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Vishwadeep Khatri
Message added by Mayank Gupta,

Freemium business model is an organization strategy in which users do not have to pay for using the basic functionality of the product or service, however, have to pay for any upgrades or advanced functionalities.

 

An application-oriented question on the topic along with responses can be seen below. The best answer was provided by Nethaji on 25th Apr 2024.

 

Applause for all the respondents - Nethaji, Vishal Melwani, Avishi Mehta.

Question

Q 663Latest business model that most organizations, even start ups have adopted is the Freemium Business Model. What is it? How do we integrate Lean Six Sigma principles in this model? Quote examples of businesses that have successfully adopted the Freemium model.

 

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Freemium Business Model

  • Freemium Business model is a combination of Free + Premium. Customer will get basic features of the products at no cost, but the additional services is available at premium price. Several factors contribute to appeal of the freemium strategy. Because free features are marketing tool, the model helps a new company to scale up and attract customers without expending resources on costly ad campaigns. The premium subscription by the customer will drive the profit of the company. Social networks are very good drivers. Many services offer incentives for referring friends.
  • Here are the some of the examples for the freemium business models are Spotify, Chat GPT, Canva, Youtube etc. 
    • ChatGPT: Chat GPt is a chatbot language model. When it launched, it was free to everyone for the basic version. But for more updated version, users need to pay.
    • Canva: Canva is a graphic designing platform that allows people to create presentation, graphics and visual. If user want to add more advanced options to their presentation, user need to pay to access those tools 
    • Spotify: Spotify allows users to access 1000’s of songs, podcast. But the free account holders will be annoyed by the ads between the two songs and cannot download songs, cannot skip to liked songs. Spotify offer premium account for better options. 
    • You tube: We all watch plenty of the videos for free, but the ad in between the video is very disturbing. To avoid this, user need to pay for premium account.

Advantages:

  • Free Trial: The freemium business model is that to provides a free trial of the product or service. 
  • Wide range of features: Users can upgrade to access more features of the product or service if they like the freemium product.
  • Low cost: for trial purposes or for basic needs, freemium products are an affordable solution.
  • Improved customer retention: Since freemium products give users a taste of the product before they even have to pay for it, it helps in improving user retention and building loyalty for the brand

Disadvantages:

  • Offers only Limited features: The preliminary or trial version of the product is minimal and offers only 
  • Hidden costs: The company might not reveal some extra charges and expenses that come along with the freemium product.
  • Expensive upgradation cost: Sometimes, the cost of upgrading to access more features can be higher than what users expect the price to be.

Challenges faced:

  • Balancing Paid and Free Features: Producers must find the right balance between the free features and paid features that are being offered to users. The paid feature must be reasonable as it might be a barrier in convincing users to upgrade from the free featured product.
  • Managing User Expectations: Companies must be clear about what they are offering with the free product; if not, users can expect more from them and raise queries regarding the same.
  • Retaining Users: When using a freemium model, it can be challenging for companies to keep users as they might only show interest in using the free model, not the paid one. Companies must focus on providing a good user experience.

Six Sigma methodologies can help the companies to provide optimum solutions to the challenges

  1. What features should be free & premium : The startups can launch their product to the certain demography and collect the data for analysis.  By studying the patterns of customer trends, startups should change their initial free offers by adding /omitting the features.
  2. How the user can understand the what is premium services of product: Six sigma methodologies can help companies, which features are should be available to customers are premium. The creative methods of communication will help in this regard. If a customer using freemium product from long time, but he never subscribed for premium service, by identifying such customer, company can give one more feature for free. Then customer will think of subscription.
  3. Customer conversion life cycle (growth & revenue forecast): Six sigma methodologies will help the business to understand the customer life cycle pattern. Early adopters are the less price-sensitive than others, so they are more likely to upgrade. But a bigger reach of customer happens, price -sensitive customer will come on board. Many doesn't value the free service.  Six sigma will help the business to test these hypotheses and provide a solution to increase the customer reach & better conversion rate. Based on the large set of data, and past behaviour of the customer, growth & revenue can be forecasted. One the biggest thing is to recognize the free plan users. They help in two ways. some of them will become subscribers and some bring new users who become subscribers.
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Freemium model is one of the latest trends companies have come up with to introduce new products/ services in the market by offering basic features at zero cost and charging a premium for more advanced services.

