For years, Spotify has been a vocal supporter of one of Silicon Valley's most successful business models: Freemium. Last week, as reported by NPR, Spotify agreed to withhold certain albums from the free tier of listeners, and some wondered if we are witnessing the beginning of the end for free music streaming.

I asked Erin Hintz, CMO of Urban Airship, what she believed was the true value that has driven the success of the freemium business model, and she provided a wealth of insights that further illustrate the power of the model and why it is likely to continue to dominate for the foreseeable future. Here's what she had to say.

Freemium Model: Not Just for Mobile Apps and Music

If you download an app from the app store, chances are you won't pay for the privilege. Freemium apps have become the dominant monetization strategies for apps, accounting for 95% of Apple App Store revenue and 98% of Google Play Store revenue according to App Annie. What's not to like? You get a great app, for free, and if you want more (or you don't want to look at ads), you pay.

As it turns out, freemium is a great model for enterprise Software as a Service (SaaS) as well. Especially in marketing technology where (like apps) the number of solutions has ballooned from 150 in 2012 to more than 3,500 today.

Why Every SaaS Company Should Consider Freemium

Over the last two decades, the growth of cloud services and the ubiquity of the internet enabled a new model for selling business software -- subscription services that allowed people to download and buy directly online. Frictionless distribution meant that people could start testing software instantly and, in some cases for free, without going through IT. The buyer became the user. In the Consumerization of IT, analyst Ben Thompson describes how freemium helped increase the number of customers for business software, which in turn, forced companies to rethink and improve their user experience, organizational structure, and product development.

Freemium also enables a new sales model, powered by word-of-mouth instead of salespeople. Slack became the fastest growing business app in part because it was free. Slack CMO Bill Macaitis has said he didn't care if he closed sales, he cared if the customer recommended the product. Slack invested heavily in the user experience, listened closely to customer feedback, and reduced sign-up friction as much as possible. It paid off: the company now has 4 million users, of which 1.25 million are paying customers.

Urban Airship, a SaaS mobile engagement provider, has been experimenting with freemium for nearly a decade, and we've learned quite a bit that's applicable to the freemium experience in apps or anywhere else. By opening up a free channel we've dramatically expanded our addressable market to include small, new businesses that might grow really big. We've also provided large organizations an easy and speedy path to adopt our solutions without talking to a salesperson or their purchasing department. Over time it's paid off with a bunch of sizable deals from well-known brands, but it wasn't always easy or successful. Our key learning: it's critical to carefully align your business goals with those of your customers, otherwise freemium can end up costing you.

Learning Curve: Urban Airship's Initial Forays into Freemium

When we launched our freemium offer in 2009, tens of thousands of developers signed up in a matter of months. We were ecstatic. Businesses from all over the world were using our service and presumably finding real value, but many were just milking the service -- a common freemium problem. Many of these apps would hit 999,999 notifications and simply stop sending messages until the next month's allotment opened up. We had based our freemium model on our basic capabilities and messaging volume, as opposed to user engagement or audience growth that more directly align to our customers' success.

Worse still, our support team was devoting considerable time to our free tier. Our head of engineering even spent one Christmas Eve fixing a bug for a freemium customer. Our freemium customers were not only not converting into paying customers as quickly as we'd hoped, they were actually draining resources away from our paying customers.

We needed to try something else, and in hindsight took an overly cautious approach by moving to a classic timed trial, offering a fully-featured product that shut off after 30 days. Someone who is signing up for a free trial is already very interested, which means that a trial lets you capture existing demand. But it doesn't let you reach anyone new. The trial could also only be used on apps in development -- not apps available to the public in app stores -- so while people could understand what they'd get when they bought, they couldn't get any real value from the trial experience itself.

Concocting the Right Freemium Formula

We finally succeeded in 2015 by taking a page from MailChimp's playbook. MailChimp offered a freemium tier that gave users access to all but a few advanced features -- like importing bulk email lists and setting up automated campaigns -- that only professional email marketers would want. In other words, not everyone needs those premium features, but those who do, find them mission critical and worth paying for.

We created a freemium product around our core service for mobile app marketers, called Urban Airship Engage Starter Edition. Even if Starter Edition users ultimately decide on a competitor's product, they have as much time as they need to fully experience what we have to offer, and the impact it can make on engaging and retaining real app users.

The only gate that's in place is the number of app users, up to 1,000, which speaks more to the value of our solution in helping them grow rather than some arbitrary messaging volume. And once they reach that limit, there are low-priced monthly plans they can adopt without worry that their investment in our solution will evaporate. Most importantly, we're providing something valuable -- our service -- upfront, which is a great way to start a relationship.

If you offer a free edition of your product, you're likely to get a lot of takers. All those signups, even the ones that won't become paying customers, can teach you a lot about how to improve your product.

For example, we're spending a lot of time improving the onboarding experience. Why? We typically offer account management to paid customers to help them get the most out of our product. But we can't do that with tens of thousands of non-paying customers. That has forced us to invest in more scalable ways of getting users set up, like dramatically improving our in-product help, UI, and onboarding emails.

This month marks the 16-month anniversary of Engage Starter Edition, and more than 17,000 businesses from more than 120 countries have signed up. In addition, hundreds of these customers have since upgraded to paid accounts and adopted additional solutions as their app audiences and business needs have grown.

Freemium is often referred to as a pricing model. And while there are certainly important aspects of freemium related to how it's priced -- most notably, striking the right balance between paid and free features -- its value as a marketing and innovation strategy is even higher. That's why we're building more and more of our business around it.

Published on: Apr 14, 2017
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