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Summary:

When Apple began allowing free apps to include in-app purchases a little over a year ago, it opened the door for apps built on freemium models to flourish. They are doing just that with about one-third of the top-grossing apps using a free-to-use model.

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When Apple began allowing free apps to include in-app purchases a little over a year ago, it opened the door for freemium models to flourish. And they are doing just that, with about a third of the top-grossing iPhone apps using a freemium model.

A look at the top-grossing iPhone apps today finds 34 of the top 100 apps are free, but make their money through in-app purchases of mostly virtual currencies as well as other premium features.  Remco van den Elzen, CEO co-founder of analytics firm Distimo, said he believes in-app purchases now represent about 30 percent of all iPhone App Store revenue. “We’re seeing more developers implement more in app-purchases especially with games,” he said. “Freemium Apps are also picking up significantly. A lot of developers realize it’s a successful model.”

App Annie, another analytics firm, confirmed the growth of freemium apps. In January, there were just two freemium iPhone apps in the App Store among the top 50, said App Annie. By the end of October, that number had grown to 10, and now there are about 20 apps among the top 50 grossing apps with in-app purchases.

The numbers behind freemium apps also got a boost from Apple, which changed the way it calculated revenues from freemium apps on Nov. 1, allowing them to be more accurate and consistent, said Bertrand Schmitt, CEO of App Annie. Schmitt said freemium apps began to take off in May and June as more developers began employing in-app purchases and consumers became more aware of it. The model works because it gives people an easy way to try an app and then allows developers to up-sell them on added features or in-game currencies, which help users buy things or move the game along.

Freemium apps are still a small percentage of apps overall. Distimo said the percentage of free apps with in-app purchases has increased from 1.10 percent in the second quarter to 1.34 percent in the third quarter. While the percentage of freemium apps is low, it’s striking to see how much money they’re actually raking in for the top apps.

The ten top-grossing iPhone apps include Restaurant Story (#3), Tap Zoo (#4), NBA Game Time 2010-2011 (#7), Haypi Kingdom (#9) and Kingdoms at War (#8).  Restaurant Story, Tap Zoo and Empire Story all launched within the last couple of months, but older games, such as Haypi Kingdom (Jan. 2010) and Kingdoms at War (Sept. 2009), also continue to rake in significant revenue. The free titles are edging out established moneymakers like Plants vs. Zombies, Madden NFL and Doodle Jump.

But it’s not just gaming apps. The New York Road Runners Marathon App, which allowed real-time tracking of the marathon, went for $3.99, and shot to No. 1 Sunday during the race. The NBA Game Time app also hit No. 1 on Nov. 1, with its ability to receive videos, highlights, radio feeds advertising free. Distimo said the largest portion of in-app purchases are in games (3.8 percent) and social networking apps (4.3 percent).

Meanwhile, the iPad, with its generally higher price points for paid apps, isn’t as lucrative for freemium apps compared to paid apps. None of the top 100 apps on the top-grossing list are free though there are free iPad apps with in-app purchases.

The growth of the freemium model on the iPhone shouldn’t be a surprise. Freemium has been popular in Asia for years with pioneers like Nexon leading the way, and has also been the model of choice for Facebook games, helping Zynga achieve a $5.5 billion valuation. IPhone games publisher Ngmoco switched early to a freemium model and hit No. 1 on the top-grossing chart with Eliminate Pro, a shooter game. Now success is becoming much more common for app developers as the pace of freemium app adoption picks up.

Free apps won’t work for every category, and they still need to provide people with plenty of use and not make them feel like they’re being cheated out of a good experience if they don’t spend money. The best of them increasingly seem to have the formula down when it comes to drawing in hordes of customers and monetizing a small percentage of them to great effect. Schmitt said top freemium developers are finding they can make more money with in-app purchases than advertising. As we’re learning more and more: Free can definitely pay the bills and more.

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  1. An app which is considered best by someone here might not be relevant to everyone.

    For that very reason, we believe that the most relevant apps to someone might be found by looking at the apps that this someone’s facebook friends use and like.

    “And there is an for that”, it’s called Frenzapp
    http://www.frenzapp.com

  2. We’ve found through tracking app prices and discounts on our site (www.happybuy.com) that the majority of apps go on sale as a promotional technique.

    The hope in doing this is that it increases sales enough for the promotional time period that the app then hits the Top Paid lists and other users see the App – resulting in even further sales.

