Freemium
Encyclopedia
Freemium is a business model
that works by offering a product or service free of charge (typically digital offerings such as software, content, games, web services or other) while charging a premium for advanced features, functionality, or related products and services. The word "freemium" is a portmanteau combining the two aspects of the business model: "free" and "premium".
') version, often given away on a floppy disk or CD-ROM, to promote a paid-for full version. The model is particularly suited to software as the manufacturing cost is negligible, so – as long as significant cannibalization
is avoided – little is lost by giving it away for free.
However, this term for the model appears to have been created only much later, in response to a 2006 blog post by venture capitalist Fred Wilson
summarizing the model:
Jarid Lukin of Alacra
then suggested the term "freemium" for this model. The term has since appeared in Wired
magazine and Business 2.0
, which has since been used by bloggers such as Chris Anderson
and Tom Evslin
. In 2009, Anderson published the book Free, which examines the popularity of this business model. As well as for traditional software and services, it is now also often used by Web 2.0
and open source
companies.
As explained by several of the references cited above, freemium is closely related to tiered services. It has become a highly popular model, with notable success, such as quite prominently in LinkedIn, and in the form of a "soft" Paywall, such as those launched by The New York Times, and by Press+. Alternative models for monetizing digital offerings, noted in "See also", include Pay what you want
, which also loosens conventional pricing constraints.
reported that traditional anti-virus software had started to lose their market to freemium anti-virus products.
Business model
A business model describes the rationale of how an organization creates, delivers, and captures value...
that works by offering a product or service free of charge (typically digital offerings such as software, content, games, web services or other) while charging a premium for advanced features, functionality, or related products and services. The word "freemium" is a portmanteau combining the two aspects of the business model: "free" and "premium".
Origin
The business model has probably been in use for software since the 1980s, particularly in the form of a free time- or feature-limited ('liteLite
Lite is a variant spelling of "light", a concept of weight, and may refer to:*Diet food or diet beverages:**Diet soda, a diet version of soda pop**Low-alcohol beer or low-calorie beer ***Miller Lite, a brand of light beer...
') version, often given away on a floppy disk or CD-ROM, to promote a paid-for full version. The model is particularly suited to software as the manufacturing cost is negligible, so – as long as significant cannibalization
Cannibalization of machine parts
Cannibalization of machine parts, in maintenance of mechanical or electronic systems with interchangeable parts, refers to the practice of removing parts or subsystems necessary for repair from another similar device, rather than from inventory, usually when resources become limited...
is avoided – little is lost by giving it away for free.
However, this term for the model appears to have been created only much later, in response to a 2006 blog post by venture capitalist Fred Wilson
Fred Wilson (financier)
Fred Wilson is a New York-based venture capitalist and a prominent blogger. Due to his successful investment track record and community involvement, he is recognized as a leading voice of the venture capital finance community in New York...
summarizing the model:
Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouthWord of mouthWord of mouth, or viva voce, is the passing of information from person to person by oral communication. Storytelling is the oldest form of word-of-mouth communication where one person tells others of something, whether a real event or something made up. Oral tradition is cultural material and...
, referral networks, organic search marketingOrganic searchOrganic search results are listings on search engine results pages that appear because of their relevance to the search terms, as opposed to their being advertisements. In contrast, non-organic search results may include pay per click advertising....
, etc., then offer premium priced value added services or an enhanced version of your service to your customer base.
Jarid Lukin of Alacra
Alacra
Alacra Inc is a privately owned company that specializes in the aggregation of large information databases to customers that utilize multiple resources in research....
then suggested the term "freemium" for this model. The term has since appeared in Wired
Wired (magazine)
Wired is a full-color monthly American magazine and on-line periodical, published since January 1993, that reports on how new and developing technology affects culture, the economy, and politics...
magazine and Business 2.0
Business 2.0
Business 2.0 was a monthly magazine publication founded by magazine entrepreneur Chris Anderson, Mark Gross, and journalist James Daly in order to chronicle the rise of the "New Economy"...
