Is the Freemium Economy Coming to an End? Find Out Before It’s Too Late

Financial Well-being

In the digital age, businesses have learned to operate differently than their predecessors. The introduction of advances in technology has led to new business practices designed specifically to support software and digital content. As a result, a new business model which couples free services with paid-subscription plans has become a norm.

Freemium Economy

In the wake of a growing freemium economy, there are still concerns surrounding this business practice. Which leads to the question, is the freemium model on its way out? Or, will this pricing structure last into the future?

History of Freemium

The term freemium is simply a wordplay off of the words “free” and “premium”. The term was coined to describe products and services offered for free to all users, with a paid subscriptions for additional features. Alternatively, freemium can refer to a product or service that is completely free for a set period of time, after which users must pay to continue its use.

The idea for freemium services started way back in the early days of computers. The cost of delivering software to another user is almost nothing. This lent itself to software developers lending out their software to users for free for a limited period of time, thereby enticing them with a great new product that they would purchase later.

However, the term freemium only came into being over a decade later.

The term itself is credited to venture capitalist Fred Wilson who came up with the concept, and Jarid Lukin for coining the actual phrase in 2006 in response to Wilson’s idea. Wilson saw the opportunity to grow a customer base by giving away a service for free and offer premium pricing services. This would offer an already large customer base more value, and entice them to purchase a paid subscription for a service they are already using.

The strategy, put more simply, is to acquire customers first, and hope they will pay later. Or, as the CEO of Evernote, Phil Libin, puts it, “The easiest way to get 1 million people paying is to get 1 billion people using.”

Companies Using this Model

Some of the world’s biggest companies utilize a freemium model. Amazon offers a platform where customers can order from billions of items. Customers can opt to use the platform for free, or, purchase Amazon Prime, which includes guaranteed two-day shipping, Amazon Prime Video, and other select features. The paid subscription also comes with Amazon Fresh, the company’s grocery delivery service which is now offering same-day delivery service to more cities than ever before.


The file storage service Dropbox is another member of the freemium club. To store files on Dropbox is free for up to 2GB of storage. Additional storage will require the purchase of a paid subscription plan. The company recently announced it would actually be adding 1TB of storage to each of its paid plans in an attempt to add more customers who are flocking to cheaper file storage options.

Streaming music services such as Pandora and Spotify offer their products in a freemium model. The free versions of these services come with ads, while paid-subscriptions lift all ads and include additional features.

Hubspot, a complete customer relationship management (CRM) tool, is a freemium darling. New customers can utilize a robust CRM platform completely free, with upgrades available to add more users and unlock different product features.

Mobile apps like Viber and Duolingo (and hundreds of other apps) provide an alternative freemium model. While the apps themselves are free, upgrades within the app come at a cost. After hooking users in with the free app, they are then likely to make in-app purchases which generate revenue for the app itself. Even the dating app Tinder utilizes this model to entice users to pay for in-app upgrades.

What’s Free Isn’t Necessarily Free

“Whenever you are offered something for nothing remember that mice die in traps because they don’t understand why the cheese is free.”   – Jameson Lopp, Bitcoin engineer

freemium model

While users of freemium products and services would like to believe there are no hidden strings behind these offerings, the truth is much darker. Companies utilizing this freemium model have to make a profit in some form or another. Because users generate no direct income, company’s have found other ways to monetize their service.

Ad revenue is one way freemium services make money. Such ads are prevalent in the free versions of software, and are usually completely lifted when users upgrade to a paid-subscription. This revenue model, while an irritant to customers, is relatively harmless.

An alternative monetization method in the freemium model is that of selling user data. This practice has become commonplace among a wide array of freemium products. Users register for a free version of a freemium product and agree to the Terms of Service agreement. Since users generally don’t read these terms of service agreements, they miss the fine print which says that the company has the right to sell any and all user data to third-party companies. This means, users are having their data sold all over the world, to parties they don’t even know exist. This data can then be used in an attempt to sell the user other products or services in the future.

Music streaming service Spotify sells not only data related to user preferences, but tracking habits and location as well. Online dating services like Tinder and OkCupid can sell users profile data, which includes very personal information like sexual orientation and gender identity. These are just a few of the ways freemium products are monetizing free users in order to keep their business going.

Moving Away From Freemium

While freemium has worked for many companies in the digital economy, there has been a shift in recent years away from this model.

One of the reasons freemium worked in the first place is that growing companies had access to almost unlimited capital via venture firms and other investors. This allowed companies to lose money on free customers for the sake of growth, hoping to gain back that revenue in the future. Unfortunately, capital is a limited commodity, and while global funding had risen to record highs in 2018, these days capital is much harder to come by for startups. Without the necessary capital to operate, these growing businesses can’t afford to offer a freemium model which allows a large subset of customers to use a service at no charge. Instead, these companies will be forced to monetize their customers from the very beginning.

Another issue with the freemium model is the way it affects the perceived value of a product or service. If a customer gets some version of the product for free, they are more likely to value the product less, and therefore may not be as likely to purchase it in the future. This is exactly what the software company Atlassian was afraid of when it weighed the option of a freemium model. According to the company’s vice president of marketing, Jay Simons, giving the product away for free would negatively affect its perceived value.

“We decided we want people to attach some value with it. If it’s just given away for free, they might be less likely to use it or feel like it is something they should pay for,” said Simons. As an alternative, Atlasian decided to charge a small fee not for the purpose of profiting, but rather, to signal to customers the product had value. Simons again, “We decided to charge some nominal initial fee, but rather than making money on that, we would donate it to charity. ” This strategy has worked swimmingly for Atlassian, and led to $2 million in additional sales as a result of this offer.

Rebels Trying to Keep Freemium Alive

Some companies are just venturing out into the freemium world after years of offering free products and services.

Facebook, which has traditionally been a completely free service for its users, is now venturing into a freemium offering. Facebook Fan Subscriptions will allow users to pay a monthly fee to access exclusive content from select creators. This will allow content producers to monetize from their following, and users to gain access to content otherwise not available on Facebook.

Freemium is also coming to the popular web browser Firefox. While the free version of Firefox will remain, its new, paid counterpart will include cloud storage options as well as VPN services for more private browsing. Some view this model as a way for customers to pay for their privacy in a time where there is a major concern surrounding user data and the need for anonymity.

This pricing model has now reached the realm of podcasting. Luminary offers podcasts for free via its app, but also has a paid service which includes exclusive podcasts not available on the free version, as well as all podcasts ad-free.

More Than One Way to Win

Freemium products and services have proven that companies can leverage a growing customer base of free users to expand rapidly. The success of freemium doesn’t come without its drawbacks, as without access to capital it can be difficult to sustain such a model without rapid growth. For those in a credit crunch, or without significant user growth, alternative pricing methods may be better. Providing a service with no free option may be necessary for a company to bring in enough revenue to support its business.