The Freemium Business Model

The freemium business model works by offering basic services for free, while charging a premium for advanced or special features.
The word freemium result from the combination of the two aspects of the business model: free + premium. The business model has gained popularity with Web 2.0 companies.

The freemium business model was first articulated by venture capitalist Fred Wilson on March 23, 2006.
"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."

After describing the business model, the problem was to find a name for this concept. After over 30 names suggestions, Jarid Lukin of Alacra, one of Wilson's portfolio companies coined the term "freemium". The term has since appeared in Wired Magazine and Business 2.0, and has been used by prominent bloggers such as Chris Anderson (from the Longtail) and Tom Evslin.

Web sites such as Linkedin.com, Flickr.com or Skype.com are examples use of the Freemium business model.


Taking the example of Skype, this company makes its users insanely productive by letting them talk with any other user worldwide for free.
The company makes money by charging users for connecting to phone systems outside of its network. It's a freemium model, indeed, Skype attracts users with free services, and then it charges them a premium for special features.
Bruce Sterling, in the article "Blogging for Dollars," Wired, June 1, 2006 gave his opinion on the concept:
“Files are stored centrally, so you will not want to use this method to transfer sensitive data. And since somebody has to pay for storage and bandwidth, you get limited capabilities for free — premium plans get you more storage, bandwidth or access to your files (Web 2.0 jargon alert: this free-to-premium escalation plan is being called the 'freemium' model)”.

Positive points:
-Basic services can be used by everybody and for a website like Linkedin, it is very useful in order to find work. So it can be viewed as a real work tool.

-The users are not bounded with the website

-The free services make the website more well-known because it increase the number of users.


Negative points:
-Basic services are often really basic and only serve to attract the customer to order the special features.

-The price you pay for advanced services is not always fair regarding the service provided.


Links:
http://www.contentmatters.info/content_matters/2006/05/whats_in_a_word.html
http://www.wordspy.com/words/freemium.asp
http://fr.wikipedia.org/wiki/Accueil