The people reading this blog are already convinced of the merits of P2P and open alternatives. Most would also like to see a wider spread of these alternatives. One way of making this happen is by showing companies how, open can be profitable.

The model
Free + Premium = Freemium

Slideshare presentation meet Freemium

The term freemium was coined to describe a business model where you give away a free service and sell premium products. A prime example of this is Skype. They give away a free VoIP client and sell complimentary products such as Skype out.

Freemium outside IT
The freemium model is common place within the internet and IT industries.
Of late, it is also featuring in other businesses, such as in the publishing and music businesses. A good example of this is Nine Inch Nails. This company released the main part of their latest album for free. Fans could then buy several different premium products, such as a deluxe edition for $300 or 27 additional tracks for $5.

Not Gillette
Now, freemium is not in practice when you subsidise one product with another. Like cell phone companies that give you a phone for $1 and let you pay for it through the subscription.
Neither is it about giving someone a glimpse of your product, like giving a free sample at the super market or giving away one chapter for free download.

Freemium is characterised by giving away a quality product that people can really use, in and of itself. Like the VoIP client from Skype.
This is a valuable program that has over 1 billion downloads. Most of the users only use the free program and that is OK, because there are so many of them.

How does this make sense?
The reason this hummingbird can fly is digital production.
The cost of digital production is falling exponentially towards zero, and the marginal cost for digitally produced products is very low. The cost for Skype to provide a user with free phone calls is very low. The cost for Nine inch nails to copy and distribute the mp3 files is very low.

This close to free, quality product allows companies to attract a large group of users. As long as a certain percentage of these buy a premium product, this model can create a profit that is greater than from a traditional distribution.

The idealistic side of Freemium
Besides working for companies the freemium model is also what makes the open source software industry work. They give away work on programs that are free and then make money on premium products such as support.
Using freemium they release a lot of valuable products for free. These can also be used by those who cannot afford it otherwise.
This is not just true for software, but anything that can be duplicated digitally. It could be anything from construction manuals on open hardware to open knowledge.

The possibilities are many. If we can show people that they can be profitable, more will choose the open alternative.

See more about freemium on my blog Freemium

Tomorrow I will do a follow-up post, covering more aspects of freemium
–    Who should use freemium
–    How do you successfully implement it
–    Places to learn more