Demystifying Freemium Wave: Understanding In-App Purchases

You must have played free games such as Temple Run on your iPad. One might refer to the age-old adage, “All good things come with a prize” and wonder how an awesome game like Temple Run can be free.

What if I was to tell you that these free games are likely to earn as much as paid apps, which in this case is five times more than Temple Run’s initial paid version? Enthralling, ain’t it? With the same amount of stunned disbelief, there I sat on a lazy Sunday afternoon, to find out what makes them so appealing. Join me after the jump to find out.

What is the Freemium model?

Freemium, a juvenile amalgamation of “Free” and “Premium,” is a business model where the product is distributed free, while a fee is charged for more premium features. This model is very close to the shareware business model, and has been here for a while but it seldom received any attention until recently.

The idea behind this is to pull more customers your way. You’ll find more suitors for your product if it’s free rather than a paid version. People have the flexibility to try out a free product without any restrictions, or anyone arm-twisting them to pay a premium.

Is it sustainable?

Before answering that, let’s understand how this model works. In real life, if you buy a certain product and like it, you’re more likely to come back for it again and refer your friends. In this scenario, companies work around the clock to maintain their brand image, and of course, you. This is known as customer retention. But things are a little different in the app world.

How does it work?

Usually when a user purchases an app, he pays a small fee upfront and owns their app forever. Once the purchase is done, his experience doesn’t count anymore. Unless you’re planning to release another product, you’re not going to get any more business from them. If the user had a nightmarish time with the app he feels cheated and will swear out loud never to buy anything else from you. On the other hand, if he loved your app it’s a lost business opportunity for you.

Let’s say your app is priced at $0.99 and it gained mild traction with over 1 million downloads in the last year. That roughly translates to a little under $700,000 after Apple takes their cut. That’s good money for a small app, I can hear you say. But sadly, it isn’t that great when you break it down. If you had 1 million users using your app, it must have a great potential. We can safely assume at least 30% of these users would use your app on a daily basis. These are the ones who would be ready to shell out more cash for your app, repeatedly. But this is not possible with the traditional model.

In-game purchace

In-game purchace

Another Universal truth is free apps get more attention than paid ones. Paying for an app is a deal breaker for some of us. With a Freemium model the initial barrier can be eliminated and that helps you rope in more customers. Wait a second — the business end of the freemium model works by getting repetitive business from the same customer, but how is that possible when the user is hesitant in paying even a small fee upfront? Actually, that is not the case. Customers are ready to pay for the service they enjoy, but they’re just reluctant to venture into something new without experiencing it first-hand. In fact, a recent survey revealed that more than 40% of the users make purchases in-game.

Coming back to your question, I strongly believe so. All available data points show that freemium games have more potential than the traditional model, for it focuses on customer retention. It should also help you build an army of loyal supporters, which will come in handy on many occasions in the future.

Future of Gaming

The future for Freemium games looks brighter than ever, with several developers lining up to adopt it. The model is very versatile and is certainly a crowd pleaser.

Addictive Stuff!

Addictive Stuff!

Then what makes it so special? Well, the success of this model can be attributed to the products themselves, in some ways. Most of these games feature addictive gameplay — Jetpack Joyride, for instance. That game is literally endless and has enough stuff to keep me at the edge of my seat. But sometimes the items in the stash become too tempting and I find myself entering my iTunes password to buy more stuff. Now that’s great for business, and that is what makes it so special.



One word of caution though: most of the games available online are a direct rip-offs. Many times I wonder if it’s just a different graphical wrapper over the same code. Over a period of time, things will get saturated, and these awesome games will start looking boring. Unless the developers reinvent themselves, there will be a huge hollow. Only time can answer that.

In Conclusion

Have you played any freemium games? What’s your take on that? We’d love to hear your thoughts in the comments section below and thank you for reading!