What is a Free Business Model (And How to Make it Work)

Modern consumers don’t buy cr*p. We see more and more free products made available on the Web since businesses moved from the material economy to the bits-and-bytes economy.

Physical things are much more expensive than virtual ones, which is why the free business model is becoming increasingly popular.

As more businesses adopt this model, you may have to rethink your business strategy because people may just stop buying your products if they can get the same for free.

Learn all you can about the free business model to stay ahead of your competitors.

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Types of Free

Yes, there are different types of free, namely:

  1. Buy one get one free – This type of free exists with traders who want to clear their stock inventory. This sort of free sells because people think that they get more while buying less even though the fact is that they are spending money for free stuff.
  2. Someone else pays – Via advertisements. People buy AdWords from Google, and that’s why we get to use free mail, powerful search engines, great productivity features, and more products for free from Google.
  3. Cross-subsidy – Product X is free, but the customer pays a hefty price for sub-product Y, which covers the cost for both items; for example, you get a free razor, but the blades are going to cost you for the long term.
  4. Freemium – Quite popular these days. For example, the basic account of the product is free, but if the user wants more features, he or she has to pay for premium services. Premium customers subsidize the free for products like Dropbox or MailChimp. Critical mass is vital.
  5. Gift Economy – The price for the product is not fixed, e.g. Wikipedia is the free encyclopedia that anyone can edit, people usually help by donating. Lost Type – you can pay as much as you want for the fonts you download but it is not obligatory.
  6. Free for real – giving things for free without expecting anything in return, e.g., charity.

Who’s using free business model?

Plenty!

Most new start-ups offer something for free, for example, Spotify, SoundCloud, Rdio, Grooveshark, Evernote, etc.

The same applies to older established brands like Twitter, Skype, Vimeo, YouTube, Google, and Yahoo, who all implemented something from this business model and successfully grew with that.

Spotify

How free business model works?

Michael Woloszynowicz explains how the freemium business model works and uses Dropbox as an example. To be successful with freemium, you need massive amounts of traffic and a continuous flow of new sign-ups.

At the beginning, freemiums are a loss of money, but at at a point where you reach a certain number of premium users, you will start making money. At that point, profit becomes bigger than cost, and this freemium model will start to pay off. Both bad and good scenarios are explained in the charts below.

To succeed, you must ensure that you have good enough features to achieve better conversion rates. This freemium model works very well even with low conversion rates.

Only 3.5-4% of Dropbox users pay for everyone. You can accomplish this by testing your concept within your target audience. Another important point to consider is the visibility of the pro account, and the benefits users will get by choosing a premium.

You can achieve better visibility by effective usage of reminders.

Free Games: Angry Birds

Angry Birds is free for Android, Chrome, and Facebook. Letting people play this game for free builds a fan base and spreads brand awareness.

When the brand becomes well known, they start selling merchandise, apps for iPhone or the iPad, and special editions of Angry Birds like Angry Birds Rio, Angry Birds Space, etc.

Toys

How to implement free model?

You can easily implement the free business model in your current business by following good practices other companies use. Here is a list of some paid services you can offer your users.

  • Upgrade features
  • Premium services
  • Support
  • Add-ons
  • Pay for commercial use
  • Product giveaways for promotional purposes
  • Membership
  • Product trials

Some burning questions:

1. What are your user communities?

If you are creating something for everyone, you’re creating for nobody then. You have to narrow down your target audience and address specific types of people segmented by interest, needs, or income.

You have to define your target audience and test your business concept with the people from your target audience to make your business successful.

2. What problems do they share?

To be successful with this free business model, you have to listen to the people you’re creating products for and try to help them to solve their problems with your products.

Nobody wants to fork out money for something that doesn’t help them solve problems.

3. What can you monetize once you have the traffic?

You must decide what you will monetize when traffic is big enough. You can offer premium upgrade features and memberships, release free products, and offer paid support.

For example, WooCommerce, the leader in the market, offers high-quality WordPress themes; some are for free, but with these free themes, you don’t get any support. If you want to support, you can buy a membership and access the forum to get the necessary information.

WooThemes
4. Pros and cons

One of the pros is the small conversion needed to succeed. Only 3-5% of users pay for the rest. That means you don’t need a lot of users who pay for the product to be successful.

Also, having a free product is easier to promote and build a community around it. For sustainability, huge amounts of traffic and users are needed, which is hard to achieve if your product is very new and cannot compete with big competitors in terms of discoverability and originality.

Money is not everything

You might think it’s not true, but in reality, it’s not just the money that counts. Getting a good reputation for the company is a hard and long process. Everyone from the company should be involved. You have a problem if your company values differ from your employee’s.

Everyone is connected to the Web via social media platforms, and they can say whatever they want after working hours, so you should be aware of this and make sure your employees understand that how they behave online will affect the direction of their product and organization.

Reputation is one of the things that is hard to build and very easy to lose. A single wrong message or misdirected campaign can destroy all your hard work.

By giving things away for free, you can build a reputation as a good and caring company. If the things you are giving away are really good, people will consider supporting your organization by buying other products from you.

If your products are too expensive, give something for free to show them that your products are worth their attention. This is the chance for them to get to know your company and products without spending money.

Every company is unique

You should analyze your company and current market in the niche you’re targeting to choose the best way of implementing the free business model in your business.

Every company is unique, and while what worked for the companies mentioned above might not work for you, it strengthens the argument that you should conduct your own analysis and find the best way to use free economy in your business to put your product on the map.

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