So how do you make money with a Freemium model?

This type of revenue model is popular among Web 2.0 service companies as a means of simultaneously getting market penetration and building revenues. Some examples of successful freemium companies include Flickr, YouSendIt, Evernote and Huddle. Skype could also be considered a freemium company.

These web-based companies generally structure their offering with two or more levels of service. They generate revenue by converting free users to paying customers.

Applicable industries: The freemium model suits web-based service companies with broad markets that offer ongoing value to their customers.

Compatible products or services: File transfers, file conversions, online media storage and VoIP applications are all offerings that work well with the freemium revenue model. A common feature of most freemium offerings is that they involve a process that can be automated online.

Customer relationships: Most freemium companies service a large group of non-paying customers, plus a minority of customers who pay for premium service. Both types of customers will interact with the company online. Registration, payment and service delivery are generally automated.

Marketing considerations: Freemium companies must deliver an excellent customer experience. The service needs to be user-friendly, deliver rapid results and create ongoing value for its customers. Upgrade options have to offer rational service enhancements and premium pricing must be equivalent to the additional value they offer to the user.

Operational implications of freemium: Successful freemium companies focus on establishing a large user base while ensuring that they service free users cost-effectively.

Strategic and financial implications: Because freemium companies rely on their web interface to generate an excellent user experience, they must develop a high-quality, highly functioning online property that has the embedded technical capacity to deliver their offering. Financing the development of sophisticated websites such as these requires significant up-front capital. Metrics used to manage and evaluate freemium companies include number of users, customer acquisition cost, and conversion (to premium) rate.

Modalities: In a slightly different context, the premium service level of a freemium offering is identical in most ways to the software-as-a-service (SaaS)/subscriber revenue model like SalesForce and KashFlow.

Benefits and costs of the freemium model: While the freemium model uses automated online service delivery to keep operation costs low, the infrastructure required to serve a large user base can be substantial. Storage and bandwidth can become expensive as usage increases. For instance, as of March 2009, Facebook had more than 10,000 dedicated servers, allowing users to upload 850,000 pictures each month.