Analyst Report: How to Ride the Freemium App Wave to Success


The freemium mobile app movement is now a full-fledged trend among consumers. For developers, it’s a lucrative one. As I wrote about recently, one-third of the top-grossing iPhone apps are freemium programs that are free to play but make their money primarily through in-app purchases of additional content or functionality.

Remco van den Elzen, co-founder of analytics firm Distimo, said he believes in-app purchases now represent about 30 percent of all iPhone App Store revenue. Juniper Research, meanwhile, predicts that mobile game revenue will hit $11 billion by 2015 and that revenue from in-app purchases in games will eclipse traditional download sales by 2013.

This isn’t quite a surprise if you’ve followed the success of gaming online, particularly on Facebook, which heavily relies on revenue from virtual goods and currency. The paid goods model has been big in Asia and has steadily grown in acceptance in the U.S. Parks Associates last month reported that one in five gamers spends money on virtual items and microtransactions, which are expected to garner $6 billion in revenue by 2015. And many of the top iPhone freemium games now employ some form of virtual currency, similar to top Facebook games like “FarmVille.”

So it’s clear that the larger trend of virtual goods and free-to-play products are growing in popularity, and that momentum is now trickling down to mobile apps.

The Rising Tide of Freemium Apps

A few key factors have helped spur on the rise of freemium mobile apps.

  • Platforms like Apple’s iOS have enabled in-app purchases, opening the door for freemium apps to flourish. Google is also expected to officially support in-app purchase in its Android offerings: Third-party payment providers such as PayPal, Boku and Zong have enabled Android developers to use in-app purchases for their apps.
  • Consumers are getting used to the idea of free-to-play and in-app purchases. Developers initially pushed the paid model because it was the best way to get revenue. And with many apps priced cheaply, many users (more so with iPhone owners) didn’t balk much at paying for apps. But with more companies dabbling with in-app purchases, users are far more comfortable with the familiar model in mobile.
  • Developers are anxious to find a way to monetize their apps. Paid downloads work for break-out hits or developers with some name recognition, but it’s becoming increasingly difficult to build a consistent business based on paid downloads when you’re swimming in a pool of some 300,000 apps. Mobile advertising is helping plug the gap, but it’s still evolving and mostly relevant to only high volume apps. Flurry reported in October that mobile virtual goods sales have already outpaced mobile advertising revenue.

The boost developers get from going freemium is substantial. Peter Relan, chairman of Facebook game publisher Crowdstar, and also mobile gaming network OpenFeint, said opening up an app to free-to-play can give a successful game a 1ox increase in users. Megajump, a game that uses OpenFeint OFX, a tool for implementing in-app purchases, experienced a 400 percent increase in revenue after it went free-to-play.

Should All Apps Go Freemium?

So if this is where the market is going, shouldn’t all app developers look at freemium models?

Not so fast. The strategy has worked, but it requires thought, planning and a willingness to keep tinkering to ensure a good payoff. The bottom line is that freemium may not be right for every app but it is a very viable revenue model for app developers. Here’s a list of things to keep in mind for developers wanting to employ in-app purchases and freemium apps.

  • Know why you’re going freemium. Dave McClure of Founders Fund said earlier this year there are three major reasons to offer a version of your paid product for free: to give users time to learn what your product is; to take advantage of viral distribution; and to improve the value of your product for users via the network benefit of having more people using it. Know which reason you’re choosing and design around it.
  • Decide how you want to use the freemium model. In a simple sense, this can mean just a free lite version of the paid app, with the option to buy the full game. Or it can mean offering the option to buy additional levels, content or tools that help gameplay. For social games like the recent hit Smurfs’ Village, in-app purchases can pay for virtual currency, which help move the game along for players.
  • Ensure the app stands on its own and provides good value. You won’t have any hope of converting even a small fraction of users if the app is not worthwhile, engaging and contains the building blocks for monetization. And even if you don’t convert people from freemium to paid, you need a good free app to pick up new users through word of mouth. Bart Decrem, founder of rhythm game-maker Tapulous, said developers should think beyond just creating a profitable app and look at building a community or network that will be invested in the app.
  • Price carefully and don’t be afraid to raise prices. Make sure it’s clear what is paid and what is free. But understand that if you have a quality product, people will likely pay for it. Some will even trust you even more if you provide a substantial price; they believe it shows you’re committed to releasing a valuable product. And when you price, understand that some users will prefer a higher price over surprises.
  • Remember, it’s a numbers game. Going freemium will likely give you a boost in users. It’s much easier for consumers to try out an app when it’s free, especially when money is tight. But developers must get used to the idea that they’ll only be monetizing a fraction of their customers, probably well under 10 percent. So it’s important to get people using your app frequently. Note-taking app Evernote said its overall conversion rate to premium is 2 percent. But for those users who stick around at least two years, 20 percent have moved up to premium. And remember, freemium works best when you have a large market.
  • Pace the app and test extensively. If you go freemium, you have to learn how to find the right time to hit up users to buy virtual goods or suggest they go premium. This is one of the trickiest aspects to master and requires a lot of testing and good analytics to see how people are reacting to premium offers. It’s important to understand that users don’t want to feel hounded by offers or cheated if they don’t open their wallet. But subtle ways of encouraging users to think premium can pay off. Evernote, for example, offers upgrades to its premium product in its tips section.
  • Understand the unique features of a mobile app. Not all apps can be monetized in the same way. Mobile users often have less time and consume content in shorter snacks. So it’s important to factor that into your freemium app. Peter Relan, the chairman of OpenFeint and Crowdstar, said mobile games are on average more skill-oriented than Facebook games. So mobile game developers should consider how to build in virtual items that enhance the game play.
  • Employ user data to ensure lock-in. For those apps that store a user’s data, the more they entrust, the harder it is for them to switch to another app because of the extra effort involved.
  • Look for help in going freemium. Developers have a number of options for going free. Payment providers are increasingly offering libraries and tools to build in in-app purchase features. OpenFeint just released an OFX software development kit that makes it simple for users to sell virtual goods, with OpenFeint handling the back-end work. TapJoy and other offer companies also offer payment alternatives to users who don’t want to — or can’t — pay through traditional methods.

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