Freemium is a pricing strategy by which a product or service is provided free of charge,
but money is charged for proprietary features, functionality, or virtual goods.
The word "freemium" is a portmanteau neologism combining the two aspects of the business
model: "free" and "premium".
Origin The business model called shareware has probably
been in use for software since the 1980s, particularly in the form of a free time- or
feature-limited 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
little is lost by giving it away for free – as long as significant cannibalization
is avoided.
The term freemium to describe this model appears to have been created only much later, in response
to a 2006 blog post by venture capitalist Fred Wilson 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 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.
Jarid Lukin of Alacra then suggested the term "freemium" for this model.
In 2009, Chris 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.
The freemium model is closely related to tiered services.
It has become a highly popular model, with notable examples including LinkedIn, Badoo,
and in the form of a "soft" paywall, such as those employed by The New York Times and
by Press+.
A freemium model is sometimes used to build a consumer base when the marginal cost of
producing extra units is low.
Cloud service providers – ranging from Infrastructure providers, platform providers to software
service providers – use freemium pattern in their business models.
Companies such as Rackspace, Heroku, and Amazon use freemium business patterns by providing
cloud services for free, but in limited and trial use.
Amazon, for example, allows anyone to create a simple cloud in their infrastructure as
a trial service for 12 months.
Other examples include free-to-play games – video games that can be downloaded without
paying.
Video game publishers of free-to-play games rely on other means to generate revenue – such
as optional in-game items that can be purchased by players to enhance game-play and/or aesthetics.
Restrictions Ways in which the product or service may be
restricted in the free version include: Feature limited
Capacity limited Seat limited
Customer class limited Effort limited
Support limited Time or bandwidth limited
Some software and services make all of the features available for free for a trial period,
and then at the end of that period revert to operating as a feature limited free version.
The user can unlock the premium features on payment of a licence fee, as per the freemium
model.
Other software makes its features available for trial period, and then at the end of that
period it stops working.
This is a time-limited evaluation, and at the end of the evaluation period does not
work at all.
This is not to be confused with the freemium model, where the user has access to a limited
free version without time restraint.
Significance In June 2011, PC World reported that traditional
anti-virus software had started to lose market share to freemium anti-virus products.
By September 2012, all but two of the 50 highest-grossing apps in the Games section of Apple's iTunes
App Store supported in-app purchases, leading Wired to conclude that game developers were
now required to choose between including such purchases or foregoing a very substantial
revenue stream.
Criticism of freemium games
Freemium games have come under criticism from players and critics.
Many are pinned with the derogatory term 'Pay2Win', a term which criticizes freemium games for
giving an advantage to players who pay more money as opposed to those who have more skill.
An example of this is Smurfs' Village, which was released by Capcom as a free game tied
in with the release of the 2011 film.
The game was very popular, at one point overtaking Angry Birds as the top-downloaded app on the
Apple iOS App Store.
The game had the player buy characters and buildings using in-game currency, but more
currency could be purchased with real money using account details tied to the device,
using Apple's store authentication prior to purchase.
Prior to changes Apple made in 2011, it was possible to use the authentication for up
to fifteen minutes before having to reconfirm the password, and parents had soon found that
their children had used this to unwittingly rack up hundreds of dollars in charges by
playing the game.
A group of parents filed suit against Apple to change their practice in microtransactions
to prevent this from happening in other freemium games.
See also
Advertising-supported software Business models for open-source software
Crippleware Free-to-play
Open core Pay to play
Pay-to-Win Pay what you want
Paywall Shareware
Street Performer Protocol Tiered service
References
Further reading Bruce Sterling.
"Blogging for Dollars".
wired.com.
Retrieved December 7, 2011.
Chris Anderson.
Free: the future of a radical price.
1st ed.
Hyperion; June 24, 2009.
ISBN 978-1-4013-2290-8.