Freemium: Making Money by Giving Away the Goods (Research)

For years, music has operated on selling things -- vinyl, cassettes, CDs and now downloads. Then came advertising on radio and elsewhere. But there’s a third way -- freemium, a combination of free and premium offerings.

Examples of this in music are Spotify (free on browsers, premium on mobile) and Pandora (free with ads, premium without ads). But what if we expand the universe to include examples of freemium from other categories? 

A report, "Making Freemium Add Up," published Tuesday by Mark Mulligan of Midia Consulting, made such a comparison, putting Spotify, Deezer, Pandora and Slacker alongside Angry Birds, Hulu, Skype and others to glean further insight into the freemium model. 

One set of observation involves the critical task converting free users to paying customers. If the free version is too good, which Mulligan argues is the case with Pandora, SoundCloud, Skype and Hulu, there’s little incentive to pull out the wallet for a paid version. SoundCloud converts a mere 0.1% of its users to a paid account, while Pandora hovers around 2%, Skype is at 3% and Hulu at 8%.

What about Angry Birds? Of the estimated 263 million people who have actively played with the game, 75 million have spent money on it, a conversion rate of just under 29%. 

Spotify and Deezer are no slouches in the conversion game, at 32% and 38%, respectively. But neither have the scale of Angry Birds.

Part of the reason is pricing, Mulligan argues: “The gap from zero to $0.99 for Angry Birds free to paid is a modest step.” Going from free to $9.99 a month or so, however, is a “more sizeable hurdle,” wrote Mulligan, who recommended bridging the gap with a range of bite-sized prices. 

The report also tackles a nettlesome population for many freemium applications -- inactive users. Music services consistently fall below the “industry average” of 52% active users (or 48% inactive) for all freemium services, according to the survey. Here’s how music services stacked up, compared to social networks such as Facebook (with 90% of users actively engaging in the service within the last 30 days) and Instagram (with a 77% active rate): 

  • Slacker: 13% 
  • Deezer: 29%
  • Pandora: 37% 
  • Spotify: 40%

If one tends to see glasses as half-empty, inactive users can be detractors. But looked at another way, Mulligan wrote, they can be "priceless qualified marketing lead databases."