Prosumer. Frenemy. Bromance. Portmanteaus are all the rage, but the one on the tip of everyone’s tongue is Freemium. Today, this mashup of Free and Premium has gone from buzzword to business model. Judging by how often the media has used the word in articles and conversations, the freemium model is beloved by technology writers and creators. But how do consumers feel about freemium apps?
Going by the numbers alone, consumers are already strongly responding to freemium apps, with 48% of revenue on Apple’s App Store coming from free apps that are supported by in-app purchases. If you include paid apps supported by in-app purchases, some of which have a nominal 99-cent base price, the amount jumps to 72%. The proportion is only slightly smaller on the Android Marketplace, where apps with in-app purchases account for 65% of the 25 top grossing titles. Whether the app is an online school platform where additional courses must be paid for or just a game where buying tokens cost real money, freemium models are certainly here to stay.
What’s more, according to IHS Screen Digest, the trend toward freemium apps will only gain momentum in 2012. “Smartphone users overwhelmingly prefer free apps to paid apps, as we estimate 96 percent of all smartphone apps were downloaded for free in 2011,” says IHS senior analyst Jack Kent. “In 2012, it will become increasingly difficult for app stores and developers to justify charging an upfront fee for their products… Instead, the apps industry must fully embrace the freemium model and monetize content through in-app purchases.” The most successful methods of monetization identified by the IHS study were virtual currencies, such as additional chips for poker, redeemable points, or in-game “gold.”. These virtual currencies reflected 63% of in-app purchases on the U.S. App Store at the end of the third quarter, according to IHS estimates.
Although the freemium model has been largely pioneered by free to play (F2P) games with optional paid currency and items, IHS suggests that “companies building other types of smartphone apps must adopt this strategy if they are to maximize their mobile app revenues.”
Wired’s Editor-In-Chief Chris Anderson explained why the freemium model is not only attractive to consumers, but profitable for producers in a 2009 talk at Y Combinator’s Startup School. In his estimation, free users aren’t freeloaders at all and it’s okay to let the minority of paid users subsidize the majority paying nothing. In a market based on social bonds, free users publicize the app more effectively than any advertiser by recommending it to their friends.
To hear it from the experts, freemium is a business model that can’t miss. However, a large cohort of would-be millionaires whose freemium apps were released to a chorus of one-star reviews on the App Store would disagree. What many developers fail to realize is that they need to make users fall in love with their freemium app, or at least see some value in it before they demand payment via in-app microtransactions or a paid “Pro” version of the app.
A quick perusal of some of the top grossing freemium apps on iTunes and their reviews reveals the not-so secret formula for a freemium app that charms customers instead of frustrating them: give first timers enough virtual currency to explore the game, allow the game to be fully enjoyed without in-app purchases, and don’t overwhelm users with intrusive or irrelevant ads. The more time they spend enjoying the app, the more likely customers are to pay a few bucks to skip the tedious parts or explore new add-ons.
Elaine Hirsch is kind of a jack-of-all-interests, from education to technology to public policy, so she is currently working as a writer for various education-related sites and writing about all these things instead.