Free + Premium = freemium

December 17, 2008

Guest entry by Peter Froberg:

View SlideShare presentation or Upload your own. (tags: model business)

The term freemium was coined to describe a business model where you give away a free service and sell premium products. A prime example of this is Skype. They give away a free Voip client and sell complimentary products such as Skype out.

Not Gillete
The strategy of giving refers to free in a broader sense than freemium.
Freemium is not when subsidise one product with another. Like cell phones companies, that gives you a phone for $ 1 and lets you pay for it through the subscription.
Neither is it about give someone a glimpse of you product, like giving a free sample at the super marked or giving away one chapter for free download.

Freemium is characterised by giving away a quality product that people can really use, in and of itself. Like the VoIP client from Skype.
This is a valuable program that has over 1 billion downloads. Most of the users only use the free program and that is OK, because there are so many of them.

The cost of digital production is falling exponentially towards zero, and the marginal cost for digitally produced products is very low. The cost for Skype to provide a user with free phone calls is very low. Because of this, the model can be very profitable even though only 7-8 % buy something.

Not only IT
Initially this business model has been mostly used within IT. Yet within the last couple of years it has spread into other industries. Such as music, publishing and consulting.

For more about the freemium business model, see the freemium blog.

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