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📝 Intro

Freemium can be a highly effective business model.

An appealing enough free version is a strong marketing tool that drives traffic and gives direct access to a large pool of potential paying customers.

These free users are valuable. Research estimated that free users in a freemium model are worth 15% to 25% as much as a paying customer, with 65% of the value coming from referrals and word of mouth they create.

Still, only about 2% to 5% of free users usually convert to a paid option (more if a market is niche or small). 

And without enough revenue from paid customers, there is no business at all.

So how can we increase that?

One way is by introducing additional options.

Let’s see how.

Previous insight: Reverse how you frame your promotions (100+ more insights here)

Introduce an additional paid option to increase sales of your main one

Channels: Freemium | Product | Pricing
For: Both B2C and B2B
Research date: October 2018

📈 Recommendation

To boost sales of your paid option in a freemium business model, you can either:

• Add a superior paid option (e.g. more features, higher usage limits, better quality) with a much higher price

• Add an inferior paid option (e.g. less features) that is only slightly cheaper (e.g. 70% - 80% price of the main option)

People will be more likely to buy your main premium option, rather than use your free version.

🎓 Findings

• In a freemium business model with one free version and one premium paid version, sales of the paid version can be increased by adding a second premium option with certain characteristics.

• Researchers ran experiments on the website of the National Academies Press. The site offers freemium options to either read a free PDF of a book or buy a paperback version. They tested two types of additional paid options:

  • Hardcover book

    • A higher quality more durable paid version

    • Priced much higher, at between 160% and 790% of the paperback version

    • Sold only a handful of copies, but turned the paperback into the ‘middle’ option

    • Increased the probability of a sale of a paperback book by 16.2%

  • Ebook

    • Higher quality than the free PDF because it’s easily portable (e.g. on Kindle), but rated not as good as having a paperback

    • Most effective when priced closely to the paperback version, at 70% - 80% of the price

    • Sold a small but significant amount, but made the paperback option more attractive

    • Increased the probability of a sale of a paperback book by 22.6%

Based on this research, The National Academies Press now uses ebooks to increase sales of paperbacks. Potential customers think “I might as well buy the paperback if it is only slightly more expensive”

🧠 Why it works

• An additional paid option can increase sales through two well known possible effects:

  • The compromise effect: we are more likely to choose the ‘middle option’ (in this case, the paperback, once the more expensive hardcover was introduced)

  • The attraction effect: having a ‘dominated option’, one which is close in price but quite far from being as good, makes us more likely to choose the ‘dominating option’ (in this case the paperback)

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✋ Limitations

• It’s unclear what happens if we add both additional paid options (high priced and just-below priced). For example, sales could increase due to more variety - which is more likely to match people’s needs, or fall because of choice overload.

• Based on what drives the effects, the researchers expect that the findings can be broadly applied to most freemium companies (e.g. news, SaaS, music streaming). However, the study focused on one company and situation, which weakens this insight.

🏢 Companies using this

• Some freemium companies offer multiple paid options, differentiated by functionality or quality, while others offer only one.

• Spotify offers multiple plan types (e.g. student, individual, family), but the premium option is largely the same. You can either use the free version or the paid version. For example, it doesn’t offer multiple tiers of paid plans with different streaming quality.

• Google offers different Workspace plans differentiating them by quality and functionality. For example, Business Starter offers 30GB of storage for $6/month while Business Plus offers 5TB for $18/month

• Other examples of freemium models include LinkedIn, the New York Times, and most gaming apps.

⚡ Steps to implement

• Make sure the additional paid options you add are differentiated based on what people use and value. For example, you can offer varying levels of content access if you are a media company (as the Financial Times does).

• Be particularly careful if you introduce a lower quality option to make your main premium option look more attractive. Research has found that it is highly dependent on context and how you frame it.

• Extensively test the new options before introducing them widely. They could easily produce unexpected results based on how they are presented (e.g. choice overload).

🔍 Study type

Field experiment (on the National Academies Press website between January and August 2016)

📖 Research

Selling the premium in freemium. Journal of Marketing (October 2018).

🏫 Researchers

• Xian Gu. Robert H. Smith School of Business, University of Maryland.

• P.K. Kannan. Robert H. Smith School of Business, University of Maryland.

• Liye Ma. Robert H. Smith School of Business, University of Maryland.

Remember: This is a new scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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