With almost all major Web service providers adopting the Freemium model to attract users and generate revenue, we take a closer look at the model and its viability for Indian businesses and start-ups.

In early 2006, venture capitalist Fred Wilson described a business model in these terms:

“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 priced value added services or an enhanced version of your service to your customer base.”

Two years later, a popular Web 2.0 business model named ‘Freemium’ was launched by Jarid Lukin, currently director of Marketing at Jones Apparel Group. It seems based on Wilson’s advice.

It is a model that is amongst the most popular options available to tap customers on the Web.

A number of major services today, like Skype, Flickr, and Yahoo! Mail, are using the Freemium model. While basic services remain free or ad-supported, advanced features and usage require you to loosen the purse strings.

Before we delve into the implications of this model and the benefits it offers to businesses and start-ups, we can get the essence of the model from an excerpt from Wilson’s blog post.

“This business model has been around for a long time. Shareware always used a model like this and there are many successful software companies that have been built with this model...It works even better with Web native services. Customers are only a click away and if you can convert them without forcing them into a price/value decision, you can build a customer base fairly rapidly and efficiently. It is important that you require as little as possible in the initial customer acquisition process…And make sure that whatever the customer gets on Day One for free, they are always going to get for free. Nothing is more irritating to a potential customer than a “bait and switch” or a retrade of the value proposition.”

For all its popularity and potential, there are a number of questions asked about Freemium. Let’s look at some of the most common ones.

Is Freemium good for start-ups and SMEs?

When service is free and even good, publicity follows naturally. Obviously, start-ups are risky ventures. So Freemium may be a good way to attract a fair number of members/customers. The development and adoption of the Freemium model has often been attributed to gutsy VCs (venture capitalists) who often bypass conventional business models. But associated investors would be bothered about returns on investment (ROI) as compared to high user statistics without any potential returns.