The Economy of Freemium Apps and Games

Freemium is often called the first business model of twenty first century. Before freemium, apps and games were pay upfront to play or use. It was reasonable because developers and companies were spending huge sums to make those apps and games. Many people were happy to pay upfront and use the app as long as they like.

But to expand reach and continuously earning from an app, developers started switching to free to play with in app purchase or ad revenue model. Free to play part attracted more users to the app, which increased ad revenue. But it wasn't enough. Game designers developed new tricks to exploit human psychology and behavior to earn more.

Researchers found that we spend more while paying with cards than paying in cash because in cash payment we can see and feel our wealth is decreasing. Games and apps now use tokens, golds, gems, diamonds, virtual coins etc as payment which can be purchased using card attached to Google Play or App Store. Usually there is a hard to calculate exchange rate e.g. user can purchase 1000 coins with 7 golds which can be purchased as a pack of 50 at $0.99 from the in app store.

Developers put intentional pain points in the app to induce users to pay to overcome. Pay prompt with a time limit or progress bar is shown to put more pressure on users. Sometime they contain users' in game character with a message like 'Save me!' in the pay button. Games like Clash of Clans, SimCity put 'time to build' on top of structures but user can get them right now by paying.

When a user fall prey to one of these tricks and spend a small sums of money they feel committed. After some time when the same user is asked to pay more to get more features they will most likely pay because they already paid. Because nobody likes their investment go in vain. So, for some users the cycle continues.

App developers collects lot of meta data and statistics of game play or app usage. They learn how a user is reacting, what phone they are using, is that expensive or not, what country the user is from. Then they charge different prices to different users based on those metrics.

Most people do not buy in app items or pay for the app. Only a few percentage of user will spend and out of those any a few will spend significantly more that the other payers. Those are called whales and this freemium business model is highly dependent on them.

But free to play games or apps are now changing for better user experiences. Because of limited number of whales and increased competition among companies to catch them - ad spendings are rising. Games are optimized for whales because they make company money, so often free players are not playing those games.So, whales do not get competitions or partners to play against in the games. To keep whales happy and spending, companies spend more on ads to acquire new users. So, ad spending increases, profit shrinks.

The good news is some developers are now developing games and apps for both types of users. Free user can get basic but adequate functionalities while paying users can get lots more. Company makes profit form whales, small spenders, and free users by showing them ads.

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