The Freemium model is a business model that works by offering a basic service for free while charging for a premium service. Examples of this model is Google Apps, PBworks and other cloud computing services. The idea is to increase market share and draw in users buy offering a decent service for free and as soon as a user needs grow big enough, charge for an upgrade to a premium service.

This model is useful for the consumer because it eliminates the barrier of entry for many small businesses and entrepreneurs who can be leveraged by these services. It also works for the supplier because it is great for gaining market share (it’s hard to compete with free), and if the service is good, people will talk about it and recommend it to their peers. It becomes free marketing.

Web hosting companies that have a large client base are starting to use a variant of the freemium model. Dreamhost for example offers generous coupons and a referall system where many users can easily get back most of their cost of hosting, and because low traffic hosting is practically free anyway, it is like a freemium service. Once a websites needs grow as traffic increases, there are premium private hosting packages available for upgrade. Furthermore, their free hosting package is quite generous offering ‘unlimited storage, domain names, and bandwidth’ under the one hosting account. It’s hard to compete with that. Gosh, now I sound like I’m working for them, this is the power of freemium, it gets users talking about you.

This post was inspired by Understanding “Freemium”

Other great freemium services that I’ve used

User Voice – A digg like user recomendation engine.

Wufoo - A user signup and satisfaction survey service

Survey Monkey – Easily set up surveys

Mint dot com – Personal finance management (U.S. only)