Freemium Business Model

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= "Attract users with free services, then charge them a premium for special features." [1]


Chris Anderson:

"This model uses free as a form of marketing to put the product in the hands of the maximum number of people, converting just a small fraction to paying customers. It's an inversion of the old free sample promotion: Rather than giving away one brownie to sell 99 others, you give away 99 virtual penguins to sell one virtual igloo. (Confused? Ask a child: This is the business model for the phenomenally successful Club Penguin.)

With physical stuff, samples must be doled out sparingly -- there are real costs to be paid. With bits, the free versions are too cheap to meter and can be spread far and wide. That's why so many people businesses (expensive!) are turning into software businesses (cheap!), which is why your cranky tax accountant has morphed into free TurboTax online, your stockbroker is now a trading Web site and your travel agent is more likely a glorified search engine." (


Chris Anderson:

"extracting a business model from free is not always easy, especially when your users have come to expect gratis. Take Twitter, the fantastically popular (and free, of course) 140-character messaging service where people update the world on what they're doing, one haiku-like snippet at a time. After taking over the world, or at least the geeky side of it, it now finds itself having to actually make enough money to cover its bandwidth bills. Last year it hired a revenue guru to try to find a business model and has announced that it intends to reveal its strategy early this year. Speculation as to what that will be ranges from charging companies to have their "tweets" recommended to consumers (which is a bit like "friending" the Burger King on Facebook) to certifying identity to avoid impersonation. The revenue officer has his work cut out for him.

Mirko IlicMeanwhile YouTube is still struggling to match its popularity with revenues and Facebook is selling commodity ads for pennies after its effort to charge for intrusive advertising led to a user backlash. And news-sharing site Digg, for all its millions of users, still doesn't make a dime. A year ago, that hardly mattered: The business model was "build to a lucrative exit, preferably in cash." But now the exit doors are closed and cash flow is king.

Does this mean that Free will retreat in a down economy? Probably not. The psychological and economic case for it remains as good as ever -- the marginal cost of anything digital falls by 50% every year, making pricing a race to the bottom, and "Free" has as much power over the consumer psyche as ever. But it does mean that Free is not enough. It also has to be matched with Paid." (