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The "Freemium" Business Model - Making Money with Giveaways
Want your startup to be a magnet for the eyes and ears of venture capitalists? Think about giving away your service or product. Free. No charge. And it’s more than a gimmick. You'll attract more paying customers by giving away free stuff than you will by charging for everything.
Skype did it. As Bruce Sterling wrote in Wired, “Rather than bragging about how insanely great its VoIP products are, Skype makes its users insanely productive by letting them talk with any other user worldwide for free. The company makes money by charging users for connecting to phone systems outside of its network.”
It’s called the “freemium” model: Attract users with free services, then charge them a premium for full or special features. The name may be new, but the business model isn’t. Netscape was founded on it. Shareware producers have always used a model like this, and many successful software companies were born of it.
“People love getting something for free,” says George Scriban, an enterprise technology and strategy analyst in New York. “Having a free, yet still useful, version of the service you’re selling is a proven way to encourage rapid adoption among people who might otherwise pass you by.”
The name first turned up on venture capitalist Fred Wilson’s blog in 2006. Wilson is a managing partner at New York-based VC firm Flatiron Partners, which develops and nurtures companies that are shaping the future of technology.
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