Over the past week I have attended two networking events that have made me think a lot about the merits of offering a free service to consumers. Last year I offered a lot of free day trials in my coworking space and used the feedback to help define my businesses strategy. This was both rewarding and at times a little frustrating. However, the broader benefits of the freemium strategy include raising awareness, promoting word of mouth referrals and enticing people to try something for the first time.
The tech sector is well primed for such an initial free sign up model and it has been utilised successfully by a variety of companies. It was estimated by Chris Anderson in his book “Free” that the 5% who pay for a service in the technology sector can support the other 95% who like to utilise the same service but without charge. This is managed by offering loyal paying subscribers additional functionality and making the upgrading process as simple as possible.
Mail Chimp moved to a freemium model in 2009 and attracted an exponential growth of new users across the following year. In addition their profits increased 650%. The e-mail marketing service is initially free up to a maximum of 12,000 mails per month. Following this limit users have to pay a monthly subscription for extra capacity according to the volume of use and registrants. The move was a master stroke and many small businesses including mine entrust the company with e-mail messaging in our early years. Loyal users and larger companies effectively subsidize the free use of the service by growing companies. Mail Chimp is the go to company for startups looking for an initial e-mail marketing campaign.
Dropbox has utilised a referral system to great affect. The cloud based company offers 2GB of free storage to users and you can buy more storage as you require it. There’s not too much remarkable about this you might think however, they also offer users extra storage of up to 16GB if you refer friends or family to the site. So for every new applicant who signs up from your invite you can benefit from 500 MB of memory. In the world of cloud storage this is minimal and people will likely still need to buy more. However, they will do this with the positive sentiment of a loyal customer who has received extra value and feels warm and fuzzy about the company. In short they have become an advocate for the brand.
By offering value when they charge, be it by removing adverts or giving more memory companies have converted users to a charged subscription. The conversion rate from free to paid subscribers should ideally be close to 10% to make the exercise worthwhile. By announcing a free service to the market the company can generate some valuable PR and raise their profile in the market. By testing the market with existing or lapsed customers a business could theoretically test the freemium model with little risk.
For our part we will continue to offer free day visits on monthly open days starting on the 1st February. Come in on the day to learn about the benefits of using a coworking space. Book here.