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Freemium model also works for self-funded startups

We experimented with freemium model and it seems to be working in our favor.  The common myth that freemium model works only for VC funded startups with deep pockets is now invalidated.
posted on 26th July 2018
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Freemium model a viable business model for self-funded startups too.  Photo by Bernard Hermant on Unsplash

Freemium model a viable business model for self-funded startups too.  Photo by Bernard Hermant on Unsplash

Freemium model is a common pricing strategy used by many technology startups with VC funding. MySQL database, a pioneer in the freemium model, was the first to prove the tech startup community that freemium model is possible in VC funded startups. MySQL disrupted Oracle's business so much so that Oracle acquired MySQL for roughly $1 Billion.

Myth among self-funded startups

A common myth among the self-funded startups is that it is nearly impossible to follow the freemium pricing model as a sales strategy.  The myth is rooted on the belief that VC funded startups have several million dollars in funding across many rounds of funding such as Series A, Series B, Series C and so on and hence they could afford to play the freemium model game. Self-funded startups do not have such a luxury and hence many of them do not attempt the freemium model as a promotion strategy due to fear of failure.

What we tried in our startup

We at CreditDeals, a self-funded online personal finance advisory firm, tried the freemium model on a trial basis. We usually distribute a free weekly newsletter to our clients sharing information on the latest financial products and any special offers that exist for our customers. Once a month, we also shared premium information, that is usually shared with our paid clients, for free in the newsletter. It's just like showing the taste of a premium product and the benefits associated with the paid service.  

End result

Interestingly, we found that some of our "unpaid" clients subscribed to the free weekly newsletter liked the premium information on niche financial products. They replied back to the newsletter enquiring on the premium service and eventually subscribed to our paid services. We saw the behavior consistently on a monthly basis. We have decided to stick to this once a week freemium promotion for now. We do not want to increase the frequency of it because it will only reduce the additional value we deliver to our paid clients.

Why it worked for us

The freemium model worked for us for the following reasons:

1. The incremental cost of providing the free product was almost zero. The product in our case was a virtual good - information shared via email. It didn't require us to have deep pockets to keep the free promotion going.

2. We strongly believed in the value provided by our premium paid service and expected some conversion from the weekly newsletter subscribers.

3. We had several tiers in the premium paid service. So it was easy for our clients to make the jump to the lowest tier in the paid service. 

4. We provided the free information to everyone just once a month. So we didn't cause a huge dent in value that we provided to our paid customers in that month.

In conclusion, we believe that freemium pricing models work well for self-funded startups as well. It is not just limited to VC funded startups alone.  

Make sure that you do your math before you try a freemium service model. Ask questions such as "How long can we do the freemium model without hurting our pockets?", "What if it doesn't yield any result", "How does it affect the value we provide to our existing paid customers" before you jump straight into implementing the freemium model.

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