by Tom Blue

In case you aren’t familiar, freemium is defined as a business model that gives a portion of its services for free and a portion of its services for a fee.

Freemium is Currently Hot

Over the past year fremium has become a hot topic in the tech community. The concept gained some ground during the 2.0 years, but has really taken off now due to plummeting advertising rates. Lowered rates have left many ad revenue based companies in a state of panic so many have latched on to the concept. Even more recently, Malcom Gladwell’s review of Chris Anderson’s new Free: The Future of a Radical Price book has spawned a lot of thought leaders to weigh in on the concept of the business of free and freemium. What is surprising to me is that everyone feels this concept is revolutionary.

A New Idea?

Just because this model has a trendy new name and someone wrote a book on it does not make it cutting edge. Companies have been running on this model for years and it became very popular after the Web 1.0 ad rate drop… or did we forget?

For example, in 2001, the magazine, Silicon Alley Reporter, was having trouble staying afloat on the advertising-only model so they changed their name to VentureReporter, gave daily venture capital news for free and offered more detailed information via a paid online subscription. They went from a company that was headed for bankruptcy into a profitable business that was sold to Dow Jones.

LinkedIn, founded in 2002, has been running on this business model since its inception. Their idea was to allow people to network with their current connections for free while allowing paid subscribers to email some of the site’s members via their Business subscription. Given the economy they started in, they assumed from the beginning that a freemium model could not only garner them some real traffic, but bring in enough revenue to not depend on ad revenues only.

These aren’t the only examples. All of these well known web properties were either founded under the freemium model during the post 1.0 era or were founded previously and started to offer paid premium services in order to supplement their decreasing ad revenue; Hotmail, Classmates, Blue Mountain, Six Apart, Hoover’s, XDrive, and hundreds of others.

The Future of Freemium

Freemium will be one of the most popular business models during this recession and most likely a few years after. But when ad rates go back up, its popularity will decline again which is unfortunate. Unfortunate because advertising only services have too many highs and lows and if you over extend yourself it is hard to recover during recessions. Also unfortunate because paid subscription only services hinder your ability to go viral. Alternatively, if you work in a freemium model you will still receive the benefits of word of mouth and organic search marketing, but you get the added bonus of receiving revenue through other streams.

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Tom Blue is the CEO and Founder of Lead411, an information services provider that caters to sales and marketing professionals. He is a serial entrepreneur and also writes for his sales and marketing blog, BTS411.