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Freemium tactics can be costly, warns SA service consultant
Wed, 30 Jan 2013 09:52
Freemium (a compound of ‘free’ and ‘premium) refers to the practice of making a core offering available for free, but charging a premium for extras once consumers make further use of the underlying product or service.
The tactic is widely used overseas, notably in the US computer games market where many games are downloadable for free. The ‘pester-power’ of child gamers ensures pressure is kept on parents to pay for the extras or children ‘borrow’ credit cards to make purchase extra features.
The freemium business model’s growing appeal has been highlighted by Aki Kalliatakis, founder-partner of The Leadership LaunchPad, a consultancy that often advises businesses on the development of service-led growth strategies.
“For today’s hard-pressed consumers the word ‘free’ is extremely powerful,” says Kalliatakis. “At the same time, some marketers are desperate to boost sales in a tight market and will be well aware that ‘free’ offers can build a huge base of new product users at minimal marketing cost.
“But my advice is to be wary of blindly adopting the freemium model. If consumers feel cheated or manipulated, trust in the brand can be quickly eroded.”
Kalliatakis said the business model was most frequently seen in the software space as a result of the availability of many free apps. But something-for-nothing marketing was evident in many sectors.
These included cellular telephony with its “free minutes” platform and even car retailing when showroom profits were driven down to almost zero on the vehicle while finance packages were quietly beefed up to ensure good returns over 60 months.
Kalliatakis said ‘free’ meant simply that to most people. Resentment set in when other costs accrued.
He added: “Internationally, groups of outraged consumers have launched legal action or companies have apologised for using the tactic. Some big brands had to radically alter their freemium strategy to prevent damage to the core brand while some start-ups that thought a freemium platform was a sure winner have had to close down.”
To build long-term marketplace gains, free offers had to be just that with no strings attached.
Those who adopted the freemium model should be honest and not attempt to disguise that second-tier costs would apply once the free element of the offer had been taken up.
“A free offer can end up costing both the consumer and the brand,” he noted. “The consumer might be out of pocket for a month or so, but the cost to brand reputation could last for years. So be careful before playing with the freemium model.”