 

Freemium models help companies cut down on CAC (Customer Acquisition Costs) since there is very limited money spent on advertising the go with the approach of "Proof lies in the pudding". Customer are already using some features for free and have a good idea on the premium model.

 

Some examples of Freemium model include:

 

Google Drive: Limited storage space for free; paid version gives you more storage.

Spotify: Listen to music interrupted with ads, inability to skip songs in the free version. The paid version lets you listen to songs break-free and ability to customise playlists.

OTT Platforms: Some offer free viewing of limited TV shows and movies and the paid version unlocks many more.

Dating apps: Swipe right on limited profiles for free. Paid version gives you unlimited swipes with ability to initiate conversations.

Zoom: Free version gives you 45 mins of meeting time. Paid version has no time limit.

 

There are many such examples of Freemium models in our day to day life.

 

Like any other industry, Lean Six Sima can be applied in the Freemium model as well. By understanding each product delivery model in detail and mapping out the end to end process map, wastes can be minimised and defects can be reduced. This will enable cut down company costs even more, thus delivering a better RoI for them.

 

Another thought is offering customers a taste of Lean Six Sigma principles by performing free consulting assignments for them and help them streamline a part of their process. As customers see the value brought by the 'pilot' approach, they would pay to have a full fledged Lean Six Sigma program deployed in their organisations.

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Freemium business model is a business tool that renders services in Free + Premium mode. When the suer signs in, a basic version of the product or services “free trial” are offered free of cost (e.g. For 30 days) and then the company offers premium versions that gives users an access to additional features (Often referred to as “Pro” versions.)

The main idea of implementing Freemium strategy is to attract customers and introduce them to experience/try out the Product/ Services without any cost, “Free trial”. Once the user starts the “free trial” and benefits from the free mode, can then sign up/ upgrade to the premium version that provides additional access to extra also referred to as “PRO” features.

Benefits of implementing Lean methodologies:

1.       Making the model LEAN: Freemium model provide a chance to the new businesses to analyze and identify the non-value adding steps (TIMWOODS) that can be eliminated making the delivery of the product simpler and more efficient.

2.       Identifying core features: Lean six sigma processes like value stream mapping helps to identify the key deliverables to the users. Prioritization of the “high in demand” features will enhance customer satisfaction, reduction in lead time leading to higher retention of the users and boosting efficiency.

3.       Pricing strategies: Once nonvalue adding steps are identified and eliminated, businesses can focus on customer preferences, how much are they willing to pay and what are the competitors charging. By analyzing different dynamics, we can set defined prices for the product and services.

4.       Customer satisfaction: Gathering customer feedback for both free and premium versions will provide insight into what services the customers use, and which steps can be eliminated to make the process more efficient. Making small yet efficient improvements will enhance customer requirements and satisfaction.

5.       Quality enhancement: Proper implementation of standardized measures will ensure high standards delivery for the product or services rendered. For e.g. Uses of control charts will provide visibility to determine deviations from expected results and monitor performances.

Business example:

Canva is an online graphics designing tool that enables users to create and sell digital posters, flyers, logos, Brochures and create a wide range of visual art. It allows free access to users for the first 30 days to get acclimated to the software with limitations: you can only download 5 high-quality projects created by the user, and it limits access to its library of templates in the free version. Once the trial period is over, it allows users to sign up for the premium version which does not have these limitations, offering a wide range of high-quality creative tools and removing the limitations to the number of high-quality project downloads. This software is commonly used by the HR department to create posters, flyers, notifications with graphics, etc.

 

 

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