patterns 96 free as a business Model The term “freemium” was coined by Jarid Lukin and popularized by venture capitalist Fred Wilson on his blog. It stands for business models, mainly Web-based, that blend free basic services with paid premium services. The freemium model is characterized by a large user base benefi ting from a free, no-strings-attached offer. Most of these users never become paying customers; only a small portion, usually less than 10 percent of all users, subscribe to the paid premium services. This small base of paying users subsidizes the free users. This is possible because of the low marginal cost of serving addi- tional free users. In a freemium model, the key metrics to watch are (1) the average cost of serv- ing a free user, and (2) the rates at which free users convert to premium (paying) customers. Flickr, the popular photo-sharing Web site acquired by Yahoo! in 2005, provides a good example of a freemium business model. Flickr users can subscribe for free to a basic account that enables them to upload and share images. The free service has certain constraints, such as limited storage space and a maximum number of uploads per month. For a small annual fee users can purchase a “pro” account and enjoy unlim- ited uploads and storage space, plus additional features. Freemium: Get the Basics for Free, Pay for More yahoo! platform management free basic photo sharing premium photo sharing mass customized switching costs casual users high-volume users fl ickr platform brand fl ickr.com yahoo.com platform development storage costs free limited basic accounts annual subscription pro account Flickr free limited basic accounts VP CR CH CS KP KA KR R$ C$ Large base of basic accounts for casual users Small base of paying “pro” users Variable cost depending on number of photos stored Fixed and sunk costs related to platform development free limited basic accounts free limited basic accounts sharing premium photo R$ free basic photo sharing annual subscription pro account high-volume users annual subscription pro account annual subscription pro account annual subscription pro account premium photo sharing bmgen_final.indd 96 6/15/10 5:37 PM