A recent study by Flurry Analytics found that mobile phone games that are free to download, are actually making more money than those that charge. Rather than asking $0.99 to download a game you have never tried, these companies let you download the app for free, then entice their most avid players into paying quite a bit more than $0.99 for in-game virtual goodies like farm crops or power boosters. In June 2011, among the top 100 games in the iTunes store, free games generated almost twice as much revenue as games that charged to download.
Offering your innovative products and services for free, and charging your more committed customers for premium services, is actually a common strategy. This business model is often called “freemium,” a term coined by Jarid Lukin and popularized by venture capitalist Fred Wilson.
The freemium business model works like this: Everyone gets your product or service for free, forever. But those customers who really like it, and find most value in it, will have a strong temptation to upgrade to a “premium” (paid) service which has lots of additional goodies. It is, at heart, a strategy of pricing by customer segmentation. I've developed some key considerations in developing and benefiting from the freemium model.
The freemium model requires that innovators rethink their customer equation. Acquisition (attracting customers) comes first, and monetization (turning them into revenue) is second.
A freemium model adds value to your customer, by demonstrating the benefits of your service before they are expected to pay for it (a powerful incentive in this lean economy). It also adds value to your business in two ways:
1) Acquiring customers incredibly rapidly, with much less marketing spend
2) Monetizing your customers based on their price sensitivity, and the value they derive from your business. (Even your free customers may generate revenue via advertising)
Most importantly, a freemium model requires deep customer insight. It hinges on uncovering the key shift in behavior between your casual users, and those customers who truly value your service. What happens when customer love you? Do they use your service more hours each month? Use more data storage? Go on to advanced game levels? Use your product for work and not just personal use?
If you can find that customer insight, and if you can offer at least a basic version of your service at minimal cost to your firm, then you may be able to follow the freemium model, and make much more money by letting your customers in for free.
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