The modern economy has become fiercely competitive, with thousands of different companies trying to attract new customers by offering products or services free of charge. This is a strategic move to attract users and gain market share. It is difficult to leave your company and try another if the company’s services are satisfactory and do everything you need. This approach is indeed powerful and usually leads to rapid user acquisition, but it comes with underlying intentions and potential drawbacks for users. Let’s now review the reasons behind such free offerings and reveal business models that support them and define possible implications for users.
The psychology behind “free”
The “free” concept has a powerful allure for consumers. It taps into rational and emotional triggers and creates a perception that there is a value coupled with instant gratification. This creates zero-price effects, and customers perceive higher benefits of free products simply because they’re free. The largest companies that use this tactic of free products are firms operating in the financial sector that offer transactions for free; banks may offer free SMS services, and financial brokers 0 spread FX accounts. Free services, especially by brokers, are always targeted to acquire new clients and increase the customer base, which is critical in a fiercely competitive financial sector.
Offering free products and services almost always leads to faster adoption rates, which is super beneficial for startups, but it also presents certain challenges. Namely, it is difficult to charge fees for services that were initially free, and customers might switch to other companies and products. This perception overshadows critical evaluation of the product’s actual value, which quickly reveals the moment the product becomes paid. There are always costs associated with free products, including the fact that users selected the products simply because it was free, and they might miss the better option.
The Freemium model explained: How companies balance free and paid services
The freemium model is the most dominant strategy when offering services and products for free. In this model, companies provide basic services at zero cost and charge only for advanced features or functionalities. ChatGPT is one such example, where it is absolutely free to use the AI chat, but users have to pay monthly subscriptions to access advanced models for video generation and so on. This approach has a main goal to attract a large user base quickly. The main strategy here is that companies who use freemium models expect a subset of users to find enough value and necessity to pay for premium features.
Examples of companies with the freemium approach
Here are some famous examples of companies that offer basic services for free and premium ones:
- Google – Provides a multitude of services, including its search engine, Gmail, and Google Docs. These products are free, but users can pay monthly fees to purchase more drive space if they need to save large amounts of emails, documents, and files.
- Spotify – Its freemium model allows users to access large amounts of music for free and is supported by ads. The platform has paid services, such as offline listening.
- Duolingo – Offers free language learning opportunities and employs gamification, allowing learners to be engaged. The basic model is free, but premium users can receive ad-free services and additional features.
- ChatGPT – Developed by Open AI, chatGPT is the most popular free online AI chatbot that offers many services for free, but premium users can receive more features and access to more advanced models.
What is the catch behind freemium?
As with everything free, freemium services offer their unique set of caveats. Surely it is super useful to employ some of the services mentioned above and they have very few disadvantages. However, let’s review the main cons.
Data modernization
Almost all free services collect user data. This data is then used for targeted advertising or sold to third parties. Users have to carefully consider these disadvantages before signing up for any free service providers. Fortunately, reputable companies always offer user agreements that explain how they collect and use users’ data.
Limited functionality
Almost all free services come with limited functionality, and users have to subscribe to paid models to get extra features. If a user wants the full functionality and no ads, they have to pay fees or purchase full products.
Advertising overload
This is probably the Achilles heel of free products and services. There are lots of ads in exchange to free services and some of these ads are intrusive and super annoying. These ads also force users to purchase full products if there are no better alternatives available.