Advantages – A freemium strategy is a great way for a company to acquire a large user base in a relatively short amount of time. Then, once you develop market share and loyalty among your customers, you can focus on how to monetize them.
Bitly, for example, accrued over two million monthly users with its free service, soon becoming one of the leading URL shorteners in the world. Today it has tens of thousands of people coming daily for links and signing up for its SaaS product, with customers ranging from beginners to enterprise-level professionals.
How It Communicates Value – “Free” is an attractive price for every consumer (especially when the quality of the product or service is as good as Bitly’s is)! There is a low barrier to consumption, which is great for beginners, and the model is scalable, so users can upgrade to various paid-services with better features on their own timeframe.
Challenges – Since price communicates value, freemium can pose a risk that your product will be undervalued. And building a successful pricing and packaging strategy out of a freemium entry can be challenging. Bitly faced this problem. It tried different things over several years to create revenue, but most of these initiatives never gained traction. And, even if you have millions of users, popularity doesn’t pay the bills. How best to monetize the business is a question that’s unique to every business. But if you can find an upsell path into a paid model, freemium can be a great way to gain traction for a service.
Advantages – Customers with deeper pockets who love your product or service will often be willing to pay for more of it. For example, in 2012, Bitly introduced its premium package, Bitly Enterprise, which caters to growing and established companies. This strategy was crucial to Bitly’s ability to ensure revenue flow. Bitly Enterprise has since become the company’s core business and it maintains its free product as a loss-lead.
How It Communicates Value – Upmarket packages offer more features and an enriched experience for customers. In Bitly’s case, the enterprise package offers a lot of organic and earned branding features, link customization and management potential, greater scalability, and enhanced security.
Challenges – Upmarket products can require a lot of customization. Also, the number of customers who can and will pay the higher price tag may be limited. Bitly’s sales team is prepared to negotiate with customers of all sizes individually, but they are behind a “contact us” sales form online. That means the onus is on customers to reach out to the company to talk to qualified sales people, even just to find out pricing.
Advantages – Businesses that offer some combination of free and paid service risk leaving money on the table if they don’t offer enough tiers of paid packages. Bitly, which, until recently, offered a highly popular free service and an expensive enterprise service was in this situation. Many customers seemed keen to upgrade from freemium for more features — but not for a couple thousand dollars per month, which is the average price of the enterprise package. Bitly decided, therefore, to “fill in the gaps” by devising a package for customers in the intermediate space.
How It Communicates Value – An effective tiered pricing strategy communicates to customers that increases in prices are consistent with increases in value. So, a strategy to capture customers in the intermediate space will offer packages with features and price points that better suit their budget and needs. Of course, communicating value with pricing cuts both ways. A customer’s willingness to pay for something also signals to a business a level of customer engagement that suggests they’re worth investing in.
“Getting people to just run the credit card makes it possible for us to do a lot of higher cost things to start a real relationship with them,” said Kevin Arts, VP, Business Operations and Analytics, Bitly, Inc.
Challenges – The first challenge it figuring out what exactly your customers want and how much they are willing to pay for it. Bitly realized that, while it knew quite a bit about its enterprise customers, it didn’t have a lot of hard data about the sensitivities and price breaks of its free user base.
The second challenge is figuring out how to offer a product with new prices and features to middle-ground customers without cannibalizing other parts of your business. Naturally, this was a big concern for Bitly who didn’t want to lose high-paying enterprise customers to the intermediate tier.
Advantages – The essence of this strategy is devising and designing a product or service that is totally different from those of established market competitors and successfully marketing it. Businesses that do this disrupt the market. They are quick to evaluate their processes and improve their service/product, which enables them to enjoy a competitive advantage in many areas, especially pricing and packaging, which opens doors to growth. amaysim launched a successful revolution in the Australian mobile phone market in 2010 by introducing simple, low-priced, subscription mobile phone service in a market monopolized by three carriers that offered only over-priced, long-term contracts with hidden charges and onerous, complicated terms and conditions.
How It Communicates Value – Lower prices, good value, simple packaging, better products, and no tricks. It’s that simple. Usually, disrupters offer better customer service, too.
