Freemium – The Gift that Keeps on Giving

Image taken from Flickr via Joe Ross

No—Freemium is not a recently discovered element on the periodic table, nor is it a misspelling of fermium, which is an element on the periodic table. A freemium is a marketing tool, a business model if you will. It is a compelling marketing strategy employed by online businesses in a variety of ways since the 1980’s.

The evolution

In the 1980’s we had crippleware, a popular marketing tool in the software industry. Crippleware was defined in one of two ways:

  1. Free software designed to expire in a pre-determined time-frame. The software manufacturers believed that these free trials would allow prospective buyers to see the benefits of the product and as a result a sale would follow.
  2. Free, but limited versions of software, which served as a teaser to potential customers. The full functionality of the software being available only to those who upgraded to the full version.

Variations of these two basic definitions remain prevalent in the software and gaming and other tech industries to this day. You may know them as feature-limited, walled-garden, etc.

However, pre-dating crippleware and predating the digital age, similar marketing tactics were in play, proving the adage that there is nothing new under the sun. In 1921, when Gillette’s patents for its razors and blades expired, the company reduced the price of its blades and handles to a price point on a par with competitors. Concurrently, Gillette received a patent for an enhanced handle and blades that sold at a higher price. Customers buying the new, expensive handles were once again locked into Gillette because of the unique style of the blades, while the company continued to make serious coin selling replacement blades to an existing loyal customer base. When these loyal customers upgraded to the newer handle, they too were locked in to Gillette, at least until the expiration of this subsequent patent. Gillette continues to practice the game of “razors and blades” to this day.

While Gillette wasn’t giving anything away, they were pioneering the concept of establishing customer loyalty through proprietary products.

Just as crippleware evolved from Gillette’s razor blade marketing ploy, the freemium has evolved from crippleware.

Definition of Freemium

As a master of the obvious, I can tell you that freemium is a compilation of the words free and premium. Hold the applause, please! In my view, freemium is best defined as marketing tool and business model designed to attract customers to a new product or service by offering it free for a limited time or offering free but limited functionality for an unlimited time. In both scenarios, the consumer is introduced to the new product at no cost, and the consumer is given the opportunity to buy the product at the conclusion of the trial or purchase “premium” functionality for products with limited functionality.

Perhaps venture capitalist Fred Wilson’s definition is more to the point:

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.

The term “freemium” was coined in response to Fred Wilson’s plea to readers of his blog to give this concept a catchy moniker. In response, Jarid Lukin, current Vice President of Global Ecommerce at Harman International, proffered “freemium” and Fred made it popular.

Obviously, the success or failure of the freemium business model is totally dependent on a product or service that is extremely good, immensely useful, extraordinarily fun or some combination thereof. If a company is giving the consumer a no strings attached “test drive”, the vehicle must be exceptional or no subsequent sale is likely to occur.

Often, the result of implementing this model is significant market share but low revenue. The question then becomes one of which has the greatest value to potential investors, market share or revenue.

That said, as we continue this in-depth look at the freemium model, we will also discuss closely related concepts, such as freeconomics, but I am getting ahead of myself.

There are many companies that have used the freemium concept. LinkedIn, Facebook and Twitter are prime examples. In the next section, we’ll examine some examples of the freemium model, the dynamics of the freemium model and why it is such a powerful agent for change.


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