freemium

Freemium is a business model in which a basic product or service is provided free of charge, while more advanced features, higher usage limits, or premium content are offered for a paid tier. The model is common in software as a service (SaaS), mobile apps, online services, and games. Free users help establish market presence and can generate data, referrals, and a larger customer base that can be converted to paying customers.

Free tier often has limitations: feature gating, usage caps, reduced support, or advertisements. Revenue comes from paid plans, in-app purchases, ads on free accounts, or enterprise licenses. The goal is to optimize conversion rate from free to paid, while keeping the marginal cost of serving free users low. Typical metrics include conversion rate, customer acquisition cost, and lifetime value.

Variants and design choices include hard gating vs soft gating; freemium vs ad-supported; tiered plans; usage-based pricing. Some products rely on viral growth or ecosystem effects. Others keep the free tier generous to reduce friction and boost engagement, at the risk of low monetization.

Advantages and criticisms: advantages include fast user acquisition, scalable growth, and potential for high lifetime value when conversion and retention are strong. Criticisms include the possibility of undervaluing the product or frustrating users with extensive gating; revenue may rely on a small paying segment; free users may generate costs without proportional revenue; pricing opacity and concerns about data collection have been cited.

The term freemium was coined in the early 2000s and widely adopted in the software industry. Notable examples include Spotify, Dropbox, Slack, and LinkedIn, which offer free tiers alongside paid premium options.