Freemium pricing is the practice of offering a basic set of services for free, and enhanced features and/or content for a fee. This approach will result in a large proportion of customers using the company’s offerings for free, and a smaller proportion paying for additional services.
This approach has had notable success on the Internet (online training at Top Pillars), where basic services can be provided by the seller at close to a zero variable cost[i]. The concept allows a company to scale its customer base rapidly with little or no incremental cost[ii] for each additional customer gained (assuming no incremental marketing expenses), and then charge for additional services (such as access training materials, session recording and certificates).
A key point with freemium pricing is that the initial “free” price in essence is the marketing that the provider uses, since word of the zero price point[iii] will likely spread quickly among potential users.
We believe education and training should be accessible and almost free for everyone.Top Pillars Team
Where to Use Freemium Pricing
- Customers can use a service for a certain amount of time for free, after which they will be charged for any continuing provision of services. This approach convinces customers of their need for the service, after which convincing them to pay is easier.
- Customers have access to a version of the service that has few features, and can scale to an expanded version by paying a price. The main issue is ensuring that key functionality must be paid for, while still giving free customers a taste of the service provided.
- students might allowed the free service, with corporations paying the full price. This approach assumes that students will become hooked on the service, and later demand that companies they work for buy it. Since it takes time for students to enter the workforce and be in positions to demand to use the service, this is a long-term strategy.
- Only allow a certain amount of usage per time period, such as one download per month, without paying extra. As users become more enamored of the service, they are more willing to pay for greater volume.
Top Pillars might apply freemium in any above situation based on course and number of registered trainees.
Example of Freemium Pricing
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Advantages of Freemium Pricing
The following are advantages of using the freemium pricing method:
- Low marketing cost. The absence of a price becomes the key marketing tool of the company, which relies upon word of mouth to spread news about the company.
- Potential paying customer base. There will likely be a large pool of users of the free service at all times, any of whom represent the obvious sales funnel for additional paid customers.
Evaluation of Freemium Pricing
This approach is extremely common on the Internet, where customers might attracted to a website at zero incremental cost per person. The approach is much less economical in situations outside of the Internet. For example, where a seller must incur a cost when a customer uses its free services. Also, if you use this model, you must be careful to price the premium services to offset all fixed costs [iv] and generate sufficient cash for continued growth.
A variable cost is a cost that varies in relation to either production volume or the amount of services provided. if no production or services are provided, then there should be no variable costs. If production or services are increasing, then variable costs should also increase. For example of the variable costs is the resin we use to create plastic products; resin is the key component of a plastic product, and so varies in direct proportion to the number of units manufactured. To calculate total variable costs, the formula is:
Total quantity of units produced x Variable cost per unit = Total variable cost
Incremental cost is the extra cost associated with manufacturing one additional unit of production. It can be useful when formulating the price to charge a customer as part of a one-time deal to sell additional units. For example, if a company has room for 10 additional units in its production schedule and the variable cost of those units (that is, their incremental cost) is a total of $100, then any price charged that exceeds $100 will generate a profit for the company. The concept can also be applied to cost reduction analysis. For example, it can be of interest to determine the incremental change in cost when:
- A person’s employment terminated.
- A production line shut down.
- A distribution center closed.
- A subsidiary sold off.
An incremental cost analysis only reviews those costs that will change as the result of a decision. All other costs will consider irrelevant to the decision.
A price point is the suggested retail price of a product or service. It is usually set in relation to the prices at which goods and services are being offered by competitors, or at the prices associated with substitute products. An ideal price point should maximize profitability for the seller. To find this optimal point, a seller runs tests at various price points to see which one generates the largest aggregate profit level. This price point may need to be changed over time, in reaction to the prices being set by other parties for similar items.
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A fixed cost is a cost that does not increase or decrease in conjunction with any activities. It must be paid by an organization on a recurring basis, even if there is no business activity. The concept is used in financial analysis to find the break-even point of a business, and to determine product pricing.
As an example of a fixed cost, the rent on a building will not change until the lease runs out or is re-negotiated, irrespective of the level of activity within that building. Examples of other fixed costs are insurance, depreciation, and property taxes. Fixed costs tend to be incurred on a regular basis, and so are considered to be period costs. The amount charged to expense tends to change little from period to period.