“We have a saying in our company that the best customer service is no customer service,” said Peter O’Connell, CEO and Managing Director of amaysim Operations. “We make our product and process so simple that no one has to ring our customer service.”
That’s good for customers as well as subscription companies because the happier the customer, the lower the churn.
Challenges – If you get the model right, you go from zero to hero overnight. But if you get it wrong, the opposite is true — unless you can pivot quickly. amaysim credits its very existence to its ability to pivot quickly when its business very nearly crashed shortly after startup. The benefits of its very first product, although extremely competitively priced, turned out to be still too complicated for busy customers to quickly digest.
“Three months after launch we realized that if we continued on our path we’d soon be bankrupt because it would cost us tens of millions of dollars in marketing to educate consumers,” said O’Connell. “We pivoted very quickly and within six weeks had designed and launched a new product.
Revolutionaries can usually expect to enjoy only a brief break-away, after which imitators will swarm into the market and erode the competitive advantage. They must continue to innovate. Witnessing its competitors copy every single feature that it brought to the market, amaysim began modifying its brand. It also went back into growth mode by taking its business model to the energy sector — another market ripe for disruption — and introducing the first-ever subscription energy product in Australia.
Advantages – Generating cash flow early on is an uphill road when expenses run high, but it’s essential to slow the burn of your initial capital and make it to profitability. That’s especially important for startups because, depending on how investors view your company, the cost of acquiring more capital later could be much higher. amaysim’s strategy was to acquire profitable customers from Day One and hit the “Holy Grail” milestone of cash-flow-break-even. Although profitability didn’t come for an additional year and a half, amaysim managed to achieve cash-flow-break-even within 18-20 months.
How It Communicates Value – A business that is sustainable can better add customer value even as it pursues growth. amaysim’s corporate focus since the beginning has been to build a sustainable business, in part to offer customers a better product. To do this, it first did a feasibility study to determine what its gross margins would be (benchmarking from margins in Europe, U.S., and Australia). amaysim worked backwards from there to set attractive prices for customers.
amaysim also focuses on several key indexes in the industry, including the cost of acquisition, cost to serve, CLV, and churn. And their net promoter score is vital because a high NPS effectively drives down the cost of acquisition. It means that customers are so happy that they’re recruiting new customers for you — a win-win for customer and company, alike.
Challenges – Finding the right model to create cash flow takes time and, to be honest, some luck. Companies may travel a tough road before finding a sustainable model. And even when they do, industries evolve and you must adapt. For example, nine years in, amaysim finds itself again going back to growth mode. You must constantly balance the need to grow and innovate with the need to generate cash flow.
Advantages – Cross-selling is a great way to boost revenues and customer satisfaction simultaneously. It’s most commonly done with complementary products, but that hasn’t stopped amaysim from pursuing a strategy of cross-selling two unrelated products: mobile phone service and energy (gas and electricity).
The plan is ambitious, but amaysim thinks it will work precisely because of the differences in the make-up of the two industries. In the mobile sector, profit margins are low but the cost of acquiring customers is cheap. By contrast, in the energy sector the cost of acquiring customers is much higher, but profit margins are also higher. O’Connell estimates that the marginal revenue from an energy customer is several times that of a mobile customer, so the combination of acquiring new mobile customers at low cost and cross-selling the same customers higher margin energy packages promises the potential for powerful revenue growth.
How It Communicates Value – The main customer benefit of a cross-selling strategy is enhanced customer satisfaction. Customers learn of products that could benefit them that they may not have been aware of, offered by an already trusted vendor. More services provided by the same vendor leads to a more streamlined customer experience, with less bills to keep track of. Cross-selling products and services increases customer loyalty and deepens customer relationships.
Challenges – Customers can get turned off by cross-selling efforts if they sense that their interests are secondary to the company’s interest in generating sales. A successful cross-selling strategy always begins from the customer’s perspective.
Another challenge is that cross-selling efforts could water down your brand if products are too dissimilar. Given the diversity of its two sales markets, this could potentially present a risk to amaysim, but amaysim is carefully managing its brand to communicate to customers that, first and foremost, amaysim represents simplicity, flexibility, and “no bullshit.” (Really!). The goal is for the additional services to enhance the amaysim brand, not dilute it.