Freemium is a pricing model in which the basic version of a product is offered for free while extended features or higher capacity require payment. The model works particularly well for digital products whose marginal cost per additional user is low. Free access massively lowers the entry barrier and creates a large user base from which a fraction converts to paying customers.
The central control metric is the conversion rate from Free to Premium. Typical values range between 2 and 5 percent, meaning 95 to 98 percent of users never pay. Spotify offers an ad-supported free version and converts users through ad-free listening, offline mode, and better audio quality to the premium subscription. Dropbox gave users free storage and monetized the need for more capacity. The art lies in setting the boundary between Free and Premium so that the free version offers enough value to retain users but creates enough friction to trigger the upgrade desire.
The term was coined in 2006 by Fred Wilson. A common mistake: the free version is so complete that there is no incentive to upgrade, or so limited that users never experience the product’s value in the first place.
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