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 completely free of charge, with no time limit. The hope is that some of these free users will eventually decide to upgrade to a paid, premium version that offers more features, greater capacity, or an ad-free experience.

Think of popular apps you might use. A music streaming service might let you listen to any song for free, but with ads between tracks. To get rid of the ads and unlock features like offline listening, you need to subscribe. A cloud storage service might give you 5 gigabytes of space for free, but if you need more, you have to pay for a larger plan. These are classic examples of the freemium model in action. The free product is a marketing tool designed to attract as many people as possible, creating a large pool of potential paying customers.

While the term is relatively new, the core idea isn't. The concept has roots in the shareware model of the 1980s and 90s, where software developers would distribute free, often feature-limited versions of their programs. Users were encouraged to pay a registration fee to unlock the full version. This was a popular way to market software before the internet made digital distribution effortless.

The actual term "freemium" was coined in 2006. Venture capitalist Fred Wilson was discussing business models on his blog when a reader, Jarid Lukin, responded with a suggestion: "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 valued added services or an enhanced version of your service to your customer base." Wilson loved the idea and the name stuck.

Not every free product uses the freemium model. A 30-day free trial, for instance, isn't freemium because it expires. Freemium products have a few distinct characteristics.

This leads to a two-tiered structure. There's the free tier, accessible to everyone, and one or more premium tiers with locked features. The limitations on the free tier are what create the incentive to pay. These limitations typically fall into a few common categories.

The entire model hinges on converting a small percentage of the large free user base into paying customers. While most users may never pay, the revenue from the few who do is enough to support the entire service, including the costs of serving the free users.