Many software companies offer software-as-a-service. In order to attract the customers these companies use freemium or free trial strategy.
What is the difference? In freemium model you offer a limited version of free software for unlimited time and hope that the the customer will see value in the extended features that the paid version has to offer and accordingly upgrade. In the free trial model, you offer a full version of the product for limited amount of time. Here the belief is that in the limited period the customer will see enough value in the product and buy it.
Problem with Freemium: The rate of upgrade in freemium is very low. Some studies in consumer psychology have shown that it is far easier for someone to upgrade from a $2 plan to $4 plan rather than $0 to $2 plan even though the net increase is same. Apparently, we have a lot of cognitive dissonance when we leave the comfort of zero price.
However, free price does not mean free cost. A company has to incur cost to serve the freemium customer. This cost may be in the form of computer hardware , software and support staff.
When should we use Freemium?: Freemium makes sense if there is an inherent network effect in the business. For example, a social networking company can use a freemium model to quickly build the user base and block out any competition. For a freemium business to sustain itself, it needs alternate sources of revenue such as advertising and data monetisation. Also, the cost of serving the customers should be low. Most of the offering should be designed as self service with minimal or no support.
When should we use Free Trial?: Free trial works best when cost of serving the customer is high and the customer needs to use the product regularly to perform an important tasks (e.g. office software ). Not every one who goes for the free trial will buy the software. Hence, during the free trial period there should be minimal customer service. Otherwise, the cost implication can be high.
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