The Freemium Business Model

I wrote a post last weekend called My Favorite Business Model.  I posted it earlier today. Here is how I described the business 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.

At the end of the post I asked for some suggestions of what I should call this business model. I've gotten 33 comments already which may make this the most commented post I've ever written, surely its the most commented post in the first day I've ever written.

And at the risk of calling the game before it's over, I have to go with Freemium.  I love the name, suggested by Jarid Lukin of the Flatiron portfolio company Alacra.

So from here on in, I will refer to this business model as the freemium business model.  I hope the name sticks because I love it.

Comments

[brian]

sounds like a heavy element

[Jarid]

Wow, I'm honored. I'd like to thank the Academy... (cue the music)

[Tom Fragala]

Fred, that term "Freemium" rocks. Kudos to Jarid Lukin.

[Chris Saad]

I love the name! Manual trackback: http://www.touchstonegadget.com/blog/2006/03/whats-your-business-model.html

[howard Lindzon]

Freemium in action - beautiful name -

golfnow.com - our golfers have been getting the best , affordable rates for 3 years - we slowly start offering a country club - extreme value - free round, golf club, usga handicap

It is a huge success. Now I know why and have an internal name for it - thanks

[Chris Saad]

I love this term! Manual Trackback: http://www.touchstonegadget.com/blog/2006/03/whats-your-business-model.html

[Jason L. Baptiste]

Freemium is the way to go. Always give the user something for free, but to get added value, then charge them something extra. By giving them something for free, you let the user understand the reason to upgrade. They'll be tons of Freemium going on in uGather. Great posts on the topic Fred.

-Jason L. Baptiste

[AWilhem]

Well Fred, there's a guy in Thousand Oaks (via register.com) who's thanking you from the bottom of his heart! But yea, it's a good name.

[Nicholas Butterworth]

Fred, it's nice to see this evolution from your previous stance -- all free, no paid (at least with respect to content-driven businesses). Myself, I like "tiered service" better as a descriptor, but I suspect this "freemium" thing might catch on!

[steve]

Heroin dealers have used this model forever. ;)

[Charlie Crystle]

Yes, "Tiered Service" has that special ring to it, like "SOAS" or "Total Quality Management", or "Enema". Yikes.

Freemium rocks.

[Otis Gospodnetic]

Freemium is a new name for an old thing that already had several names: tiered services, premium services, etc.

But Freemium is nice, combines two meanings in one, and is catchy, so that's good.

But, Fred, look at Nik's comment in the original post. I think _that_ is the question that many entrepreneurs would like to know more about. Nik says anything above 4% conversion ratio is good. 4% sounds like a LOT to me. I'd guess the average is closer to 1%.
Do you have any experience in this area from companies you invested in? If they followed the Freemium road, how did their conversions go in terms of conversion rate?

I think this would be a good topic to cover in one of your future posts.

[Jay W]

Fred,

Sorry to have jumped in so late and to be the dissenting voice. The incentive promotion space also uses the term "Freemium" to describe part of its business. Those in this area have used this term for a few years and is one reason why Gratis Internet changed its outward facing brand name to Free Pay.

In its current usage, the freemium is not the model but the item that attracts initial consumer interest. Again, great name, but using it for the model will confuse some. Then again, we are the minority :)

[Mike]

This is what the Koreans are doing with their free online games. They sell in-game items.

[Kaka17830]

I haven't been up to anything today. I can't be bothered with anything recently. Nothing seems worth thinking about. I haven't gotten anything done recently, but oh well. Not much noteworthy going on worth mentioning.

[Dave]

So, I like the name Freemium, but I propose a differnet term. Let's call it the "Underwear Gnome Model". Remember the Underwear Gnome episode of Southpark? "Step 1: Steal Underwear; Step 2: ____; Step 3: Profit!". The flaw in the Freemium model is that you spend lots of resources upfront building up a free service and you don't know whether the users will EVER pay for premium services.

[Ann]

Yeah, the idea's good---simple and workable.
But,it is not enough unless you know how to combine the advantages of industries.

[Diana]

Amusing blog you have here!

That's my site's business model in a nutshell, and I firmly believe in it. There's something brilliant about spreading a taste of your service/product all over the Web... if it's as good as you think it is, people will get hooked.

If not, it needs retooling to appeal to the masses.

Cheers,
D

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[Sohbet]

You should get a cat next time and name it Leontief.

[Gregory]

Haha! Freemium, I love it.

It's basically to business models what shareware is to software. I've always called it the shareware model, but I like freemium too.

[Dave Schappell]

hmmm... not a huge fan of this one at first glance... when i read the term, I assumed it was referring to the practice of "giving something away to encourage signup" (i.e. get a free research report when you sign up for our service). I understand that this is an extension of that, but a premium seems like a one-time thing, where as these services/business models are more longlasting.

mashing the word free would lead me to things like:
* freevolutionary business models
* freevolving business models

of course, i don't like the name podcasting either :-)

[Steve M.]

Freemium.com!

[Andrew]

I've clearly been too busy working or that work has made my memory highly unreliable - Freemium sure sounds familiar; but in anycase, a great addition to the world of geekspeak - or more accurately, business jargon!

[Neale]

The definition of freemium that you give is one that has produced many successful sites on the web, great word & idea.