Freemium

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File:Free-tier in freemium business pattern.png
In the freemium business model, business tiers start with a "free" tier.

Freemium, a portmanteau of the words "free" and "premium", is a pricing strategy by which a basic product or service is provided free of charge, but money (a premium) is charged for additional features, services and virtual (online) or physical (offline) goods that expand the functionality of the free version of the software.[1][2] This business model has been used in the software industry since the 1980s and is closely related to tiered services. A subset of this model used by the video game industry is called free-to-play.

The term freemium was coined in 2006 in response to a blog post by venture capitalist Fred Wilson. Freemium services commonly limit the free version by features, capacity, or time, while reserving additional functionality or content for paid users. The model is used in software, online services, media paywalls, and video games, where revenue may come from subscriptions, advertising, or purchases of premium content. It has also been the subject of criticism, particularly in discussions of monetization practices in some free-to-play games.

Origin

The business model has been in use for software since the 1980s. The term freemium to describe this model was coined much later, in response to a 2006 blog post by venture capitalist Fred Wilson summarizing the model:[3]

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, one of Wilson's portfolio companies, 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 proprietary software and services, it is now also often used by Web 2.0 and open source companies.[4] In 2014, Eric Seufert published the book Freemium Economics, which examines the freemium model in software products and the use of analytics and user segmentation in implementing it.[5]

The freemium model is closely related to tiered services. Notable examples include LinkedIn,[6] Badoo,[7] Discord,[8] Spotify[9] and in the form of a "soft" paywall, such as those employed by The New York Times[10] and La Presse+.[11] This is often in a time-limited or feature-limited version to promote a paid-for full version. The model is particularly suited to software as the cost of distribution is negligible.

A freemium model is sometimes used to build a consumer base when the marginal cost of producing additional copies is low. Thus, little is lost by giving away free software licenses as long as significant cannibalization is avoided. Research on freemium services emphasizes balancing the free tier so it attracts and retains users without reducing the perceived value of the premium tier.[12] Other examples include free-to-play games – video games that can be downloaded without paying. Video game publishers of free-to-play games rely on other means to generate revenue – such as optional in-game virtual items that can be purchased by players to enhance gameplay or aesthetics.[13]

Types of product limitations

Ways in which the product or service may be limited or restricted in the free version include:[14]

  • Limited features: A free video chat client may not include three-way video calling.[14] Some free-to-play games fall into this category by offering virtual items that can be purchased with real-world money.[15]
  • Limited capacity: For example, SQL Server Express is restricted to databases of 10 GB or less.[16]
  • Limited use license: Some software is free only for students, educational use, or personal use. For example, Autodesk's Education plan gives eligible students free one-year, single-user access to Autodesk software and services for educational purposes, and CCleaner Free is for home use only.[17][18]
  • Limited use time: Some free-to-play games permit the user to play the game consecutively for a limited number of levels or turns; the player must either wait a period of time to play more or purchase the right to play more[19].
  • Limited support: Priority or real-time technical support may not be available for non-paying users.[14]
  • Limited or no access to online services that are only available by purchasing periodic subscriptions.[14]

Some software and services make all of the features available for free for a trial period, and then at the end of that period revert to operating as a feature-limited free version.[14] The user can unlock the premium features on payment of a license fee, as per the freemium model.[14] Some businesses use a variation of the model known as "open core", in which the unsupported, feature-limited free version is also open-source software, but versions with additional features and official support are commercial software.[20]

Significance

In June 2011, PC World reported that traditional anti-virus software had started to lose market share to freemium anti-virus products.[21] 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.[22] Beginning in 2013, the digital distribution platform Steam began to add numerous free-to-play and early-access games to its library, many of which utilized freemium marketing for their in-game economies. Due to criticism that the multiplayer games falling under this category were pay-to-win in nature or were low-quality and never finished development, Valve has since added stricter rules to its early-access and free-to-play policies.[23]

Criticism of freemium games

Script error: No such module "Labelled list hatnote". Freemium games have come under criticism from players and critics. Many have been labelled pay-to-win, a term used for systems in which spending can confer gameplay advantages and which has been criticized as unfair.[24] Other criticism has focused on monetization practices in digital games that players perceive as misleading, unfair, or aggressive.[25] Research on free-to-play games has examined mechanisms described as "demand through inconvenience", where perceived inconvenience has been associated with players' purchasing intentions.[26]

In November 2014, the animated TV series South Park aired an episode entitled "Freemium Isn't Free". The episode satirized the business model for encouraging predatory game design tactics based on an improper business model.[27] In 2015, Pokémon Shuffle became available for the Nintendo 3DS family systems as a game that users could start playing for free.[28]

Freemium monetization strategies

Tiered subscriptions

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Some freemium services offer several premium subscription levels aimed at different customer segments.[9]

Hybrid ads and in-app purchases

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Freemium services may generate revenue through advertising, premium subscriptions, or purchases of premium content.[9][29]

Free trials and soft paywalls

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Some services offer limited access before requiring payment. In news media, this may take the form of a metered or feature-limited paywall, under which users may read a limited amount of content for free before subscribing for broader access.[9][10] In a forced free trial, a recipient is sent a few issues of a publication without asking before being required to pay a subscription to continue receiving them.

