Freemium = Free+Premium

Once upon a time, in the bad old days of business, giving away a product without charge was unheard of. Sure, Estée Lauder gave samples to celebrities and Gillette sold its razors cheap and made money on the blades.
But free didn't become a serious option until the Internet gave us low-cost online distribution. Adobe did it with its PDF Reader in 1994, Macromedia with its Shockwave Player in 1995. Both became the industry standard, and those companies were able to make money by selling the products' authoring software.

In these days of Web 2.0 services that rely on quick customer adoption, the strategy has become so common that VCs have coined a term for it: freemium.
We're talking about companies like Six Apart, which offers its LiveJournal blogging platform for free and has sold 2 million of its customers a premium version, which costs $20 for a one-year subscription.
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Chris Anderson speech at the Nokia World 2007 in Amsterdam last month where he presented some of the ideas included in his new book, entitled ‘Free’, following up his past book, The Long Tail.
In his speech, Anderson explained what disruptions happen in the economy when some basic goods become free or almost free (such as electricity, IT infrastructure or access to information) and what new markets and business models generate from there. It is particularly interesting the list of business models arising from a market of free goods and services (where open source is definitely included in most of them), such as:

- Cross-subsidy: give away the razors, sell the razor blades; or give away music and sell concert tours; or give away the bits and sell the services; or give away flight tickets and sell other tourist services (food, hotel rooms, car rentals, …); or give away a computer game for free and sell virtual land, characters or items in the game, …
- Ad-Supported: magazines, newspapers, blogs, …
Freemium: 99% use the free version, but a few pay extra for a premium version; Skype is in this category and so many other dual-license based open source products
- Gift economy: give people an opportunity and a platform to contribute, like Wikipedia or most of community based projects
great video here

How can giving away product for free financially benefit an e-business?


- Traditionally, software sold on the “freemium” business model (where the base product is free, but some key features are paid) is neatly packaged around “sets” of premium features, wrapped up into carefully calculated monthly rates and sold via fancy names.
Think you didn’t know what a “tall” coffee was? Makes as much sense as me buying “Pro” Flickr account. I’m no pro. I just want their service.source

- People love getting something for free,” says George Scriban, an enterprise technology and strategy analyst in New York. “Having a free, yet still useful, version of the service you’re selling is a proven way to encourage rapid adoption among people who might otherwise pass you by.” source
- When the service is free, word spreads

some online businesses utilizing 'freemium' business model
Examples:

Skype – basic in network voice is free, out of network calling is a premium service
Flickr – a handful of pictures a month is free, heavy users convert to Pro
Trillian – the basic service is free, but there is paid version that is full

advantages of 'freemium' concept

- they are door openers.
- They give brand identity.
- They definitely lift response and have a high perceived value.
- They are powerful to catch more people
- Maximize the reach of media, and new kind of media designed to satisfy everybody
- It previleges one to one, few to few,distribution is free,

disadvantages of 'freemium' concept
-At its heart, the freemium plan is a simple price discrimination plan where you drastically lower the admission price for the service while charging substantially higher costs for other additional benefits.

- “Roll up! Roll up! Shoot the balloon and win a goldfish! No charge!” Fairgrounds across the land ring to this refrain. There’s a clever scam at work that’s been paying dividends for decades. The key is the goldfish.

If you shoot the balloon with the air gun you get the fish in a plastic bag. Your daughter wants to keep the goldfish, not throw it down the nearest drain. So you need a bowl. Wouldn’t you know it, the shooting range proprietor happens to sell goldfish bowls for £10. An apparently free product results in an expensive upgrade.

This is a classic freemium model. Here’s another: Microsoft’s Hotmail service. Users get 250mb of free email storage, but, for £60 can upgrade to 2GB storage, junk filters, parental controls and 20 other features.

Both Hotmail and the goldfish scam feature a key requirement for freemium: customer capture. Emailers can’t walk away from Hotmail because it would require changing their email address. And goldfish owners can’t horrify their offspring by flushing the creature down the toilet.

The masters of freemium selling are crack dealers. In south-central LA you can pick up a crack of rock for free. A few smokes and you’ll be back as a paying customer."
SOURCE