Starting at $0: When Freemium Works
Pricing strategies are an important part of the marketing mix. In Roger Kerin’s traditionally-inclined overview of the field, Marketing: The Core, he outlines various pricing strategies, from prestige pricing to loss-leader pricing, and some of the scenarios in which each would be best suited. Price, he claims, is an indicator of value for the consumer, against which the consumer weighs the benefits of the product to determine how valuable the product is. Different pricing strategies can be used to convey value differently, and to target different consumer segments.
Pricing Strategies in the Digital Age
In the digital age, new pricing strategies have emerged that defy traditional marketing norms. For what seems like a first in the history of capitalism, many of the products we use most frequently don’t cost anything at all. These free internet-based services, like Gmail, Whatsapp, or Apple Podcasts, have set a new expectation for the digital age: that we can expect to get something for nothing.
Or so it may seem. In reality, as the Netflix documentary The Social Dilemma illuminates (somewhat heavy-handedly), these free services we use are not truly free. They are paid for by advertisers — and our attention is the real product they’re selling.
The ad-supported model is one “pricing strategy” that’s developed in the digital age. But the unintended consequence of the proliferation of ad-supported online services is that nobody’s willing to pay for anything on the internet anymore. We’ve come to expect that everything online is free, and we can’t quite understand why something that isn’t as appealing to advertisers — like a to-do list app or a video-chat platform — should be any different.
All this has created a problem for software developers who have a useful service to offer, but who cannot convince people to spend money on that service, because they’re not used to having to spend money on those types of things. The solution — another novel “pricing strategy” born of the digital age: the freemium model.
The Freemium Model and Proving Value
Like much of the rest of the digital-native generation Z, I have an aversion to paying real money for online services. I grew up using Gmail, Whatsapp, Facebook, and Twitter to communicate for free. I entertained myself with free YouTube videos, read free online blogs, and played free online games. As I grew older and school became a bigger focus in my life, I used free online tools to help organize my studying, because why pay for something when you can get it for free?
In college, I began using Quizlet, a free online flashcard tool that I used to memorize key terms and concepts from my courses. Before any test, I’d create flashcard decks and spend hours in the Quizlet app testing myself and memorizing terms. And it worked — I must humbly acknowledge that I did pretty well on those tests. Quizlet was proving a valuable part of my study regimen.
And then I took Intro to Psychology, a course that required me to memorize the locations of brain structures and be able to identify them on a diagram. Quizlet had a feature that let you upload a photo and create an interactive diagram, but it required a premium plan. I hesitated, of course, still wary of spending money on an online service. But in the end I realized that Quizlet was proving beneficial in my studies and that it was worth the few dollars a month to access that additional feature. And so I bit the bullet, subscribed to the premium plan, and aced the psych test.
I’m not deluding myself into thinking you’re interested in reading about my college studying experiences. I recount this story only because I think it highlights the key strength of the freemium pricing model — it allows a product to prove its value and only then ask for money in return. And it turns people like me — who would never spend money outright on an online service — into eventual paying customers.
The Innovation of Freemium
The freemium model breaks from Kerin’s traditional understanding of pricing — that price is inherently connected to value. A freemium service, though it may cost $0, is not valueless. Rather, it is being given an opportunity to prove its value to the consumer before a purchase is made.
The freemium model flips the traditional capitalist approach on its head, letting consumers derive quite a bit of benefit without ever paying anything. And most consumers will never pay anything. In fact, for most services, only about 1% of freemium users ever convert into paying customers. But the scale of doing business online means that, if you’re lucky, you can reach a large enough market to make such a model sustainable.
At the very least, it’s worth keeping in mind that proving your product’s value to a customer is never a bad thing.
