Business Models
Freemium
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Freemium is a pricing strategy, its name a blend of free and premium, in which a basic version of a product or service is offered at no cost while advanced features, capacity or content are reserved for paying users. It is designed to acquire a large user base cheaply through word of mouth and organic growth, then convert a fraction of those users into paying customers, especially in software and online services.
Facts
Core MechanismA free tier drives low cost mass user acquisition, and a subset of those users then converts to a paid tier for expanded features, capacity or removal of limits, cross-subsidizing the free users. 1 Cross-Tradition Connections
Associated With
Freemium pricing is a marketing-led acquisition strategy: a free tier draws users in, and marketing practice then converts a share of them to a paid tier.
Freemium is one of the dominant monetization models for consumer software and mobile apps, and the source article dates the practice in the software industry specifically to the 1980s, well before the term itself was coined in 2006.
Contains
Sources
1. Wikipedia, Freemium
WikipediaLead sectionQuote, Lead section
a portmanteau of the words 'free' and 'premium', is a pricing strategy by which a basic product or service is provided free of charge, but money (a premium) is charged for additional features, services and virtual (online) or physical (offline) goods that expand the functionality of the free version of the software.
1. Wikipedia, Freemium
WikipediaEtymology and History sectionQuote, Etymology and History section
The term freemium was coined in 2006 in response to a blog post by venture capitalist Fred Wilson.
1. Wikipedia, Freemium
WikipediaOrigin section, term coinageQuote, Origin section, term coinage
The term freemium to describe this model was coined much later, in response to a 2006 blog post by venture capitalist Fred Wilson. Jarid Lukin of Alacra, one of Wilson's portfolio companies, then suggested the term "freemium" for this model.
Frequently Asked Questions
Why would a company give its product away for free under a freemium model?
It is not really free: the company recovers its cost, and its profit, from the smaller share of users who convert to the paid tier, while the free tier itself functions as low-cost mass user acquisition.
A freemium company is not really giving the product away; it is spending on user acquisition through the free tier and recovering that cost, plus a profit, from the smaller share of users who convert to the paid tier. The free tier drives low-cost, mass user acquisition, exposing the product to far more people than a purely paid product could reach, and a subset of those users then converts to a paid tier for expanded features, added capacity, or removal of limits placed on the free version. Because the marginal cost of serving one more free user is typically very low, especially for software, the paying minority can cross-subsidize the much larger free population while the company still turns an overall profit. The model has been used in the software industry since the 1980s, well before the word "freemium" itself was coined in 2006.
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