Understanding this innovative business model
The word freemium is a combination of the words free and premium.
It describes a business model in which you give a core product away for free to a large group of
users and sell premium products to a smaller fraction of this user base.
A well known example of a freemium business model is Skype which provides free computer to computer calling and sells premium products in the form of voicemail, conference calls and world wide connection to landlines and mobile phones. (see case study)
Freemium is not…
… the same as a free trial:
A common misconception is that freemium includes or consists of a free trial period though this is not the case. The difference is that a free trial allows a user to test a product or service for a limited time before buying the actual product.
A freemium model on the other hand provides a product or service that is always free and the premium part comes from offering the free platform of users additional products or services that for a fee can expand or improve their experience. So just because a free product appears in a business model does not make it freemium.
… the only form of free:
Another common misconception is that all business models that involve the use of free products
are freemium models.
There are three other business models centered on a free product, which are commonly used; Direct cross-subsidy, Ad-supported and gift economy. (Illustration from Chris Anderson’s great post, four kinds of free)
If you are not using free, you will be competing with free
Freemium business models play a key role in business today. They are widely use in a range of industries. An example of this is that apps with freemium models account for 98% of the revenue in googles app store and 95 % in apples app store.
While this disruptive model was initially only used within the software industry, this is no longer the case. Newspapers, music, publishing, telco, education and a range of other industries are now facing competition from freemium business models.
The underlaying concept that makes this development possible is digital production. The fact that it is now possible to produce and distribute a wide variety of value propositions using computers and the internet. Because of the ever decreasing cost of computer power, storage and internet bandwidth, the marginal cost of distributing this value is virtually zero.
Once a musician has produced an album, it costs him practically the same to have 10 people or 1 million download the album.
(See Economics of Digital Production)
This creates a situation where you can give away the core product for free and create a profitable business model from just up-selling to a few percent.
(see The Economic Principle Behind Freemium)
This trend will only continue, as costs continue to decline and an ever increasing array of value propositions can be delivered through the internet. Meaning that across a wide range of industries;
– If you are not using free, you will be competing with free –
If you are interested in actively understanding or using the freemium model. we recomend that you
use the freemium framework that we have developed here at freemium.org
This page is part of the first leg of the framework, understanding freemium. You can dive into detail
with: “Understanding Digital Disruption”, “The Economic Principle Behind Freemium” and “Economics of Digital Production”
The second leg is our analytical model, that can be used to understand and shape freemium models.
The third leg is what we have chosen to call a travel guide; a set of cases, tools and editorials that can help you to further understand and use freemium. (See more)