Freemium, aportmanteau of the words "free" and "premium", is apricing strategy by which a basic product or service is providedfree of charge, but money (a premium) is charged for additional features, services and virtual (online) or physical (offline) goods that expand the functionality of the free version of the software.[1][2] Thisbusiness model has been used in the software industry since the 1980s. A subset of this model used by the video game industry is calledfree-to-play.
The ethics of freemium, especially the free-to-play subset, were criticized byTouch Arcade andBusiness Insider in 2014 and 2015.[3][4]
The business model has been in use for software since the 1980s. The termfreemium to describe this model appears to have been coined much later, in response to a 2006 blog post by venture capitalistFred Wilson summarizing the model:[5][failed verification]
Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium-priced value-added services or an enhanced version of your service to your customer base.
Jarid Lukin ofAlacra, one of Wilson's portfolio companies, then suggested the term "freemium" for this model.
In 2009,Chris Anderson published the bookFree, which examines the popularity of this business model. As well as for traditionalproprietary software and services, it is now also often used byWeb 2.0 andopen source companies.[6] In 2014, Eric Seufert published the bookFreemium Economics, which attempts to deconstruct the economic principles of the freemium model and prescribe a framework for implementing them into software products.[7]
The freemium model is closely related totiered services. Notable examples includeLinkedIn,[8]Badoo,[9]Discord,[10]Spotify[11][12] and in the form of a"soft" paywall, such as those employed byThe New York Times[13] and La Presse+.[14] This is often in a time-limited or feature-limited version to promote a paid-for full version. The model is particularly suited to software as the cost of distribution is negligible.
A freemium model is sometimes used to build a consumer base when the marginal cost of producing extra units is low. Thus little is lost by giving away free software licenses as long as significantcannibalization is avoided. Other examples includefree-to-play games – video games that can be downloaded without paying. Video game publishers of free-to-play games rely on other means to generate revenue – such as optional in-game virtual items that can be purchased by players to enhance gameplay or aesthetics.[15]
Ways in which the product or service may be limited or restricted in the free version include:[16]
Some software and services make all of the features available for free for a trial period, and then at the end of that period revert to operating as a feature-limited free version (e.g.Online Armor Personal Firewall). The user can unlock the premium features on payment of a license fee, as per the freemium model. Some businesses use a variation of the model known as "open core", in which the unsupported, feature-limited free version is alsoopen-source software, but versions with additional features and official support are commercial software.[17]
In June 2011,PC World reported that traditionalanti-virus software had started to lose market share to freemium anti-virus products.[18] By September 2012, all but two of the 50 highest-grossing apps in the Games section of Apple'siTunesApp Store supportedin-app purchases, leadingWired to conclude that game developers were now required to choose between including such purchases or foregoing a very substantial revenue stream.[19] Beginning in 2013, the digital distribution platformSteam began to add numerous free-to-play andearly-access games to its library, many of which utilized freemium marketing for their in-game economies. Due to criticism that the multiplayer games falling under this category werepay-to-win in nature or were low-quality and never finished development,Valve has since added stricter rules to its early-access and free-to-play policies.[20]
Freemium games have come under criticism from players and critics. Many are labelled with the derogatory term 'pay-to-win', which criticizes freemium games for giving an advantage to players who pay more money, as opposed to those who have more skill.[21][22] Criticisms also extend to the way that the business model can often appear unregulated, to the point of encouraging prolific spending. Freemium games are often designed in a manner where players who are not actively using premium features are actively frustrated, delayed or require much larger investments in time required to acquire currency or upgrades.
In November 2014, the animated TV seriesSouth Park aired an episode entitled "Freemium Isn't Free". The episode satirized the business model for encouraging predatory game design tactics based on an improper business model.[23] In 2015,The Pokemon Company released two of its own freemium games in thePokémon series based on other standalone purchasable titles.[24][25] With the titlePokémon Rumble World, the company took a different approach by making it possible to complete the entire game without buying premium credits, but retaining them as an option so players can proceed through the game at a pace that suits them.[25]
Apps now offer several subscription levels—like “Basic”, “Pro” and “Enterprise”—so users can pick the plan that fits them best. Prices can even adjust automatically based on how much each person uses the app or their region.
Instead of choosing just ads or purchases, many apps combine both. Users see banner ads, interstitial ads or rewarded videos, but they can also pay to remove ads or unlock extra features. Ad mediation tools make sure the highest-paying ads show up.
Rather than locking everything behind a paywall immediately, apps offer short free trials (usually 7–14 days) or unlock a trial after a few actions. When the trial ends, a gentle prompt (a “soft paywall”) asks users to subscribe or buy a feature.
Apps group people by how they use the app—power users versus casual visitors—and then test different offers, prices or layouts (A/B testing) to see which choices earn the most.[26]
{{cite journal}}: CS1 maint: article number as page number (link)Some companies have only a single version of their software, while others follow an "open core" model, providing a community release of the core version, and offering proprietary premium features us- ing a commercial license.