The word “freemium” is a mashup of two other words: “free” and “premium.” It’s a business model where a company offers a basic version of its product or service for free, with the option to pay for more advanced features, functionality, or an enhanced experience.

Think about a mobile game you can download and play without paying a cent. You can enjoy the core game, but you might have to watch ads, or maybe you can’t access certain levels or special items. If you want to get rid of the ads or unlock that cool gear, you have to pay. That’s freemium in action.

This model lowers the barrier for people to try something new. You don’t have to risk any money to see if you like it. The company hopes that once you start using the free version and see its value, you’ll be willing to pay for the upgrade.

The concept of giving something away for free to attract paying customers is not new. In the 19th century, King C. Gillette famously gave away razors to sell his disposable blades. This “razor-and-blades” model is a direct ancestor of freemium.

However, the term “freemium” itself is a product of the digital age. It was coined in 2006 by venture capitalist Jarid Lukin in response to a blog post by Fred Wilson, another investor. The idea was simple: with software, the cost to distribute one more copy is practically zero. This makes it possible to give a product to millions of users for free in the hope that a small percentage will convert to paying customers.

Early software companies in the 1980s and 90s used a similar model called “shareware.” They would distribute free, often limited, versions of their software, encouraging users to pay for the full, unrestricted version if they found it useful.

In today’s crowded digital marketplace, getting a potential customer’s attention is a huge challenge. Freemium cuts through the noise. By removing the price tag, it makes it easy for people to sign up and try a service, from music streaming and cloud storage to productivity tools and online games.

For businesses, freemium is primarily a customer acquisition strategy. It’s a way to build a large user base quickly. The free users might not generate revenue directly, but they can still be valuable. They might spread the word about the product to others who will pay, creating a powerful marketing effect.

The success of this model hinges on converting a fraction of the free user base into paying subscribers. This is the central challenge for any freemium business. They need to make the free version good enough to attract people, but not so good that there’s no reason to upgrade. It’s a delicate balancing act that has come to define a huge portion of the digital economy.

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