Freemium (and Brutal Competition)

Illustration by Konani Chinn

Freemium is a business model where an app or web service has a both a free version and a ‘premium’ (paid) version with more features. The idea is to attract users with the free version, then get them to pay to upgrade to premium.

Story: The Brutal Competition of Freemium

Freemium services are everywhere these days. You know them: Spotify, Hulu, YouTube, Zoom, Twitch, Dropbox… the list goes on. These services tend to have very low (or zero) variable costs, enabling them to serve millions of users for free without breaking the bank.

The freemium model works because most people don’t want to pay – and because if you build a big enough audience, you can make money two ways: 1) selling ads, and 2) upselling your users to subscriptions.

Competition among freemium competitors is brutal, because they’re often willing to lose money for a long time to build up the largest user base.

Freemium companies compete (and win) by making more and more features free – or very cheap – thus delivering increasing value to their users.

But this isn’t very profitable, so freemium businesses can be challenging until they get big enough. There are constant debates: Which features should we make free, and which paid? How can we make our product more ‘addictive’ and ‘lock our users in’ so they won’t consider switching?

Freemium isn’t a totally new concept, just a modern, digital version of the old ‘free trial.’ The earliest oil companies gave away free kerosene lamps so people would buy their oil. Shaving companies made razors almost free, to sell lots of blades.

But freemium is a tougher model, because users can use the ‘free trial’ forever. And at any moment, a better freemium product can come along to take your free users – or even start giving away your best paid features for free (how dare they).

This brutal competition of freemium is the wave of the future. If you don’t keep making your product better and better, and dropping your prices lower and lower, somebody else will.