10-K Wrap

What is a freemium?

A combination of the words “free” and “premium”, the term freemium is a type of business model which consists in offering its customers complementary services at an additional cost. A company provides the user with simple and basic services free of charge; it also offers more advanced services or additional features at a higher price.

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

Understanding freemiums

Under a freemium model, a company offers a free service to the consumer as a means of establishing the basis for future transactions. By offering free basic services, companies build relationships with their customers, possibly offering them advanced services, add-ons, improved storage or usage limits, or an ad-free user experience for an additional cost.

The freemium model tends to work well for Internet-based businesses with low customer acquisition costs but high lifetime value. The freemium business model allows users to use the basic functionality of software, a game or a service for free, and then to bill for “upgrades” to the basic package. It is a popular tactic for businesses that are just starting to 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 a common practice in many computer software companies. They offer basic programs to consumers who are free to try but have limited capabilities; to get the full package, you need to upgrade and pay a fee. It is also a popular model for game companies. Everyone is invited 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 may surprise users, as they may not know how much they (or their children) are spending on the game, as payments are made in small increments.

Key points to remember

  • Freemiums represent a business model in which a company offers basic functionality for free to users and charges an additional fee for additional or advanced functionality.
  • Freemium as a practice dates back to the 1980s, although the term was coined in 2006.
  • Freemiums are particularly popular among computer software manufacturers / suppliers and Internet companies.

Examples of freemiums

An example of a business that uses the freemium business model is Skype, the company that lets you make video or voice calls over the Internet. Setting up a Skype account is free, the software can be downloaded for free and the basic service is free: call from a computer (or mobile phone or tablet) to another computer.

But for more advanced services, such as making a call to a landline or mobile phone, you have to pay, although a small amount compared to the costs of the conventional telephone company. Other premium services are text messages and video conferencing among up to 10 users.

Another popular freemium employer – one of the first to do so – is King, the developer of the hugely popular Internet game Candy Crush Saga. The addictive activity, available on the website, on Facebook and on apps, is free. It allows users a number of lives allocated within a certain time, but charges additional lives if you want to play more during this window. Users can also pay for “boosters” or additional moves to level up and progress more easily in the game.

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