Pattern description

The basic version of an offering is given away for free in the hope of eventually persuading the customers to pay for the premium version. The free offering is able to attract the highest volume of customers possible for the company. The generally smaller volume of paying ‘premium customers’ generate the revenue, which also cross-finances the free offering.

Inventive problems

Application examples

Microsoft’s Hotmail, for example, offers its users a free basic account, but charges a premium for additional features such as unlimited storage.

The telecommunications company Skype, founded in 2003, is an example of an enterprise that was able to capitalise on the Freemium pattern for business model innovation. Skype offers its users a Voice-over Internet Protocol program (VoIP) that enables them to call anywhere in the world over the Internet. In addition, Skype offers its customers the option to purchase call credits for use with landlines and mobile phones. Now owned by Microsoft, the company has had a profound effect on the telecommunications industry, boasting well over half a billion users at the present time. Many traditional telecommunication providers have seen drastic reductions of their revenue from fixed line and mobile phone calls now that users have the ability to communicate for free.

Another example of a business model based on the Freemium pattern is the music streaming service Spotify. Users who pay nothing are regularly exposed to advertisements, which are no longer imposed if they upgrade to the more userfriendly premium package. Introduced in Sweden in 2006, Spotify acquired over a million customers within its first year of existence. Spotify has since tinkered with its Freemium business model to permit non-paying users access to the music streaming service for a limited number of hours each month, thus providing an incentive for them to switch to the premium version of the service.

References

The Business Model Navigator: 55 Models That Will Revolutionise Your Business