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FREE AS A BUSINESS MODEL Freemium: Get the Basics

for Free, Pay for More

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Flickr
PATTERNS The term “freemium” was coined by Jarid KP KA VP CR CS
Lukin and popularized by venture capitalist
Fred Wilson on his blog. It stands for business platform mass customized
management switching costs
models, mainly Web-based, that blend free
basic services with paid premium services. The f free basic photo ree basic photo casual users
sharing
sharing
sharing
freemium model is characterized by a large user yahoo! KR p premium photo CH high-volume
high-volume
premium photo remium photo
users
sharing
base benefi ting from a free, no-strings-attached sharing users
offer. Most of these users never become paying fl ickr platform fl ickr.com
customers; only a small portion, usually less brand yahoo.com
than 10 percent of all users, subscribe to the paid
premium services. This small base of paying
users subsidizes the free users. This is possible C$ platform development R$ R$ free limited basic a
free limited basic accountsccountsccountsccounts
free limited basic a
free limited basic a
because of the low marginal cost of serving addi-
storage costs annual subscription pro accountal subscription pro accountal subscription pro accountal subscription pro account
annu
annual subscription pro account
annu
annu
tional free users. In a freemium model, the key
metrics to watch are (1) the average cost of serv-
ing a free user, and (2) the rates at which free can purchase a “pro” account and enjoy unlim-
users convert to premium (paying) customers. ited uploads and storage space, plus additional Fixed and sunk costs Variable cost
Flickr, the popular photo-sharing Web site features. related to platform depending on number
acquired by Yahoo! in 2005, provides a good development of photos stored
example of a freemium business model. Flickr
users can subscribe for free to a basic account
that enables them to upload and share images. Large base of basic Small base of paying
The free service has certain constraints, such as accounts for casual users “pro” users
limited storage space and a maximum number of
uploads per month. For a small annual fee users

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