How does the freemium business model make sense? Intuitively it does not make much financial sense to give your core product away free.
“When the supply of a product increases, the demand for complimentary product increases”
The principle is quite simple, look at it this way, the more people have an ipod the bigger will be the market for ipod and its accessories. Or if more people take to eating peeled apples, the bigger would be the demand for quality apple peelers.
The logic behind freemium is the use of this principle, by giving away the core product, you profit by marketing the complimentary products. It is akin to giving away apples to sell apple peelers. However, we all know that this model does not work with apples, as you will have to source the apples from the orchards and this will cost you both money and time. But this can work with products that can be digitally duplicated.
Digital duplication is practically free and even if there is any nominal cost, it will be borne by the person who is duplicating not by the one who offers it free for duplication. The cost for the producer remains the same whether it is 10 copies or 10 million copies that are duplicated. The more number of copies that are duplicated the probability of making profits from complimentary products increases.
Skype is perhaps the best example of how profitably this model works and beats traditional alternatives hands down. Freemium can potentially be used for anything that can be digitally duplicated be it text, video, music etc. This creates a lot of possibilities for using this model in the knowledge and culture industries.
Photo: willposh
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2 Comments
“However, freemium model does not work with software or software applications.” Actually, wordpress has the freemium model as business model.
@ Siedrix
Of caurse you are right that freemium can be used for software, I don’t know how that got in the text. Thanks for pointing it out, I changed it.