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 cost nothing 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. And 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.

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. And the boost developers get from going freemium is substantial. Megajump, for example, 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. As I discuss GigaOM Pro Report, (subscription required) while the strategy has worked, 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 partial 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.

For more tips, read the full post.

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