The term freemium is coined using two powerful words ‘Free’ and ‘Premium’. It describes a business model where in you give away a core product for free and then generate revenue by selling premium products to a small percentage of free users.
An example of the ‘freemium’ model is Google, LinkedIn, Skype and so many other online businesses,
‘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 is a term increasingly used in commerce to designate a business model using two products or services, or a combination of products and services. In such combination, one item is provided at no charge while a complementary item is sold at a positive price. Unlike what economists call tying, the free and commercial items are softly connected: the complement is not indispensable.
The practice has existed for a very long time, although it carried different names and forms. The name however was coined by venture capitalist Fred Wilson in 2006 and is gradually becoming a model that businesses identify with. Freemium relies on a free version of a product or service, and by nature this version is limited. Commercial transactions happen outside the limitation. The delta between what is free and what is paid is generally called differentiation.
Businesses have been using free as a strategy for a long time. Gillette is famous for giving away the razor and selling the blades. Similarly you can buy a cell phone for $1 if you sign up for subscription. This is fake free – you are just paying in another way. For a model to be Freemium, the free has to be something that can be used in and of itself, without necessarily buying something else. Like the way you can use the free version of Skype as a valuable tool, without necessarily buying something.
As this emergent business model develops there may be possible application in more traditional industries.