The Freemium Business Model—What is It?

The Freemium business model is all the rage in mobile games and Internet start-ups, it seems. Simply defined, according to Wikipedia, freemium is a business model by which a product or service (typically a digital offering such as software, media, games or web services) is provided free of charge, but a premium is charged for advanced features, functionality, or related products and services. The word “freemium” is made up of the two words and models: “free” and “premium”. In other words, it’s “try before your buy,” or to look at it another way, “create a customer dependence and then upsell.” It’s mostly used as a customer acquisition tactic which essentially builds value for your business (see “Customer P & L” for more info). Venture Capitalist Fred Wilson explained it this way in his 2006 blog post:

“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.”

Freemium got its start with software companies and product, where costs are somewhat negligible. Lite versions, or ones with less functionality than the actual product, were distributed to test or try a particular software program. Hundreds of thousands of computers coming equipped with lite versions of software led to not only the full versioned software sales but also tremendous lifetime value in terms of new version upgrades and add-ons. Also, being able to distribute lite versions via Internet download or disk made distribution easy and cost effective. So, there’s something to be said for freemium that is worth analyzing for your own business potentially. Freemium does come with risk, however, in that it might only attract customers looking for free and at some point a sound revenue model is necessary to sustain and grow a business. Nonetheless, as you’ll see in the examples that follow, several successful new and existing businesses have used Freemium with great results.

Examples of Freemium

Freemium has not only been popular with software but has also served as a business model for several companies. Here are three examples that have mastered the Freemium business (taken from Charlie C’s “7 Companies that Mastered the Freemium Business” blog):

1. Skype: Skype was founded in 2003 as a P2P-driven application people could use to “call” other Skype users with over the web. It quickly evolved and attracted customers away from traditional land and even wireless calls. Once this happened, Skype simply announced on its website that while computer-to-computer calls would remain free, a “low per-minute rate” would be charged for using Skype to call land lines. Many users were happy to pay for the extra convenience and features offered by the expansion. Indeed, it was a major driving force behind eBay acquiring Skype for $2.6 billion in 2005 (although Skype has since been acquired by a group of private investors.)
2. LinkedIn: LinkedIn committed to a freemium business model in 2009, launching a free version of the digital resume creating service. They added features that customers had to pay for shortly thereafter such as a feature that helps recruiting agencies search for candidates. LinkedIn also offered subscription models based on various flexibility and privileges.
3. ESPN: While ESPN is certainly isn’t a startup, the sports giant adopted the freemium model for its online news reports. Early on, the company published in-depth sports reports from great sports writers on its website free of charge. Then, in June 2009, ESPN had merged its online magazine with its Insider service, which costs $6.95 a month. The Insider service (which ESPN established way back in 1998) was set up such that readers could see only glimpses of Insider stories before being asked to pay for full access. According to ESPN spokespeople, Insider subscriptions have, “…more than doubled” since 2005. As with Skype and LinkedIn, ESPN’s switch to freemium was made possible by the rapport and trust it established with users by offering free content and features early on.

Applying Freemium to Your Own Product or Service Business

You don’t have to be an Internet start-up, Angry Birds or ESPN to implement a Freemium business model. Consider applying it to your own product or service business to attract new customers and/or create an upsell environment. For example, a cleaning service may offer a free room cleaning (up to 30 or 60 minutes) for new customers. Or a coffee shop owner could offer a free small coffee sampler of a new coffee flavor for a limited time. Be sure to generate the contact information or some other opt in of Freemium customers so you are building value for your business for offering it. Monitor your conversion and results to see if it works for your business. You never know, it could accelerate your business’ growth more than you ever imagined.

About the Author

Angelo Biasi is General Manager of SMART Marketing Solutions, LLC, a leading full-service integrated marketing company in Florida and New York since 2001. He has helped create and execute marketing plans and integrated marketing solutions for companies such as Playtex, Bic, Rogaine, Tauck, and over 35 colleges and universities, to name a few. Angelo has an MBA in Marketing from the University of Connecticut and teaches Marketing at New York University where he has for over six years. He has been quoted and/or featured in USA Today, Mobile Marketer magazine, Mobile Commerce Daily, Luxury Marketing magazine, BNET TV and Business Currents magazine, to name a few. For more information or to learn more, email him at abiasismartmarketingllccom  (abiasismartmarketingllccom)  , visit www.smartmarketingllc.com, call him at 239.963.9396 and follow him on Twitter @angbiasi.