There's a lot of "free" software out there and a lot of confusion about how the companies giving it away survive, let alone generate revenue. This includes any website, program, or app where at least some features or versions are free. There are nine basic types of free software and here's how they each work:
(1-7 are typically seen in B2C software; 8-9 are typically seen in B2B software)
1. Completely Free - all features cost nothing and there are no ads. If a company is providing software completely free, then either (a) its owner(s) haven't quit their day jobs and the product will only be maintained as long as their hobby interests them or (b) its owner(s) have taken funding and will eventually turn to one or more of the models below to provide a return to their investors. Think any popular app before it gets acquired by a big company (e.g. Instagram had no ads until after Facebook acquired it).
2. Advertising - ads are present, all features cost nothing. Pretty straightforward. Google's search engine is the perfect example. Google will let any person use their search tools, but inserts ads to create revenue.
3. Freemium - premium features cost something, most features cost nothing. The popular League of Legends video game has perfected freemium. Players can get all the essentials of the game and compete on even footing for free, but can purchase cosmetic or time saving features. A more devious version is "pay-to-win", such as Clash of Clans, a video game where paying gives advantage. Typically a small percentage of users provide the majority of the revenue.
4. Merchandise - related merchandise is sold, all features cost nothing. An aging example is HomeStarRunner.com, which has a clearly marked store button that funds the whole site with branded clothing and accessories. Ello.co, which promised to be a social network without ads forever, sold t-shirts to raise money.
5. Pay What You Want - users donate, all features cost nothing. Inviting the altruistic and freeriders, this model simply asks users to donate if they feel like it. Wikipedia is the greatest example; once a year they ask site visitors to donate and manage to hit their revenue targets every time.
6. Data Collection - features cost nothing, your data is sold or used. Only example I thought of were those phishing surveys (where they ask "What Disney princess are you?", you answer 10 questions, then to see your result you have to create an account and they try the password you just created on your Twitter, Gmail, and banks). Leave a better example in the comments if you have one, there are certainly more.
7. Multi-level Marketing -
features cost nothing for influential users. Okay, I only know of one site like this: Paribus. They request refunds on behalf of users who bought products before sales, but take a portion of each dollar they recover. This portion is reduced down to 0 percent if the user refers a few other users who sign up. It's
like a pyramid scheme except the people at the bottom are actually benefiting.
8. Support - fees for support, features cost nothing. Can't think of an example where #9 doesn't also apply, but I'm sure it exists. Let me know if you have an example.
9. Enterprise Edition (B2B) - Some advanced features come in "enterprise edition" (EE) for a price, many or all features come in a zero-cost "community edition" (CE). This is different than freemium because there are two distinct versions of the software. For example, GitLab provides a free CE download without even asking for an email address, but if you want certain features and integrations, you need EE. Support and Enterprise Edition revenue strategies often go hand-in-hand.
Why do free at all?
Giving something away for free allows for fast adoption and growth of software. For instance, GitLab can give away its CE because it knows that people will adopt and enjoy using their software. When an individual who uses GitLab CE is in a work discussion on what software the team should use for project x, that individual will vote for GitLab. The company will pay for support and EE features, so GitLab keeps its lights on and keeps the servers up for free users.
Would love if you commented with your favorite model to use! Do you prefer to see ads or get pressured to buy premium features? Have you used free versions then had your company pay for a better version at work?
Did I miss any free models? Let me know and I'll update.
