Freemium

The Freemium business model was first articulated by Fred Wilson in 2006. It's quite a recent development and one that is primarily adopted by Web 2.0 companies. The basic concept behind the Freemium business model is to give away your basic product for free, while charging for premium or advanced products or services related to your product. The difference between this model and try-free models is that your customers can potentially utilize your free product forever without purchasing premium products or services.

For this business model to work, you will need to give away a lot of your product. Each person that utilizes your free product has a probability of becoming a paid member of the premium version of your product, or premium services associated with your product. Hence, it is obvious that in order for this business model to work, your basic product cannot have substantial variable costs.

However, because of the fact that this business model is counter intuitive, by taking such an approach, one can reach niche markets that would otherwise go untapped. For instance, let us pretend that we own a new VOIP company. We could go with conventional wisdom and provide our services as a regular charged service, marketing it based on its lower cost compared to conventional phones. This however, would put us in the same league with many of our competitors, with litter competitive advantages. However, things would be different if we took a Freemium approach.

The basic service that we could offer for free would be local calls. However, to minimize the variable costs of we would only provide this service to people with an existing internet access and microphones. Now we know that our primary competitor Skype already provides free calls to everyone on their network, and providing free local calls would give us a distinguishing trait. Hopefully, with sound planning and management, this Freemium service would generate enough revenue from non-local calls made through the system to turn a profit. Because this service would be attractive to many people, a supplement income can be made by utilizing the traffic as a revenue generating center. Ads can be placed on the site for non-premium members (without access to non-local calls) to generate income.

If well researched and thought out, the Freemium model can be applied to different areas of business to maximize resource usage. For instance, a courier service might look into providing free deliveries within the same neighborhood to make full use of the underutilized local trucks. This could build customer loyalty and increase the chance of people in the neighborhood giving the courier their longer distance, paid business.

Freemium business models don't always work, but it seems that when it works, it is difficult for a competitor to enter a market; competitors would have to give more for free, and sometimes, that's just what it takes to make the endeavor unprofitable.

Be Safe,

Vic