Is freemium the best choice for Internet-based businesses?


As a free music streaming service platform that has expert made play list for every time of day and for any occasion as well as has no audio advertisement during songs, Songza once was a hit. Although having positive revenue from display advertisement as well as partnership with music brands and groups, Songza was acquired by Google Play Music in 2014 for long-term development.


A totally free business model for a website or an app may not be the best choice. Over 65% of the top 100 apps in Apple’s App Store uses a freemium strategy. Let’s see whether freemium is the ideal choice for Internet-based businesses taking Pandora for example.


Founded in 2000, Pandora offers personalized radio service that plays music based on every user’s individual taste.


At the beginning, Pandora’s  strategy was to give away 10 hours of free access, and then ask subscribers to pay $36 a month for a year after they used up their free 10 hours.

Facing the situation in which users loved the platform but refused to pay for the annual service fee, it has changed into freemium; subscribers are able to listen to music for 40 hours freely per month, and then either choose to pay $0.99 for the rest of the month or pay for premium to be offered unlimited usage as well as no-advertisements experience.

With the optimization of business model, Pandora is now the Internet’s most successful radio service with over 250 million registered users and more than 45% of all Internet radio listening hours. However Pandora has not yet shown a profit and its stock price has slowly declined these years. The predicament has been caused by slowly decreasing number of active users, sharply increase in music licensing costs as well as increasing competition from competitors like Spotify, Apple Music and so on.

A freemium strategy is based on giving away some products or services for free while relying on a certain percentage of customers to pay for premium versions of the same product or service. It is a good way to gather a large group of potential customers but, it is hard to convert them into those who are willing to pay for premium services.

Therefore, when consider a freemium revenue model, following considerations should be paid attention to.

Firstly, your services should be easy to use and you should have large potential customers. In order to get customers to use your service, it has to be easy to use. Otherwise you will not have a huge customer base. The rate of conversion from free users to premium subscribers is not high. If you can not get enough potential customers, the subscription fee will be extremely few. Also it is unlikely for you to get positive advertisement income without enough traffic on your website or app.

Secondly, you should figure out which segment will need upgrade service, what service will them be willing to pay for, and what the ratio of free users and premium subscribers is to be profitable.

Additionally, the variable cost to add additional free users should be low. The number of new customers of online-based businesses can rise quickly. If there is a lot variable cost for a new customer, your revenue will not grow enough to cover the extra expense. In this circumstance, you are not going to stay in business for long.

Last but not least, value of your service to customers should grow over time to get high retention rate. Once people are using your service, you should invest more efforts to study and analyze them to guarantee your service is always centered around their taste and needs as well as increase its value over time. So the longer customer is on your site, the more difficult it is to leave it. To increase retention rate, you are also supposed to make the experience of using your service sharable, so that you can get your service spread by word of mouth. Once your customers’ friends and business associate are on your site, they are less likely to leave.


Related blogs:

Mobile Marketing Case Study: Songza

Pandora and the Freemium Business Model


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