Freemium: Attributes of an Emerging Business Model

Abstract

How does freemium work as a model and in practice? This paper draws concepts from the book The Mind Share Market: The Power of an Alternative Currency, by the same author.

A term increasingly used in commerce, freemium designates a business model using two products or services, or a combination of products and services. In such combination, one item is provided at no charge while a complementary item is sold at a positive price to the same general group of customers.

This paper first provides the necessary foundations to understand the model and describes 13 monetization strategies used in 3 types of freemium: quantity (volume, time), feature, and distribution. Second, it defines two distinct transactions taking place during the sale cycle: one using money, and the other using mind share as an alternative currency. Third, the paper considers freemium's attributes relative to multi-sided markets, specifically the presence of distinct sub groups of users and customers and how their interdependence generates indirect network effects.

Keywords: freemium, free versus paid, freeconomics, product differentiation, business model, multi-sided market, two-sided market, free, monetization

JEL Classification: M21, M30, M31, M37, A10