Freemium

The freemium business model was first articulated by venture capitalist Fred Wilson on March 23, 2006

The freemium business model works by offering a basic service for free, then offer premium versions and add-ons, available for a fee. The word freemium has been created by combining the two aspects of the business model: free + premium. The business model has gained popularity with Web 2.0 companies.

Examples:
Skype – basic in network voice is free, out of network calling is a premium service
Flickr – a handful of pictures a month is free, heavy users convert to Pro
Trillian – the basic service is free, but there is paid version that is full featured

Advantages:
Freemium offer free services to every user, and sometimes some of them are willing to pay more to have premium service. Moreover, nowadays payments through internet are secure and quick.

Disadvantages:
It may be hard to convert free users to paid users, willing to pay on-line.
Furthermore, this business model is a very competing one.

Sources:
http://avc.blogs.com/a_vc/2006/03/my_favorite_bus.html
http://en.wikipedia.org/wiki/Freemium