Designing for the Cognitive Principles Behind Freemium
By: Jess Shutt
Tags: Cognition, User Research, Freemium, UX

By Jess Shutt

You’re probably familiar with freemium — from games to business tools, the pricing strategy has proven a popular and effective business technique. A free, limited version of a product lets users try an experience before deciding whether or not to purchase the full-function paid version. If you’ve created playlists on Spotify, played a game on Facebook, or read three free articles a month at the New Yorker, you’ve used a freemium product. This strategy takes three common approaches:

Freemium vs. premium. In this model, the paid premium experience gives users features unavailable in the free version — letting them, for example, buy more effective armor in an online game or removing ads from a music app.

In this model, the paid premium experience gives users features unavailable in the free version — letting them, for example, buy more effective armor in an online game or removing ads from a music app. Quotas. The quota model limits usage through licenses, size limits, or other means. — for example, capping storage capacity for a free online database.

The quota model limits usage through licenses, size limits, or other means. — for example, capping storage capacity for a free online database. Cross-sells/up-sells. Here the platform is free, but users are encouraged to buy profitable products — for example, Apple’s free iTunes platform lets users purchase music and other media.

In any freemium experience, the product leads the sales strategy, making it essential that the product design sets users up for success. No matter which freemium technique you use, keep these four cognitive principles in mind when creating user experiences:

Endowment effect

Mere exposure effect

Loss aversion

Status quo bias

Let’s explore how these principles can add value for users by applying them to the three freemium experience types.

Freemium vs. Premium

Examples: buying more effective armor in an free online game or paying to remove ads from a music app

It’s natural for humans to increase the perceived value of products we already own, regardless of their actual market value — a phenomenon called the endowment effect. A freemium strategy helps users justify a premium purchase based on the increased perceived value of owning the freemium experience.

We attribute greater value to objects that we own than we would to the equivalent object that we do not own.

This concept has long been noted in psychology; Freud, for example, highlighted the power of the human brain to ascribe emotional value to inanimate objects. This urge can be seen every time a child names a teddy bear, or when people getting married are encouraged to equate diamond rings with love and romance. Beyond literal value, we prescribe emotional & psychological value to everyday objects & experiences.

In the 1960s, Richard Thaler coined the term “endowment effect” to describe this phenomenon from an economic standpoint. In a now-famous study, he asked subjects to define their willingness to accept compensation for a mug. People wanted to be paid twice as much for mugs they owned as what they had originally been willing to pay for the mug before it had become theirs.

When applying the endowment effect to a freemium experience, consider how that experience might encourage a sense of ownership in users. This can be challenging with freemium digital experiences, where it’s harder to inspire perceived ownership than it might be for physical objects. Freemium music platforms, however, show that the endowment effect can apply in the digital world. Many of these services allow users to listen to music and create playlists for free; their premium experience is the removal of ads. While they could have chosen to make playlist creation a premium feature, but allowing users to create something within the free experience fosters a sense of ownership that listening alone cannot.

Quotas

Example: capping storage capacity for a free online database

Freemium quotas hinge on the pivotal moment at which users hit a quota limit — and either purchase the full version or find a new product. There are two factors in play here: status quo bias and loss aversion.

It’s a truism that people fear change. But that’s too simple; research does confirm that, in general, people prefer the status quo — note that this doesn’t mean that fear is the reason. Instead, change requires overcoming inertia.

A freemium strategy makes it easier for users to overcome that inertia and try your product. And once they’ve used it, inertia is on your side — a strategy famously used by Amazon, both in its freemium go-to-market strategies and its habit of pricing products at a loss in order to draw shoppers.

Another example of status quo bias is the prototyping software InVision, which makes it very easy to start building a free initial prototype. But if you want to collaborate with other InVision users, you must purchase a set of licenses. At this point, you could explore other prototyping tools, but you’re already familiar with this one, and you may even have a couple of prototypes stored in it.

We attribute greater significance to pain than we do to joy. Causing us to actively avoid pain, rather than seek joy.

Quota freemium models also play on our tendency toward loss aversion. Humans tend to view a loss as significantly more painful than an equivalent gain would be joyful. While this paradigm is most common in free trials (where a positive experience must end), it can also be applied to freemium experiences. When users must either make a purchase or migrate, they tend to experience migration as a loss of an existing experience.

In the InVision example, let’s say you hit your quota. Start exploring other prototyping tools, and you’ll probably encounter some with features that InVision doesn’t offer. While these are technically a gain, in making the switch you’re also likely to lose some features that InVision offers. Combine your familiarity with InVision with loss aversion, and it’s a good chance you’ll see InVision’s features as more valuable than that of the other prototyping tool — their absence would be a loss. It becomes more valuable to continue using InVision, rather than changing to a new tool.

Cross-sells and Up-sells

Example: Apple’s free iTunes platform lets users purchase music and other media

It’s innately human to prefer the familiar. Simply having been exposed to a product (in a commercial, seeing someone wearing the logo, seeing it reviewed on daytime TV, etc.) increases its perceived value — this is the mere exposure effect identified by Gustav Fechner, the guy you can blame for every product placement you’ve ever seen on TV or in movies.

When evaluating freemium up-sell options, think about how users can rapidly become familiar with the product. All free experiences run the risk of being “one and done” — users try it once, never to return again. The more a product experience encourages return and exploration, the more familiar they’ll be with the product. One of the best ways to do this is when marketing and design partner to create helpful (not annoying) product reminders via ads, emails, and PR. An excellent example of this kind of partnership is the in-app and email-based educational campaigns from Headspace. Partnering across channels helps the company encourage habit-building with the product, and makes it easy to know when a user is ready to make additional in-product purchases.

The Power of Well-Considered Cognitive Principles

While freemium experiences can be a powerful mechanism to set users up for success, the strategy can be harmful if misapplied. To create successful freemium experiences, we need to consider the human inclinations at play — including the endowment effect, mere exposure effect, loss aversion, and status quo bias. But too often, these powerful cognitive principles are misapplied, only to frustrate users (I’m looking at you, “Sorry to see you go…” popup trying to play on loss aversion). But recognizing the psychological and behavioral economics at play in product design can help us create much more powerful — and successful — user experiences.

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Thank you to Kai Nunez for the feedback!

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About the Author

Jess Shutt has spent her career in emerging technologies, including consumer robotics & AI. As a Lead User Researcher for Salesforce’s Einstein, she spends her time exploring how predictive models can help all businesses succeed.