The "Freemium" Business Model

The most common business model is Free Service with an up sell to paid premium subscriptions, commonly known as the "freemium" model.
Freemium (adj.) - relating to a business model that offers basic services free, but charges a premium for advanced or special features.
This free-to-premium escalation plan is being called the 'freemium' model: Attract users with free services, then charge them a premium for special features.

A venture capitalist named Fred Wilson uses the word "freemium" to describe the business model on which many Web 2.0 companies operate: "Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium-priced value-added services or an enhanced version of your service to your customer base."

Freemium business models usually involve a Free service, sometimes time limited or feature limited, supported by advertising. The ads rarely cover costs. The goal is to convert these free users to paid subscriptions. Most services start with a $10 per user per month subscription and scale up to $20 or $50 per month based on a small, medium, large usage scale. They all have slightly different measurements and cut-off points, but most have some notion of small, medium, large.

Files are stored centrally, so you will not want to use this method to transfer sensitive data. And since somebody has to pay for storage and bandwidth, you get limited capabilities for free — premium plans get you more storage, bandwidth or access to your files.

Rather than bragging about how insanely great its VoIP products are, Skype makes its users insanely productive by letting them talk with any other user worldwide for free. The company makes money by charging users for connecting to phone systems outside of its network.

Advantages
1. Possibility to attract a lot of customers very efficiently

2. It’s becoming easier and cheaper to build Web applications. The freemium services could introduce a lot of companies to technologies they might never have purchased the years ago. They are also being used by people who aren't necessarily in a traditional IT role, because they were developed with the needs of line-of-business personnel -- the managers, the admin staff and even the CEO -- in mind.

3.This is an excellent revenue stream that continues to grow every year, for companies that typically have 3 to 5 employees. And, by the 3rd or 4th year these small companies can be generating $3M to $5M a year, still with less than 10 employees.

Disadvantages
1. A challenge to get users to transition from free to paid, especially with consumer services on the Internet because there has been an attitude where consumers expect everything on the Web to be free

2. There's a lot of competition to reach the bottom of this market because if you don't offer your service for free, another imitator might come along and offer it for free.

3. It could be that a lot of Web 2.0 customers are content with the basic service and they needn’t necessarily to pay for additional products.