Freemium – The Giveaway Basics

As of today, freemium ranks high among the latest buzz words in the constantly-changing and continually-evolving online business landscape. Essentially, it is a business model where the main premise is simple: giving away pays. As for the term, freemium is a coined combination of the two aspects of business models – free and premium.

As a business model, the freemium mechanics is to simply offer basic Web services or product for free. Usually, these companies who offer these kinds of products and services often charges premium payments for advanced or special features.

Momentum

While admittedly still in its infancy and in the center of intense discussions among Internet business gurus and experts, freemium as a business model had (strangely enough) picked up enough momentum, most especially among business startups in the Web.

Among the new companies that are using the freemium model today include Flickr, Pandora, LinkedIn Spotify and Skype. (These companies are successful startups and have already made their impact in the online business community.)

Freemium fundamentals

Theoretically, freemium is giving your service (or product) away and gaining a sizeable number of customers through several means: word-of-mouth, search marketing efforts, referral networks and others. The next step is to offer an enhanced version (added values) of the same products (or services), to your customer base.

Theoretically again, if your campaign to convince your lower level users (free) to move up and acquire the enhanced version for a fee, your initial losses shall be covered and can even pull in profits. The freemium business model is simply to have a base of free customers with which you will generate your paying customer base.

Even if only a minuscule percentage of this free customer base becomes a paying customer group, your business will have generated its needed revenue, enough to run the business and even produce a profit margin.

Tricky balance

In practical terms, however, getting the right balance on what to offer for free and what to charge is difficult. It is hard to come up with the right number of free versions to give away (to produce traffic and usage) but not over the edge where there will be no more incentives to upgrade.

Companies who employ the freemium business model must integrate this free service (or product) into the customer’s routine enough to have that customer to reach a point where the decision is simply to pay up.

Critical considerations

The freemium model is still in its infancy stage and has not yet been fine-tuned as well as it should be. At this time, the model has been the subject of some intense critical observations.

On one side, there is a line of thought where the freemium business model is declared to be ineffectual and therefore should be scrapped. The crucial point is a very simple question: If there is something offered for free, why would the user pay?

As had been proven in the past, customers will continue to use a service as long as it is free. Customers simply move on to another free service company once the original free service provider starts charging fees. Today, the freemium business model has not yet found its ideal form in theory and in practice.

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