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.

One of the most well-known examples of a freemium business model is Skype, which provides free computer-to-computer calling but sells voicemail, calls to landlines and other products.

Use of Freemium

Freemium is most often used with apps, games and SaaS software. However, it has found a place in a wide variety of industries. All industries in which a quality, free product can be duplicated with virtually no marginal cost can successfully utilize a freemium business model.

Less common examples of freemium can be found in design, education, manufacturing, publishing, music, movies and even the manufacture of window gardens.

As IT technology develops, more and more companies will see their industry disrupted by digital alternatives.

Freemium is Not the Same as a Free Trial

A common misconception is that freemium consists of a free trial, especially when it comes to software. This is not correct.

A free trial allows users to try out a product or service for limited time, after which the user must pay to continue using the product or service. A freemium model, on the other hand, provides a free product that is always free, generating value in itself. Some users may purchase one or more premium products, but typically only a small percentage will do so.

The bottom line is: freemium is not the same as a free trial.

Free is Not Always Freemium

Another common misconception is that all business models that involve the use of free products are freemium models.

freemium is not the same as advertising (even though the two business models are often combined)
freemium is not the same as cross subsidizing (e.g., getting a phone for a dollar and then paying for it through a subscription)
freemium is not the same as a gift economy

Chris Anderson was the first to articulate the difference between these models. (link)

The Rise of Free and Freemium

Many business models include some free aspects, and freemium is becoming increasingly more utilized and popular among such models. The reason for this lies in the underlying economics of the Internet and digital production.

It is becoming possible to do more and more with computers and the Internet. At the same time, the price of doing these new things is falling exponentially (thanks to Moore’s law).

This means that the marginal cost of providing a service facilitated by computers and the Internet is virtually zero. Making one additional copy of a book, movie or piece of music costs nothing; the marginal cost of adding 10 or 100 new users to an online service is practically non-existent.

Technical innovation has paved the way for creating successful business models in new ways, including through the use of free and freemium.

For more on this topic, see “freemium logic.”

Origin

Some variety of the freemium business model has been in use since the 80s in the form of shareware computer programs distributed on floppy disks.

Because freemium is highly dependent on having a free product with very low marginal cost, the model only started to become popular as Internet distribution and the ever-decreasing cost of digital production drove the potential marginal cost down.

This is illustrated by the fact that this business model was hardly used at all before 2006. Fred Wilson is credited as being the first to widely use the term, which was first used by Jarid Lukin in his 2006 blog post “My Favorite Business Model.”

Lukin’s post began with the following:

“Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base.”

The Future of Freemium
An increasing number of industries are being disrupted by digital offerings. Just think of the way Airbnb is disrupting the hospitality industry or the way Skype has disrupted long-distance calling.

These disruptions happen through digital products and services that, because of low marginal costs of production and distribution, have the potential to be employed in business models involving free offers.

This means that in the future, companies in almost every industry will be either using free or competing with free.

For more on this topic, read “future freemium models.”

Learn More

The goal of this site is to help people learn more about the freemium business model.

You can find pieces describing different aspects of the freemium model under editorials. (link)

You can find a list of cases describing different freemium models here. (link)

You can find a how-to guide detailing how to implement freemium and tolls here. (link)