Freemium model: basic principles. Explains two transactions taking place, and provides examples.

1. Basic principles
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2. What is freemium?
 A business method to pair products and/or
services
 Pair includes a free, and one or multiple premium
goods
 Method entices (but does not force) free users to
upgrade to premium levels
 Often used in software, web services, technology,
expanding to new industries
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3. How does Freemium work?
Side A Side B
Mind share $
User Provider Buyer
Free goods Premium goods
Conversion
from A to B
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4. 2 transactions
 Side A: provider goes after market share
 Offers free product or service
 No obligation for user to purchase, now or later:
standalone value
 Users reciprocate (“pay”) by giving their mind share to
provider
 Side B: provider goes after revenues
 Sells premium products or services to buyers
 Buyers may come from free user base (conversion) or
purchase immediately
 In many cases (not always), users and buyers are
distinct groups that value each other’s presence in
the system, and have different needs.
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5. Examples
Side A Side B
Linux Fedora Project Red Hat
Enterprise Linux
MySQL Community Enterprise
database features and
services
WordPress WordPress blog Sale of web
domains, backup
service
Skype PC-to-PC chat Phone number,
and calls outcall to phone
networks
Google Apps Basic services Enterprise
features
Yale University Open Classes Formal Classes
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6. Further reading: white paper on SSRN.com (PDF)
Freemium: Attributes of an Emerging Business Model
Basic principles
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