Paid, freemium, or free: Picking the right startup business model

Choosing the right revenue model for your startup can be a challenge. The decision to pick between the paid, freemium, and free models will determine what incentives will guide the company and how you will measure success.

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Each model provides unique strengths and challenges, and depending on your specific business model, customer type, and the amount of funds your startup has raised, they can be a strong or weak fit for you. Generally, free models are more common in the consumer space, whereas freemium and premium models dominate the business-to-business space.

Sometimes, startups must pivot to find a suitable approach for them. For example, Education Ecosystem, my own startup, switched from premium to free in early 2019. Understanding the strengths and weaknesses of each model can help you determine which model is suitable for your user base, sector, and competitive landscape.

This article will outline the differences between paid, freemium, and free models and present some thoughts from unit economics experts from Asia and the US.

Paid model

The paid revenue model is a classic way of making money as a startup, either by charging a price for each transaction or using a monthly subscription.

When asked about the paid model, Cong Thang Huynh, co-founder of open innovation platform InnoLab Asia, said, “Compared with free and freemium, the paid model dominates the Southeast Asian market (e.g., Grab, Foody, Topica). [It] is an ideal model for this exciting market, where an affluent young population is willing to spend money on quality of life and convenience services.”

According to Huynh, the paid model is the most popular model for most Southeast Asian startups, as they do not have access to unlimited VC funding like some startups in China, the US, or Europe.

However, despite its strengths, there are a lot of challenges with running a paid model. “The weakness of the paid model [is that it] requires a lot of money to build the ecosystem and gather enough data to understand the customer to expand,” says Huynh. The cost of growing a business based on the paid model is high, but if the customer lifetime value is significantly higher than the cost per acquisition, then the startup will succeed in the long term.

David Stok, a partner at Matrix Partners, agrees. “[For] any company using the subscription model, traditional GAAP [generally accepted accounting principles] accounting methods for tracking performance totally fails to paint a proper picture of the business, as they don’t track the future value of subscribers.”

The only way to solve this problem, says Stok, is to focus on unit economics: customer lifetime value, customer acquisition costs (CAC), and months to cover CAC. These indicate the business’ long-term financial health.

According to Stok, management must alter their metrics and incentive programs to match the best interests of their business model – in this case, a paid subscription model.

Freemium model

Over the past 10 years, the freemium (a mix of free and premium) business model has become the go-to concept for B2B and business-to-consumer startups that intend to monetize early on. In this model, users receive basic features at zero cost and have the option to access upgraded functionalities for a subscription fee.

Some businesses who use this model to great success are Tokopedia and Singapore’s Swingvy. Recently, Singaporean video-streaming service Hooq added a freemium option for consumers, as well.

Free model

Conclusion