How the Freemium Has Shaped the Financial Market

Chia-Li Chien | Sept. 17, 2012

Freemium is a type of business model that has gone viral in recent years as more and more people are online. The Freemium business model has been, technically speaking, in use since the early 1980s, mostly in software industry. However, you can find many examples in today’s market. It would include free downloads, free eBooks, free webinars, free 1-hour live seminars, etc. The purpose of the Freemium is to persuade a targeted audience to buy the service or product upon receiving the freebie.

For the most part, the conversion ratio of that targeted audience averages about 10%. Companies such as Skype hold that record. Some other direct marketing experts may have better conversion rates using in-person types of presentations for specific types of services or products.

The freebie up front is simply considered a cost of sales for most companies, in either customer acquisition or retention. As an ecommerce tool, it attracts the prospect and leaves a trail of contact that a business can continue to use to reach out to that prospect over time. In the ecommerce world, Freemium marketing is called permission-based marketing.

Financial institutions have been deploying this type of marketing for many years. It seems to me that they have a much higher conversion ratio, especially in face-to-face service.

As Baby Boomers get ready for or are already in retirement mode, many are privatizing their liquid assets into their own pension or annuity. The need for this type of financial service is greater than ever. Many in this particular audience have been offered a FREE financial plan by their current 401(k), 403(b) providers. Because of certain characteristics, these free financial plans are typically what I call modular plans.

These plans focus specifically on the investment plan based on the assets you currently hold with the financial institution, or a retirement plan that provides guidelines on asset distribution.

Through this free service, the financial Institution is able to obtain either additional liquid assets or retain the consumer. Nevertheless, it is a valuable service to their customers. Below are some examples of what’s available in the market place based on different financial Institution scenarios:

Financial Institution	A	B	C	D
Free Financial Plan Offer (FP)	Centralized: manufactured by headquarters	Decentralized: manufactured by a Financial Advisor (FA)	Optional to retail Financial Advisor (FA)	Centralized: manufactured by headquarters
Data Gathering	Manual from a Financial Advisor (FA) & some industry data aggregations	Manual from Financial Advisor (FA) & some industry data aggregations	Manual from Financial Advisor (FA) & some industry data aggregations	On-line from consumer activity & some industry data aggregations
Fee of the Financial Plan (FP)	Free	Fee, varied by size of the net worth & complexity	Fee, varied by size of the net worth & complexity	Nominal fee
Consumer Segmentation	Distribution age 55+ with min. $250,000 current assets with this Financial Institute.	Mostly distribution age 55+. Ideally min. $250,000 assets to invest.	Mostly distribution age 55+. Ideally min. $250,000 assets to invest.	Mostly between ages 20 and 55 at accumulation stage.
Goals of the Financial Institution	Consumer to convert to new financial products or remaining assets with this Financial Institution	Consumer to purchase new financial products or remaining assets with this Financial Institution. On-going service and advice.	Consumer to purchase new financial products or remaining assets with this Financial Institution. On-going service and advice.	Continuous provider fee for advice and education.

All appearances are that the four types of Freemium business models above are doing very well in the market space. Their common problem is the lack of enough people/employees to service the customers. This is due to the high conversion ratio of the up-front free service plus the market demand.

From a consumer’s standpoint, regardless of current financial situation, there are several things to consider when working with a Financial Advisor and their firm.

• Sustain a positive cash flow on a monthly basis
• Protect only up to your assets
• Lock in the assets sufficiently to keep the cash flow positive

From financial industry standpoint, there will be more and more Freemium business model driven retail firms despite the competition from giant financial institutions. If you’re competing in this space, in addition to high touch and customized service for your customers, package your products or services efficiently to gain higher conversion ratio. Unless you are in the space of competition in price, your volume must be there to sustain profitability.