User segmentation

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Research on freemium business models has described the free offering as a way to identify and segment customer groups that may become paying customers, which can lead to more targeted offerings.[30]

See also

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References

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  1. ^ Page Module:Citation/CS1/styles.css has no content.Marín de la Iglesia, Jose Luis; Labra Gayo, Jose Emilio (2009). "Doing business by selling free services". In Lytras, Miltiadis D.; Damiani, Ernesto; Ordóñez de Pablos, Patricia (eds.). Web 2.0: The Business Model. Boston, MA: Springer. pp. 1–14. doi:10.1007/978-0-387-85895-1_6. ISBN 978-0-387-85894-4.
  2. ^ Page Module:Citation/CS1/styles.css has no content.Hayes, Tom (2008-02-21). Jump Point: How Network Culture Is Revolutionizing Business. McGraw-Hill. ISBN 978-0-07-154562-4. LCCN 2008297983. OCLC 166390402.
  3. ^ Page Module:Citation/CS1/styles.css has no content.Schenck, Barbara Findlay (February 7, 2011). "Freemium: Is the Price Right for Your Company?". Entrepreneur. Retrieved 2018-01-09.
  4. ^ Page Module:Citation/CS1/styles.css has no content.Heires, Katherine (2006-10-01). "Why It Pays to Give Away the Store". CNN Money. Business 2.0 Magazine. Archived from the original on October 30, 2006. Retrieved 2012-08-13.
  5. ^ Page Module:Citation/CS1/styles.css has no content.Seufert, Eric Benjamin (2014). Freemium Economics: Leveraging Analytics and User Segmentation to Drive Revenue. Morgan Kaufmann. ISBN 978-0-12-416690-5.
  6. ^ Page Module:Citation/CS1/styles.css has no content.Barr, Alistair (2011-09-11). "'Freemium' approach attracts venture capital". The Montreal Gazette. Postmedia Network Inc. Retrieved 2013-08-13.
  7. ^ Page Module:Citation/CS1/styles.css has no content.Rooney, Ben (2012-01-24). "A Very Social Network". The Wall Street Journal. Retrieved 2012-08-13.
  8. ^ Page Module:Citation/CS1/styles.css has no content."What are Nitro & Nitro Basic?". Discord Support. 2025-11-14. Retrieved 2026-03-09.
  9. ^ a b c d Page Module:Citation/CS1/styles.css has no content.Kumar, Vineet (2014-05-01). "Making "Freemium" Work". Harvard Business Review. 92 (5): 27–29. ISSN 0017-8012.
  10. ^ a b Page Module:Citation/CS1/styles.css has no content.Chittum, Ryan (2011-07-22). "The NYT Paywall Is Out of the Gate Fast". Columbia Journalism Review. Retrieved 2011-12-07.
  11. ^ Page Module:Citation/CS1/styles.css has no content.Owen, Laura Hazard (2011-09-06). "Three More Papers Put Up Paywalls, With Some New Twists". paidcontent.org. Gigaom. Archived from the original on 2012-01-06. Retrieved 2012-08-13.
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  14. ^ a b c d e f Page Module:Citation/CS1/styles.css has no content.Kincaid, Jason (2009-10-24). "Startup School: Wired Editor Chris Anderson On Freemium Business Models". Techcrunch. AOL, Inc. Retrieved 2012-08-13.
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  20. ^ Page Module:Citation/CS1/styles.css has no content.Wasserman, Anthony I. (2011). "How the Internet transformed the software industry". Journal of Internet Services and Applications. 2 (1): 11–22. doi:10.1007/s13174-011-0019-x. ISSN 1867-4828. Some companies have only a single version of their software, while others follow an "open core" model, providing a community release of the core version, and offering proprietary premium features us- ing a commercial license.
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  24. ^ Page Module:Citation/CS1/styles.css has no content.Zendle, David; Ballou, Nick; Meyer, Rosa (2020-05-20). "The changing face of desktop video game monetisation: An exploration of exposure to loot boxes, pay to win, and cosmetic microtransactions in the most-played Steam games of 2010–2019". PLOS ONE. 15 (5) e0232780. doi:10.1371/journal.pone.0232780. PMC 7205278.
  25. ^ Page Module:Citation/CS1/styles.css has no content.Petrovskaya, Elena; Zendle, David (2022-12-01). "Predatory Monetisation? A Categorisation of Unfair, Misleading and Aggressive Monetisation Techniques in Digital Games from the Player Perspective". Journal of Business Ethics. 181 (4): 1065–1081. doi:10.1007/s10551-021-04970-6.
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  27. ^ Page Module:Citation/CS1/styles.css has no content.Grubb, Jeffrey (2014-11-06). "'South Park' is right about why 'The Simpsons' and 'Family Guy' free-to-play games stink". Venture Beat. Archived from the original on 2014-11-07. Retrieved 2014-11-08.
  28. ^ Page Module:Citation/CS1/styles.css has no content."Pokémon Shuffle". Nintendo. Retrieved 2026-03-09.
  29. ^ Page Module:Citation/CS1/styles.css has no content.Hamari, Juho; Hanner, Nicolai; Koivisto (2020-04-01). ""Why pay premium in freemium services?" A study on perceived value, continued use and purchase intentions in free-to-play games". International Journal of Information Management. 51 102040. doi:10.1016/j.ijinfomgt.2019.102040. ISSN 0268-4012.
  30. ^ Page Module:Citation/CS1/styles.css has no content.Günzel-Jensen, Franziska; Holm, Anna B. (2015). "Freemium Business Models as the Foundation for Growing an e-business Venture: a Multiple Case Study of Industry Leaders". Journal of Entrepreneurship, Management and Innovation. 11 (1): 77–101. doi:10.7341/20151115. hdl:11199/8732. ISSN 2299-7326.

Further reading

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