Software companies were giving away stripped-down products and charging for the full ones in the 1980s. Nobody called it freemium until 2006.
That year the venture capitalist Fred Wilson wrote a blog post on his site, AVC, setting out the model. Give the service away, possibly with ads, and win customers cheaply through word of mouth, referral networks and organic search. Then sell a premium-priced enhanced version to the people you have gathered. In the comments, Jarid Lukin of Alacra, one of Wilson’s portfolio companies, proposed the name. Wilson took it up and spread it.
A funnel, not a revenue stream
The free tier does not earn money. It brings users in. Revenue arrives when some of them hit a limit or want a locked feature and upgrade. A user who has already built workflows or stored data inside the free product has a reason to pay and a cost to leaving, which is why the paywall converts better than a cold sales pitch.
Everything depends on where the line sits. Gate too hard and the free product feels crippled, so nobody signs up. Gate too loosely and nobody pays. Research on the model stresses that the free tier has to attract and keep users without draining the perceived value of the paid one.
Ways to hold things back
Free versions are limited in a handful of ways:
A free video chat client may leave out three-way calling. SQL Server Express caps databases at 10 GB. Autodesk’s Education plan gives eligible students free one-year, single-user access, and CCleaner Free is for home use only. Some free-to-play games let you play a limited number of levels or turns in a row, then make you wait or pay. Support can be restricted too, with priority help reserved for paying customers.
A free trial is a different animal. Freemium is permanent but limited. A trial gives full access for a fixed period, after which you pay or leave. Trials tend to suit expensive, sales-assisted business software, where serving free users indefinitely would cost too much. Freemium fits cheap, self-serve products that spread by word of mouth.
Who uses it
LinkedIn, Badoo, Discord and Spotify are the standard examples, and meertrack’s glossary adds Zoom, Dropbox, Zapier and Canva. Newspapers borrowed the idea as the metered paywall: The New York Times and La Presse+ let readers see a limited amount before asking them to subscribe.
Chris Anderson’s 2009 book Free looked at why the model had become so popular. Eric Seufert’s Freemium Economics, published in 2014, covered the analytics and user segmentation that make it work in software.
Games are where it draws fire. Publishers of free-to-play titles earn their money from optional in-game items bought with real cash. Critics call many of these games pay-to-win, and researchers have documented monetization practices that players see as misleading, unfair or aggressive. Valve tightened its rules for early-access and free-to-play games on Steam after complaints that some multiplayer titles were pay-to-win or never finished. In November 2014, South Park aired an episode called “Freemium Isn’t Free” that mocked the model for encouraging predatory game design.
By September 2012, all but two of the 50 highest-grossing games in Apple’s iTunes App Store supported in-app purchases. Wired concluded that developers had to choose between including them and giving up a very large source of revenue.