, which has since been used by bloggers such as Chris Anderson
Chris Anderson (The Long Tail)
Chris Anderson is editor-in-chief of Wired, which has won a National Magazine Award for general excellence three times during his tenure. He wrote an article in the magazine entitled The Long Tail, which he expanded upon in the book The Long Tail: Why the Future of Business Is Selling Less of More...
and Tom Evslin
Tom Evslin
Tom Evslin formerly served as Chief Technology Officer for the State of Vermont. Formerly he was Chief Recovery Officer responsible for coordinating the State's use of federal stimulus money under the American Recovery and Reinvestment Act...
. In 2009, Anderson published the book Free, which examines the popularity of this business model. As well as for traditional software and services, it is now also often used by Web 2.0
Web 2.0
The term Web 2.0 is associated with web applications that facilitate participatory information sharing, interoperability, user-centered design, and collaboration on the World Wide Web...
and open source
Open source
The term open source describes practices in production and development that promote access to the end product's source materials. Some consider open source a philosophy, others consider it a pragmatic methodology...
companies.
As explained by several of the references cited above, freemium is closely related to tiered services. It has become a highly popular model, with notable success, such as quite prominently in LinkedIn, and in the form of a "soft" Paywall, such as those launched by The New York Times, and by Press+. Alternative models for monetizing digital offerings, noted in "See also", include Pay what you want
Pay what you want
Pay what you want is a pricing system where buyers pay any desired amount for a given commodity, sometimes including zero. In some cases, a minimum price may be set, and/or a suggested price may be indicated as guidance for the buyer. The buyer can also select an amount higher than the standard...
, which also loosens conventional pricing constraints.
Restrictions
Ways in which the product or service may be restricted in the free version include:- Feature limited (e.g. a "liteLiteLite is a variant spelling of "light", a concept of weight, and may refer to:*Diet food or diet beverages:**Diet soda, a diet version of soda pop**Low-alcohol beer or low-calorie beer ***Miller Lite, a brand of light beer...
" version of software) - Time limited (e.g. only usable for 30 days)
- Capacity limited (e.g. for an accounts package, can only be used to create 10 invoices)
- Seat limited (e.g. only usable on 1 computer rather than across a network)
- Customer class limited (e.g. only usable by educational users)
- Effort Limited (e.g. all or most features are available for free, but require extended unlocking which can be shortcut for a fee)
Significance
On 7 June 2011, PC WorldPC World (magazine)
PC World is a global computer magazine published monthly by IDG. It offers advice on various aspects of PCs and related items, the Internet, and other personal-technology products and services...
reported that traditional anti-virus software had started to lose their market to freemium anti-virus products.
See also
- Advertising-supported software
- Fee in, free outFee in, free outFee in, free out is a business model which works by charging the first client a fee for a service, while offering that service free of charge to subsequent clients. The model is appropriate in business environments where there is a one-time cost to develop a product or service but little or no...
- Pay what you wantPay what you wantPay what you want is a pricing system where buyers pay any desired amount for a given commodity, sometimes including zero. In some cases, a minimum price may be set, and/or a suggested price may be indicated as guidance for the buyer. The buyer can also select an amount higher than the standard...
- Paywall
- SharewareSharewareThe term shareware is a proprietary software that is provided to users without payment on a trial basis and is often limited by any combination of functionality, availability, or convenience. Shareware is often offered as a download from an Internet website or as a compact disc included with a...
- Street Performer ProtocolStreet Performer ProtocolThe threshold pledge or fund and release system is a way of making a fundraising pledge as a group of individuals, often involving charitable goals or financing the provision of a public good. An amount of money is set as the goal or threshold to reach for the specified purpose and interested...
- Tiered serviceTiered serviceTiered service structures allow users to select from a small set of tiers at progressively increasing price points to receive the product or products best suited to their needs. Such systems are frequently seen in the telecommunications field, specifically when it comes to wireless service, digital...
External links
- Blogging for Dollars - Wired magazine