A “freemium” product is one that’s free, but offers premium options.

In recent years, mobile gaming has been the poster boy for this model.

Phone games are often free to play, but users are enticed to buy game-enhancing extras.

When it works, the strategy can be incredibly profitable.

King Digital is the most well-known example. The maker of Candy Crush and other freemium games was just sold to Activision Blizzard for $5.9 billion. Billions of dollars in revenue, all from “free” games.

But today, the freemium isn’t just for companies that sell to consumers (B2C).

The model is increasingly being applied to enterprise software, programs that are designed for business users.

Selling enterprise software is traditionally an expensive proposition. For one, the sales cycle is long, often six months or more.

Offering a free product is a great way to cut the time it takes to convert a prospect to a user.

Additionally, until somewhat recently the software itself was extremely costly to build. Today it’s at least an order of magnitude cheaper than it once was. This is due to rapid advances in free development tools, along with a larger pool of talented coders.

Freemium Profits

Zenefits is a leading freemium enterprise software startup. It gives away free yet sophisticated software for managing HR tasks like insurance, onboarding and payroll.

Zenefits delivers a lot of value upfront to its customers. No charge. It’s a great deal for its users, which helps spread the word organically.

It then leverages these relationships with its users to sell high-dollar products like corporate life insurance. And it’s working like a charm.

The “startup” – if you can still call Zenefits that – has gone from being valued at $7 million in 2013 to $4.5 billion in its last round.

AppAnnie.com is another great example of the freemium model at work in the B2B (business to business) market.

App Annie offers insight into the app market. Which apps are being downloaded the most? Which are making the most money?

The company offers much of this data for free. All you need to do is register, and you can see all sorts of data about hundreds of thousands of apps.

I spend a lot of my time evaluating startups, so App Annie has become an almost indispensable tool for me. I can see how popular a startup’s app is and track how it’s trending over time. I haven’t converted to a paid account yet, but I’m certainly considering it.

The model is working extremely well for App Annie. It’s expected to IPO sometime in the next 12 months. It’s certainly one I’ll be paying close attention to.

Zenefits and App Annie are just two examples of how free offerings can fuel dramatic growth in the enterprise space.

Clearly, giving away something of value can be a fantastic sales and marketing tool. It can spark growth in a way that’s hard to match.

That’s not to say it’s easy to pull off. You still need to build a great product. But in today’s environment, I think the freemium model is an extremely attractive one to invest in. Given the right opportunity, of course.

On the Radar

One freemium startup I’m investigating is Fieldbook. It’s sort of like a next-generation Microsoft Excel.

Another is called Stayful, which gives away hotel management software to independent hoteliers. Once a customer is using the software, there are dozens of ways Stayful could potentially make money.

Do you know of any interesting freemium businesses? Let us know in the comments.

Have a great weekend.

Adam Sharp