Applying the Freemium Business Model in Telecommunications

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Would you be willing to try a service that usually costs $100 per month for free for two years?

Once the domain of Internet and mobile companies, so-called "freemium" business models are popping-up more frequently in the telecommunications business. Carriers are luring new customers with free trial offers to get them to sign-up for a service in the hope that customers will love the service and opt to pay for it later.

How does freemium work? Freemium plays off the old “puppy dog trick.” Give a little boy a cute puppy to take home on a trial basis, and chances are that his parents will find it impossible to return it to the pet shop. Digital players such as Zynga games and Spotify music services have built their entire businesses on the freemium business model. Spotify offers free music streaming to some 20 million customers with some 5 million customers opting to subscribe to Spotify’s premium service.

Now, telecommunications carriers are increasingly experimenting with freemium offers. As a recent example,T-Mobile recently bundled free 4G with new laptops. T-Mobile offers new owners of select Windows 8 laptops free 4G broadband service for two years, but limits them to 200 MB per month—with no strings attached. Once the free monthly data allotment is used up, trial users have the option to subscribe to one of T-Mobile’s premium subscription plans. Indeed, your average customer might use the free monthly allowance of 200 MB in just a couple of hours.

Freemium Benefits Why does freemium make sense for both businesses and customers?
  • Encourages trial: First and foremost, a freemium offer is intended to lure customers to test a new service and get them hooked. To put the T-Mobile offer into context, the U.S. broadband scene is dominated by fixed broadband subscriptions with few customers opting to expand their subscriptions to mobile broadband services for the ‘big screen’ (i.e. laptops, tablets, Connected TVs, etc.) Chances are that new laptop buyers already have a fixed broadband subscription, so tempting them to give mobile broadband a try can be quite challenging—especially if the mobile broadband plan is more expensive than a fixed broadband subscription. However, consumers might be willing to pay a premium for the added mobility convenience. After all, who doesn’t enjoy browsing the web while sipping a pina colada on the beach?
  • Lowers subscriber acquisition costs: T-Mobile could potentially lower its subscriber acquisition costs since its partners (in this case electronics laptop retailers) market the product for T-Mobile. T-Mobile’s partners surely appreciate the freebie they can offer their clients since it increases the value of their laptops in the eyes of a customer at no incremental costs to them.
  • Locks in potential high-value customers: As part of its offering, T-Mobile chose to bundle its free service offer with a Dell Ultrabook starting at $699, which is priced at double the cost of an entry-level desktop and 75 percent above the price of an entry-level laptop. This suggests that T-Mobile is trying to lure slightly more affluent customers who could afford to subscribe to its 4G plans.

Freemium Challenges However, the freemium model comes with challenges. There are two hurdles T-Mobile must overcome. First, some customers may never activate the 4G service as they are not deliberately buying the 4G service—but are instead buying the laptop.

The second hurdle is being able to convert a significant enough number of trial users into paying customers. The conversion rates in both instances need to be healthy enough to justify the costs of providing the free trial. Mobile media companies such as Blyk have had mixed results, even suspending its ad-supported mobile phone network operations in the U.K.

What will happen next? It will be interesting to see whether carriers decide to experiment with extending freemium offers into other service offerings and how different customer segments will respond.