This what he said while introducing the model



"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."

The word Freemium is a combination of the two important aspects of the business model, namely free and premium. This type of business model has gained a lot of significance with the Web 2.0 companies.

The basic idea behind this model is that a company provides its customer with a free service initially. This will definitely lead to publicity through referral networks mouth publicity etc and grow the customer base. And when the customer/customers comes back the company offers the customer a premium priced value added service.

A rate is the ratio between free services offered and the fee services (paid services).

The Freemium model of business is an idea of offering a version of something absolutely free when there are other fee-based premium versions of the same product are available, as well. The idea to provide a free version is to make the lowest possible barrier of adoption. The aim is to achieve as well as increase the number in customer base, maintain a loyal and trustful relationship and transfer some of these customers to the fee-based versions.

A business venture can earn huge profits by using Freemium business model, if used promptly and accurately. To gain profits, a business should have a lifetime customer base of premium paying customers, which accumulates to a cost that is higher than the cost of production, development, distribution and the marketing of the free as well as the paid products. This can be achieved, if the marginal cost of production, distributing, marketing, etc of the free version is near zero. This will create a large customer base and there will be a transfer from the free premium versions to fee-based versions. The control mechanisms of the business should be strong enough and in place to preserve the premium value from reduction in the competitive market.

The business model's finds its use on the internet also and it has gained a lot of popularity among the start-ups. Internet provides low-cost marketing and a distribution medium for the digital products and data line, eBooks, software, videos, music and virtual goods. At the same time, it also offers the customers to acquire referral networks, word of mouth and low cost search marketing.