You’ve probably used a freemium product today without even thinking about it. That mobile game you play for free but offers in-app purchases? Freemium. The music streaming service with a free, ad-supported tier? Also freemium. The productivity tool that lets you manage a few projects for free but requires a subscription for more advanced features? You guessed it.

The model’s name is a mashup of its two core components: “free” and “premium.” It’s a strategy built on a simple idea: attract a large user base by removing the initial cost barrier, then convince a small fraction of those users to pay for more value. The free version needs to be useful enough to keep people around, but the premium version must offer compelling benefits that make the upgrade worthwhile.

Giving away a basic version of something to entice customers is not a new concept. Think of a free food sample at a grocery store or a free razor handle that requires you to buy the blades. The core idea has been around for over a century.

However, the internet and digital goods supercharged this strategy. In the pre-internet era of software, companies distributed “shareware” on floppy disks or CDs. You could try a limited version of the program for free, and if you liked it, you could mail in a check to unlock the full version. This was an early ancestor of modern freemium.

The game changed when the cost to distribute software digitally dropped to nearly zero. Suddenly, companies could give their product to millions of users at very little extra cost. In 2006, venture capitalist Fred Wilson described this model in a blog post, searching for a name. A reader, Jarid Lukin, suggested “freemium,” and the term stuck.

The main reason companies adopt a freemium model is to acquire users. It's a powerful marketing tool. By offering a free product, a company can lower the barrier to entry, allowing potential customers to experience the product's value firsthand without any financial risk. This creates a wide top-of-funnel, attracting a massive number of users who might never have tried a paid-only product.

The strategy hinges on the idea that once users are engaged and see the product's value, a certain percentage will be willing to pay for enhanced features, more storage, an ad-free experience, or other premium benefits. This small group of paying customers subsidizes the entire user base. The free product essentially does the marketing, letting its quality and utility speak for itself and drive upgrades.

This model turns the traditional sales process on its head. Instead of spending heavily on marketing to convince people to buy something, companies invest in building a great free product that markets itself through word-of-mouth and user experience.