Jun 24, 2015


 By Lyndsey Hall

Subscription-based business models are currently hot property: solve all your cash flow problems by getting your customers to pay monthly! It’s a no-brainer. But the latest phenomenon to hit the business world is the Freemium business model.

The word ‘Freemium’ is a portmanteau of the words ‘free’ and ‘premium’, coined by Jared Lukin in 2006. It refers to business models where the basic product, usually a digital application, is free of charge, but additional features and upgrades can be purchased for a fee.

Fred Wilson first wrote about this type of business model in his blog, My Favourite 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…I would like to have a name for this business model. We’ve got words like subscription, ad supported, license, and ASP, that are well understood. Do we have a word for this business model? If so, I don’t know it.”

In response, Jared Lukin volunteered ‘Freemium’, and it stuck.

 A few examples of businesses that use this model are Farmville, Amazon, Dropbox and Spotify.

Farmville, an online simulation game that first became popular as a Facebook extension, allows users to build their own virtual farm for free; but the more ambitious gamer can pay to have access to enhanced features. Amazon uses the freemium model for both its Kindle and Amazon Prime offerings; the Kindle app itself is gratis, and there is a vast array of free e-books available for download, but if you want the latest publications you’ll have to pay up. Amazon Prime users can start with a free 30 day trial – another mechanism that is popular with freemium businesses – before investing £79 a year to continue enjoying the advanced features. These include one-day delivery, instant streaming of movies and TV shows, Kindle e-books and Cloud-based photo storage.

Dropbox, like most other Cloud storage providers, offers a low amount of storage space free of charge, and allows users to upgrade to a larger amount for a fee (£7.99 a month, or £79 a year for Pro). Spotify, the music streaming service, has a free option which includes ads and doesn’t allow users to listen offline, whilst their Premium offering costs £9.99 a month after a 60 day free trial, and is ad free. Apple have recently announced their latest offering to rival Spotify: Apple Music will have a similar premise, with a 30 day free trial before a fee is required to continue listening ($9.99 per month in the US, the UK fee is yet to be announced). You might have heard about Apple Music in the news this week, as Taylor Swift wrote an open letter criticising Apple for refusing to pay artists for plays of their songs during the free trial period. Taylor successfully managed to change the tech giant’s mind, although the entire exchange has been denounced by social media users as a PR stunt, and it has since come to light that Apple intend to pay lower royalties during the free trial than for paid plays.

Newspaper websites have also jumped on the freemium bandwagon, providing snippets of content free of charge, and encouraging users to register and pay monthly in order to read articles in full. This is a great way of monetising online news content, as sales of printed newspapers continue to drop in favour of web and app versions.

Could the freemium business model work for your business? We’d love to hear your thoughts on this trend, leave us a Comment or get in touch on Facebook and Twitter.

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