What Is a Freemium?

A combination of the words "free" and "premium," the term freemium is a type of business model that involves offering customers both complementary and extra-cost services. A company provides simple and basic services for free for the user to try; it also offers more advanced services or additional features at a premium.

The term freemium is attributed to Jarid Lukin of Alacra, a provider of corporate information and workflow tools, who coined it in 2006. The practice, however, dates from the 1980s.

Understanding Freemiums

Under a freemium model, a business gives away a service at no cost to the consumer as a way to establish the foundation for future transactions. By offering basic-level services for free, companies build relationships with customers, eventually offering them advanced services, add-ons, enhanced storage or usage limits, or an ad-free user experience for an extra cost.

The freemium model tends to work well for Internet-based businesses with small customer acquisition costs, but high lifetime value. The freemium business model allows users to utilize basic features of a software, game or service free, then charges for "upgrades" to the basic package. It is a popular tactic for companies just starting out as they try to lure users to their software or service.

[Important: Freemiums as a practice date from the 1980s, though the term was coined in 2006.]

Since the 1980s, freemium has been common practice with many computer software companies. They offer basic programs to consumers that are free to try but have limited capabilities; to get the full package, you have to upgrade and pay a charge. It is a popular model for game companies as well. All people are welcome to play the game for free, but special features and more advanced levels are only unlocked when the user pays for them.

Freemium games and services can catch users off guard, as they may not be aware of how much they (or their kids) are spending on the game, as payments are made in small increments.

key takeaways

  • Freemiums represent a business model in which a company offers basic features to users at no cost and charges a premium for supplemental or advanced features.
  • Freemium as a practice dates from the 1980s, though the term was coined in 2006.
  • Freemiums are especially popular among computer software makers/providers and Internet-based businesses.

Examples of Freemiums

An example of a company that uses the freemium business model is Skype, the firm that allows you to make video or voice calls over the Internet. There's no cost to set up a Skype account, the software can be downloaded for free, and there's no charge for their basic service—calling from a computer (or a cell phone or tablet) to another computer.

But for more advanced services, such as placing a call to a landline or mobile phone, you do have to pay, albeit a small amount compared to conventional phone company charges. Text messages and video conferencing among as many as 10 users are other premium services.

Another popular employer of freemium—one of the earliest to do so—is King, the developer of the highly popular Internet game Candy Crush Saga. The addictive activity, available on the king.com site, on Facebook, and on apps, is free to play. It allows users an allotted number of lives within a certain timeframe, but charges for extra lives if one wanted to play more during that window. Users also can pay for "boosters" or extra moves to help win the levels and advance through the game more easily.