Freemium

Chris Anderson lays out the Freemium business model for digital goods:

What's free: Web software and services, some content. Free to whom: users of the basic version.

This term, coined by venture capitalist Fred Wilson, is the basis of the subscription model of media and is one of the most common Web business models. It can take a range of forms: varying tiers of content, from free to expensive, or a premium "pro" version of some site or software with more features than the free version (think Flickr and the $25-a-year Flickr Pro).

Again, this sounds familiar. Isn't it just the free sample model found everywhere from perfume counters to street corners? Yes, but with a pretty significant twist. The traditional free sample is the promotional candy bar handout or the diapers mailed to a new mother. Since these samples have real costs, the manufacturer gives away only a tiny quantity — hoping to hook consumers and stimulate demand for many more.

A typical online site follows the 1 Percent Rule — 1 percent of users support all the rest. In the freemium model, that means for every user who pays for the premium version of the site, 99 others get the basic free version. The reason this works is that the cost of serving the 99 percent is close enough to zero to call it nothing.

An interesting example of the freemium model is Nine Inch Nail's new 36 track album Ghosts. Trent Reznor was able to make $1.6 million in one week, although the album could be downloaded for free.

Reznor made the albums available at five different prices, including a free download, without any advance publicity. His marketing campaign, such as it is, consisted of a terse announcement on his nin.com Web site. On Wednesday, he reported 781,917 transactions, including free and paid downloads and orders of physical product. A $300 box set sold out of 2,500 copies within a day. Nine of the 36 songs were made available as a free download. The complete set also was available as a $5 download, a $10 double-CD and a $75 set with bonus visual content.

The $300 box set was a stroke of genius. He made $750,000 right there from just 2,500 fans. Never underestimate how much hardcore fans are willing to pay, especially for "limited edition" goods. I just hope the box set included a "I could have got this album for free but I decided to pay $300 for it" T-Shirt.

I don't know if this conformed to the 1% rule, but it certainly looks plausible. And count me in the 99% as I have downloaded the tracks for free. I don't think I would have paid for this, as while the album is interesting musically, it makes neither good background thinking music nor good workout music and that is primarily when I am listening.

Also, don't miss Reznor throwing the smackdown on Radiohead's offering (see my thoughts on the Radiohead experiment here).