The Freemium Controversy

What is freemium? The practice has existed since the 1980s, but the word itself has been around since 2006. It’s a mashup of ‘free’ and ‘premium’, which refers to an app (or service) that is free to download, but includes in-app monetization via progress incentives or premium content. There are different kinds of freemium, but essentially, a service is free to download, and may be free in part to use, but any useful content is hidden behind a paywall. Freemium apps have become synonymous with mobile gaming, often referred to as ‘Free 2 Play’, but the freemium model has entrenched itself into all areas of business. It can be seen in everything from the gaming app Candy Crush, to the language app Babbel, to the business app MailChimp. If your business offers content or a service to an audience, it can take advantage of the freemium model. This is increasingly a good thing, since the app type has cemented itself as a marketplace juggernaut, making up 83% of the app landscape.

A Tumultuous Public Perception

Although they’re incredibly popular, freemium apps carry a public stigma of predatory, exploitative business practices. These apps, particularly in the gaming sphere, are designed to take advantage of the reward centres of the brain, directly exploiting the mechanisms of addiction by including a sort of ‘lottery’; users can spend money to uncover certain items or bonuses, but they don’t know if their bonus will be small or large until they’ve opened their wallets. When a playing only ‘wins’ a small reward, they’ll keep playing in the hopes they’ll eventually get a big one, upon which occasion they’ll think the time and money sink was worth it. For these gaming apps, in particular, they follow a standard progression of introducing new players to a fun, easy game, then as the user progresses, the game gets steadily harder, until eventually it’s so difficult that the player needs to make in-app purchases (such as buying more lives, more time, or more rewards) to make any progress.

If your app is particularly predatory, it can severely hurt your overall brand, turning willing customers away or incurring the wrath of government bodies. For instance, in 2018, Belgium ruled that loot boxes (which operate on the same in-game purchase model for lottery prizes that many freemium apps use) were illegal and a violation of gambling legislation.

The Freemium Cash Cow

Even with the turbulent public perception, freemium apps remain incredibly popular. Users are much more likely to download and try out a new app if it’s completely free, than to put money down immediately for a product they may not want, enjoy, or know much about. This low-stakes incentive means you can often entice a larger number of people to download and try out your app, increasing the possible number of people who will then convert to paying users. The larger install base also increases the possibility of your business catching a handful of ‘whales’; a term which refers to people who spend a lot of money on in-app purchases. The threshold to qualify as a ‘whale’ is generally a person who spends at least $100 every month on an app. They’re often only a small percentage of users (some estimates put them at only 0.15%), but they often make up half of an app’s revenue. For instance, in 2013, Candy Crush made $1.88 billion from in-app purchases on their freemium app, in large part because of ‘whales’ addicted to the game.

Doing It Right

If you feel the potential revenue pros outweigh the cons and believe your business can thrive with a freemium app, there are a number of ways to implement it in positive, successful ways.

Focus on smaller in-app purchases that allow users to customize their experience or pay for new content. This can keep users engrossed in your product over a longer period of time, as opposed to offering expensive, high-level products that either turn users off all together, or entices them to pay for a single expensive item and then abandon the app all-together when retail regret sinks in. You can also focus (or diversify) your revenue stream by selling ad space to other companies inside of your app, rather than simply relying on locking progression or content behind a paywall. These ads can be unobtrusively small popups, or short 15 seconds videos users can be rewarded for watching. If your app deals primarily with premium content or features, allow users a trial period where they can see the breadth of content you offer; this way, when the trial ends and your content reverts back to pay-to-use or pay-to-see, users can confidently put their money towards content they know they want and will use. This trial method also helps retain your customer base and increase conversions. Alternatively, you can also allow a small portion of your content to be free forever so users can try out what you offer for a more flexible amount of time, but keep your better, more robust content behind a paywall to entice spending on features people really want and need.

A good example of a trial-based freemium app is ‘Calm’. It advertises itself as a meditation and sleep aid, which offers a free 7-day trial to access their expansive premium content, including personalized wellness and sleep tracking, guided meditations, expert classes, and a library of “Sleep Stories”; calming tales read by celebrities that are billed as a way to help you fall asleep. Calm’s version of freemium focuses on showing users their huge breadth of content for a short time, hoping they’ll be able to entice these new users to sign up for a premium subscription to keep accessing content they’ve become reliant on.

At the end of the day, a business has to weigh the pros and cons of a freemium business model with the type of content they offer, and the overall strength of their app. While freemium apps are incredibly popular, their success is largely dependent on a number of factors. Businesses have to decide if they’re willing to sacrifice guaranteed income with a paid app for the possibility of a vastly larger install base and a smaller number of conversions and aquatic big-spenders. They also need to consider what type of freemium model to use; one-off in-app purchases, a subscription service after a trial period, or some free, basic content with higher quality content behind a paywall. The options are nearly endless, but a business needs to be confident in their products, the functionality of their app, and their ability to do freemium ‘right’ to maintain their business’ positive, high-quality brand and public perception.