OriginThe business model has probably been in use for software since the 1980s, particularly in the form of a free time- or feature-limited ('lite') version, often given away on a floppy disk or CD-ROM, to promote a paid-for full version. The model is particularly suited to software as the manufacturing cost is negligible, so – as long as significant cannibalization is avoided – little is lost by giving it away for free.
However, this term for the model appears to have been created only much later, in response to a 2006 blog post by venture capitalist Fred Wilson summarizing the 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.Jarid Lukin of Alacra then suggested the term "freemium" for this model.
In 2009, Chris Anderson published the book Free, which examines the popularity of this business model. As well as for traditional software and services, it is now also often used by Web 2.0 and open source companies.
The freemium model is closely related to tiered services. It has become a highly popular model, with notable examples including LinkedIn, Badoo, and in the form of a "soft" paywall, such as those employed by The New York Times, and by Press+. A freemium model is sometimes used to build a consumer base when the marginal cost of producing extra units is low.
 RestrictionsWays in which the product or service may be restricted in the free version include:
- Feature limited (e.g. a "lite" version of software, such as Skype, which doesn't include features like three-way video calling)
- Capacity limited (e.g. SQL Server Express, which is restricted to databases of 10GB or less)
- Seat limited (e.g. only usable on one computer rather than across a network)
- Customer class limited (e.g. only usable by educational users)
- Effort limited (e.g. all or most features are available for free, but require extended unlocking which can be shortcut for a fee, such as some software for virtual printing on PDF)
- Support limited (e.g. users of a "lite" version do not receive telephone and/or email support)
- Time or bandwidth limited (e.g. Spotify, which limits the time free users can use the service for, resetting each month)
Other software makes its features available for trial period, and then at the end of that period it stops working (e.g. Microsoft Office 30 day trial). This is a time-limited evaluation, and at the end of the evaluation period does not work at all. This is not to be confused with the freemium model, where the user has access to a limited free version without time restraint.
 SignificanceIn June 2011, PC World reported that traditional anti-virus software had started to lose market share to freemium anti-virus products. By September 2012, all but two of the 50 highest-grossing apps in the Games section of Apple's iTunes App Store supported in-app purchases, leading Wired to conclude that game developers were now required to choose between including such purchases or foregoing a very substantial revenue stream.
 CriticismFreemium games have come under criticism from players and critics. Smurfs' Village was released by Capcom as a free game tied in with the release of the 2010 film. The game was very popular, at one point overtaking Angry Birds as the top-downloaded app on the App Store. The game had the player buy characters and buildings using in-game currency, but more currency could be purchased with real money using account details tied with the device, using Apple's store authenication prior to purchase. However, prior to changes Apple made in 2011, it was possible to use the authentication up to fifteen times at the App Store before having to reconfirm the password, and parents had soon found that their children had used this to unwittingly rack up hundreds of dollars in charges by playing the game. A group of parents filed suit against Apple to change their practice in microtransactions to prevent this from happening in other freemium games.
Another freemium game, My Little Pony: Friendship Is Magic, based on the show of the same name, was released as a freely downloadable title by Gameloft under license by Hasbro. In the game, the player collects both in-game money and bits to buy ponies, houses, and other features from an in-game store to fill up a town. While several of the purchases were optional, a selected number of characters were required to be purchased to complete the story line. However, many of these required the rare gems to be used for purchase, which would take several years with constant play to collect, or otherwise have the user spend real money to obtain gems; the last such required character initially costed approximately $50 in gems, but a later adjustment by Gameloft to reduce it to about $9. Though Gameloft believes that these complains primarily came from the adult "brony" fans of the show who wanted to complete the game quickly, the United Kingdom Consumer Action Group worried that parents of young girls, the target demographic for the game, would be upset at having to chose between spending money on the game for their child or otherwise say "no" to them and prevent them from continuing in the game.
 See also
- Advertising-supported software
- Fee in, free out
- Pay what you want
- Street Performer Protocol
- Tiered service
- JLM de la Iglesia, JEL Gayo, "Doing business by selling free services". Web 2.0: The Business Model, 2008. Springer
- Tom Hayes, "Jump Point: How Network Culture is Revolutionizing Business". 2008. Page 195.
- "My Favorite Business Model". Musings of a VC in NYC. AVC. 2006-03-23. http://www.avc.com/a_vc/2006/03/my_favorite_bus.html. Retrieved 2012-08-13. "Free + Premium = Freemium?"
