might like, including instructions and tutorials. In addition, the community provided insight into how to make the product’s functionalities more engaging. Within six months of receiving this feedback, Adobe saw a 200 percent increase in conversion.
Providing relevant content to users at the right time could help increase use of your products and, more importantly, convince people to sign up for paid services.
Please your users.
LinkedIn has built a profitable business by selling premium subscription services to its 450 million users. As the company looks to uncover new growth opportunities, user experience becomes even more critical. In particular, mobile has been one area of focus for the Microsoft-owned company.
Speaking with VentureBeat about the recent redesign of its flagship app, LinkedIn CEO says that the company has looked at its product portfolio through “the lens of the member’s value proposition” to get “crisp insight into what the flagship app should do for the members.”
Research data informed the app’s cleaner, more intuitive design. It also uncovered new features that should be added. “We’ve heard from people through user research,” says Jonathan Redfern, LinkedIn’s vice president of product, “that people wanted to know what’s happening in their network.” That piece of insight lead to the ‘My Network’ section in the app—an easy way for people to keep track of what’s new with people in their LinkedIn network.
In the first quarter of 2016, job applicants who used LinkedIn’s mobile app increased by 50 percent year-over-year. Listening to what users wanted translated into higher revenue for LinkedIn: over the same time period, the company grew its subscription business by 22 percent year-over-year.
Be amazing—or else.
The best way to convince users to pay for your software is to create an amazing product. Just ask Spotify, the popular music streaming app. Despite challenges from competitors like Apple Music and musicians like Taylor Swift, the company has seen major subscriber growth.
Experts believe the company’s conversion rate is up to 26.6 percent—annihilating the industry average of 1 percent.
“The second half of 2015 was our fastest subscriber growth ever,” Jonathan Prince, head of communications at Spotify, told Business Insider. Experts believe the company’s conversion rate is up to 26.6 percent—annihilating the industry average of 1 percent.
As Benjamin Brandall, head of content marketing at Process Street, points out in a Business2Community article, user-centric innovation is helping Spotify outmaneuver its peers in the conversion game. Besides having the widest selection of music in the streaming business, the company has focused on building a user-centric product. According to Brandall, Spotify’s deep empathy for users shows in its features, including its well thought-out and well-curated playlists that match users’ moods and activities. The easy and seamless sign up process also provides a good first impression for new users of the service.
Spotify demonstrates that conversion boils down to a basic tenet of doing business: putting the customers at the center of your organization, building empathy for them and creating products and experiences that they’ll love.
Test, test and then test again.
Trello is one of the freemium world’s rising superstars. This product management tool has seen its user base balloon to 14 million, reaching $10 million in annual recurring revenue. Not bad for a startup that’s barely six years old.
In a recent podcast, Kristen Habacht, VP of sales at Trello, said that continuous testing has been key to the company’s incredible growth. For instance, Trello sales professionals test their approach to different user segments to verify whether certain groups are more likely to convert to paying customers. The first step, according to Habacht, is to look for “trigger points,” which are moments that get people to convert from a free to paid user, and to validate those points through tests.
So how do you find trigger points? User data can provide some clues, but the people who have the answer are right in front of you: your current customers. Since they already signed up as customers, they can tell you exactly why they decided to pay for your product—and how you can get other users to do the same.
Your current customer base is a good group to engage for business insight.
More importantly, your current customer base is a good group to engage for business insight. They are a critical source of feedback on your product, marketing campaigns and the user experience. Talking to current customers can inspire the necessary insight to convert non-paying users into paying subscribers.
Make freemium work for you and your customers
As Microsoft, LinkedIn, Trello, Adobe and Spotify demonstrate, the freemium model is a profitable way of doing business. However, for this model to work, tech companies can’t afford to create products and go to market blindly. You must first develop an understanding of your customers. Investing in customer intelligence software—tools that allow companies to engage with users and develop customer relationships over time—is a must to making freemium work.