CFA Level I · CFA Level I Exam · Business Models
A start-up gives away a basic version of its app and charges a fee for advanced features used by a small share of its users. Which of the following is the most likely risk of this business model?
The most likely risk is converting too few free users into paying customers. In a freemium model, most users pay nothing yet still create servicing costs, so low conversion to paid features can leave revenue insufficient to cover those costs.
- AConverting too few free users to paying users to cover costsCorrect
- BEarning revenue only once at the time of the initial sale
- CDepending on a single large customer for all revenue
Explanation
A freemium model depends on a small share of free users upgrading. If conversion is low, revenue may not cover the cost of serving the many free users. The other options describe a one-time sale or customer concentration, which do not match the described model.
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