Mix ‘free’ with ‘premium’ and the result is Freemium. Freemium is a business model that is based on the idea that the majority of customers use a product or service for free, while a very small percentage of customers pay a fee. This should not be confused with the idea of a free sample with a paid subscription – the vast majority of the customers will never pay for their usage of a product.

For a company considering converting to a freemium business model, there are some enticing reasons: over a million of them. To begin with, the attraction of a large number of users is a huge benefit. However, because most of the customers will not be paying for the product, the number of users needed to make a profit can run into the millions. When only 1% of the people who use a product pay for it, the sheer number of people needed to make the 1% cost effective can be astronomical.

Freemium can fail easily, however, because the service must continue to be something that people value. Not only is the number of users needed large, the number of users who continue to come back must remain large. Through continued use and dependency on the product, the consumer is more likely to convert their freemium subscription to a premium subscription and pay for the product.

Using the freemium model is not a quick race to profitability. It takes time to convert users to a pay version. The value of the product will continue to increase to users over time, while new free users are constantly being added. This creates a long stretch of time before the company breaks even. Once the breakeven point has been reached, however, profitability quickly follows.  There are an equal number of companies that successfully used the freemium model, as well as companies that could not make it work.