How the freemium app model will pave the way to profits

pirate passage ipad app in app purchase freemiumThe idea of micro-transactions started catching on in the video games industry after eastern MMO developers started releasing a basic version of their game for free and then charging small fees for additional in-game content. Giving the game away for free generated a massive user base and loads of publicity. Even though only a small percentage of dedicated users splashed out on micro-transactions, profits soared.

That blend of free and premium is only slowly taking off in the traditional gaming market in the west, but it has grabbed the mobile market by the throat and it is not letting go.

Free apps may seem counter-intuitive. Developers devote resources to developing them and they naturally want to see a return. The free app trend started out experimentally but the number of apps being released for free with an alternative monetization strategy has grown dramatically over time as the model has proven successful.

Top grossing apps

Take a look at the top grossing apps on Android and you’ll see that well over 50 percent of them are free. The same thing is happening with iOS in the games chart. It’s worth mentioning that this phenomenon is largely limited to games, but then again, games are also the most popular category of apps by a distance. The freemium model is gradually being adapted for some non-game apps and in-app purchases are definitely going to grow more and more important.

IHS has predicted that in-app purchases will account for 64 percent of total market revenue by 2015, compared to 39 percent in 2011. They also revealed that a whopping 96 percent of all smartphone apps downloaded in 2011 were free.

Standing out in a crowded market

The competition in the app market is fierce. Both Google Play and Apple’s App Store boast well over 500,000 apps and games. It’s tough to get noticed if you don’t hit the top app charts and many developers are resorting to gaming the app rating system. What better way to secure a big audience than to give your app away for free?

A tale of two models

If you’ve decided to give your app away, there are two popular ways to do it. You either sell advertising space or you create in-app purchases.

Even within those two models there are variations. You could offer a free app with advertising and then charge money for an ad-free version. Typically premium versions of free apps include some extras but sometimes they are literally just ad-free versions of the same thing.

The old demo system is still in use, whereby a free taste of the game is offered with full functionality, but you need to pay if you want the extra levels. Many early releases on Android enjoyed tremendous success with this model. Now that in-app purchases are becoming standard, the transition to paid content is handled smoothly within the app. We’re unlikely to see two separate versions (one free and one premium) quite as often.

in app purchases virtuoso ipad iphone ipod touch app store freemiumIn-app purchases are fast becoming the model of choice. The app or game is free, with little or no advertising, but there’s additional content that you can unlock for a small fee. It works well for some apps where content can be packaged and sold, but niche apps are largely sticking with an upfront premium.

The freemium model works best for games because players can not only buy new content, but they can pay to advance in the game. Games work because of an addictive hook and this can create a powerful urge to buy. People might not be willing to spend $5 on a casual smartphone game up front, but get them hooked and they’ll spend it to advance. Once they are invested they’re even more likely to spend cash and they could end up paying out as much as $20 — or a lot more.

Is advertising a good idea?

Mobile advertising is still on the rise. A recent Juniper Research report is suggesting that in-app advertising spend across all mobile devices will reach $7.1 billion by 2015. That’s a major increase from $2.4 billion in 2012. While marketers may be jumping on the mobile advertising bandwagon in droves they may also be missing a key point.

To generate good advertising income you need the user to keep returning to your app and crucially you need them to click on ads. Most people simply don’t.

The Nielsen report on Global Trust in Advertising found that people don’t trust mobile advertising. Even banner ads on websites rank higher.

But one area where mobile advertising is proving successful is social media. There have been a number of reports about the higher smartphone click-through rates on Twitter and Facebook. However, the prospect of integrating advertising into your own app is quite different.

Freemium is not one-size-fits-all

Most in-app purchases on iOS and Android are for virtual currency for games. What you can actually do with that currency varies, but selling consumables so players can use them in-game, and then return to buy more, makes business sense.

Any game looking to make the change from paid to freemium should plan carefully. It’s easy to annoy users and turn them off. In-app purchases should offer tangible benefits but not ruin the experience. Paying extra for more content makes perfect sense to most of us; paying to skip levels or unlock a weapon that unbalances a game — not so much.

Typical conversion rates sit at between 1 and 5 percent. So the vast majority of people will never make an in-app purchase, but it’s vital to cater to them as well if you want your app or game to succeed.

The big freemium successes have managed to combine good conversion rates with high retention, so that people continue to play the game for weeks or even months. That’s why they are earning significantly more than a host of high quality premium games. There are also some high profile successes that started out as premium apps and then adopted a freemium model later to squeeze more revenue from their release.

We can expect to see more variations on the freemium model in the coming months and whatever works best will naturally rise to the top. Like it or not, freemium is here to stay.