- Heires, Katherine (2006-10-01). "Why It Pays to Give Away the Store". CNN Money. Business 2.0 Magazine. http://money.cnn.com/magazines/business2/business2_archive/2006/10/01/8387115/index.htm. Retrieved 2012-08-13. "But free didn't become a serious option until the Internet gave us low-cost online distribution. Adobe (Charts) did it with its PDF Reader in 1994, Macromedia with its Shockwave Player in 1995. Both became the industry standard, and those companies were able to make money by selling the products' authoring software. Running starts: Companies like Six Apart and MySQL are following the example of MySpace and Skype by offering a free basic product and charging for premium service. More from Business 2.0 Live chat: your new online salesperson The hijack-proof truck Server farm goes solar Fastest Growing Tech Companies Current Issue Subscribe to Fortune In these days of Web 2.0 services that rely on quick customer adoption, the strategy has become so common that VCs have coined a term for it: freemium."
- Barr, Alistair (2011-09-11). "‘Freemium’ approach attracts venture capital". The Montreal Gazette. Postmedia Network Inc.. http://www.techstarthub.com/2011/09/11/freemium-approach-attracts-venture-capital/. Retrieved 2013-08-13. "While it’s been around for a while, the model is gaining more notice because some companies have become profitable growth machines with its help. LinkedIn Corp. may be the highest-profile freemium story. The business-focused social network went public earlier this year and is valued at about US$8-billion. This month, the company reported its first quarterly profit, while revenue more than doubled. It is free to join LinkedIn, but the company charges for premium subscriptions. Revenue from paying members jumped 60% to US$23.9-million in the second quarter."
- Kincaid, Jason (2009-10-24). "Startup School: Wired Editor Chris Anderson On Freemium Business Models". Techcrunch.com. AOL, Inc.. http://www.techcrunch.com/2009/10/24/startup-school-wired-editor-chris-anderson-on-freemium-business-models/. Retrieved 2012-08-13. "Anderson than started talking about the very popular game Club Pengiun, which is free to play. Parents are used saying no to credit card purchases for stuff on TV. But if they’re on Club Penguin, they see the child has built an igloo, and has their friends, etc. But if you pay, you can get into the cool igloo, etc. It’s easier to hand over the credit card that way, because it’s clear that the child isn’t just reacting to what they saw in an ad. What will people pay for? They will pay to save time. Younger people have more time than money. Older people have more money than time. Anderson then outlined some of the models he’s seen for Freemium models."
- Dunn, John E. (2011-06-07). "Free Antivirus Programs Rise in Popularity, New Survey Shows". PC World (IDG Consumer & SMB). http://www.pcworld.com/businesscenter/article/229610/free_antivirus_programs_rise_in_popularity_new_survey_shows.html. Retrieved 2011-06-12. "In its quarterly analysis of the security software running on 43,000 computers around the world between March and May 2011, OPSWAT found that well-known brands such as McAfee, Symantec and Trend Micro are continuing to be pushed down the popularity tables by mostly European rivals marketing on the basis of either a free-to-use or "freemium" (free with paid upgrades available) model. Globally, the two most commonly encountered brands were Czech companies Avast Software and AVG, tied with being detected on 12.3 percent of systems each, ahead of Avira of Germany on 12.2 percent, Microsoft on 11.2 percent, and ESET Software, also of Germany, on just under 10 percent. Traditional security brand leaders, Symantec, McAfee and Trend Micro were found on only 8.77 percent, 4.5 percent and 2.15 percent of systems respectively."
- "iOS Game Developers Must Choose: Sell Digital Currency or Lose Money". Wired. 26 September 2012. http://www.wired.com/gamelife/2012/09/life-after-disc-digital-coins/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wired%2Findex+%28Wired%3A+Top+Stories%29&utm_content=Google+Reader. Retrieved 27 September 2012.
- Stern, Joanna (2012-04-20). "Parents Sue Apple for In-App and In-Game Purchases Made by Kids". ABC News. http://abcnews.go.com/blogs/technology/2012/04/parents-sue-apple-for-in-app-and-in-game-purchases-made-by-kids/. Retrieved 2012-12-06.
- Starr, Michelle (2012-11-19). "Gameloft, My Little Pony and rampant greed". CNET Australia. http://www.cnet.com.au/gameloft-my-little-pony-and-rampant-greed-339342493.htm. Retrieved 2012-11-21.
- Starr, Michelle (2012-12-06). "Gameloft issues My Little Pony 'fix'". CNET Australia. http://www.cnet.com.au/gameloft-issues-my-little-pony-fix-339342716.htm. Retrieved 2012-12-06.
- "My Little Pony mobile phone game in-app payment row". BBC. 2012-12-06. http://www.bbc.co.uk/news/technology-20629245. Retrieved 2012-12-06.
 Further reading
- Bruce Sterling (June 2006). "Blogging for Dollars". wired.com. http://www.wired.com/wired/archive/14.06/posts.html?pg=7. Retrieved December 7, 2011.
- Chris Anderson. Free: the future of a radical price. 1st ed. Hyperion; June 24, 2009. ISBN 978-1-4013-2290-8.