    For the freemium model this promotional technique is not an option so using freemium does restrict the usage of some common App Store sales techniques.

  3. Free apps make big money on the App Store | 9 to 5 Mac Free apps make big money on the App Store | Apple Intelligence Thursday, November 11, 2010

    [...] In-app purchasing has opened up new opportunities to developers to entice users with quality apps for free (the carrot) and then to upsale new features, layers, levels or any other conceivable kind of virtual good (I bought an obelisk once) via in-app purchasing, GigaOm tells us. [...]

  4. RobertJWeber|W3i Thursday, November 11, 2010

    Dead on with your observation! Freemium apps, and especially free-to-play games, are undoubtedly growing faster on the iOS than paid apps.

    Your observation could go a step further with a deeper review of the free apps that are ranking in the top 100 grossing. These analytic services aren’t catching the whole story. There is a huge difference between using in-app purchasing to unlock a level, or an entire full version of a game, versus the Zynga model of consumable goods and microtransactions. Some of the free games seem to be ditching the previous “Lite” versions of their games, and using in-app purchasing to sell their full version content. There is a huge distinction between this model, and “free” with consumable goods. The real story is in the consumable good, free app growth.

  5. This looked intially like a by-pass to appstore’s per item/app payment model and allowed payment providers to directly hook developers.
    Compare it to what Paypal did with Ebay by hooking merchants at the source and then entering entering the marketplace by force.

    per item or in-app, real or virtual currencies. at the end, whoever provides developers the best and more flexible price plans will probably win the apps payment game, whether appstores like it or not.

    I’d say, its a golden rule to provide a payment mechanism in a external marketplace. Date the merchants…here the developers directly. Marketplace owner will be forced to follow.

  6. Improved functionality in an app is one thing, but the in-game purchase model can be tricky for competitive/social games.

    The issue always brings to my mind a photoshopped image of an Everquest character, looting a foe, with a loot select screen and credit card authorization prompt (i.e., buy better treasure). The height of insult!

    Competitive games rely on integrity. Downloadable content and cosmetic items (e.g., pets/mounts in WoW) are totally viable revenue stream options, but allowing real dollars to impact the competitive landscape within a game can be disastrous.

    1. I completely agree with your comment. I got really t’ed off when gpotato a freemium game publisher in the states, ruined one of their games, by forcing users to pay up, in order to prevent your items from becoming’cursed’. I would have bought plenty of novelty items when I reached a higher level, but enough of my rant.

      The point of my comment is to let game publishers know that the freemium model shouldn’t be abused, or as the author put it “they still need to provide people with plenty of use and not make them feel like they’re being cheated out of a good experience if they don’t spend money.”

      1. Yeah, freemium clearly can work but it’s examples like yours that can sour people on the idea. Thanks for the comment.

  7. “Freemium” Apps Doing Quite Well :: App Advice Thursday, November 11, 2010

    [...] Gigaom recently reviewed the top grossing apps in the App Store and acknowledged that nearly one third on the list were free apps. The reason? Developers are increasingly including in-app purchases within their free apps. [...]

  8. The Linker: The Top 5 Links of the Week Friday, November 12, 2010

    [...] Liang: One Third of Top-Grossing iPhone Apps Are Free. Interesting statistic, shows how freemium model can work and the willingness of people to pay for [...]

  9. Weekly Mobile Mash-up #25 | Life is better On Wednesday, November 17, 2010

    [...] Ryan Kim from Gigaom produced a remarkable story that 1/3 of the top-grossing iPhone apps were free. This is all the more remarkable since free apps with in-app purchases make up just 1.34% of all apps. The ten top-grossing iPhone apps include Restaurant Story (#3), Tap Zoo (#4), NBA Game Time 2010-2011 (#7) and Kingdoms at War (#8), all of which are free apps. Interestingly, this is a phenomenon only on the iPhone – none of the 100 top-grossing iPad apps were ‘freemium’ apps. [...]

  10. Nice article. Freemium app games actually gave you a taste of the game but yes, you will not really enjoy it as much without buying the gems say for Restaurant Story. What I consider the real freemium are those with no follow-up sale… just the whole app features as it is. Intuition (www.iconapps.com) is an example of this. Just recently use their app for task management and I don’t get an up-sale, not even a sign of buying something to them later on to upgrade my Intuition use.

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