Freemi

1) Freemium means giving away a basic version of the product for free while charging for a premium level of service. It allows customers to try before they buy, eliminating risk and hopefully getting customers hooked and create stickiness between customers and the product, making them eventually pay for the product.

It is especially a good business model for digital goods because the value of the digital product can be enhanced by the users themselves without paying physical costs by the company. There is almost no marginal cost to digital goods. Distribution of free product is low cost and at the same time has a better chance of getting in touch with a larger population when the users share and attract their friends to also try the free product, while some of whom will ultimately choose to pay. It is a cost effective way to build a customer base fast and let the company to grow and create massive value.

2) The major problem of freemium revenue model is that the free version can cannibalize the paid offering. It requires a lot of effort, experimentation and fine-tuning to figure out what functionality should be premium. Many companies simply don’t have the patience or expertise. It takes time to work and companies may need to bear high operation costs due to thousands of freeloaders before the freemium revenue model works.

Also the freemium approach only makes sense for business that can eventually reach millions of users. It often isn't effective for businesses whose range of products is limited in scope, because paid users generally expect to get better or different versions of what they've already received free of charge. And it rarely makes sense for companies that sell products or services mostly to large businesses.