In-App Purchases and the Freemium Business Model

Any time I see a free app, I automatically look for the Top In-App Purchases bar to appear across the top of the app’s page. I’ve been trained to do this by the so-called freemium model that has taken the App Store by storm.

My feelings on this model are mixed. Is it a lie that is used to convince people that an application can be enjoyed for free, only to find out that you have to pay for the most features, or is it an innocent business model that capitalizes on a feature of the App Store?

Before We Begin:

In this article I will say game instead of application. This is for a few reasons, the foremost among them being that this appears to be a larger issue with games in the App Store than it is for any other kind of app. Where other applications may require an in-app purchase to unlock a feature, anecdotal evidence shows that they will often use the in-app purchase in a responsible way, instead of as a gimmick or money-grubbing method.

That said, it’s clear that some of these will apply to other applications as well. I will do my best to refer to these as the generic applications instead of games.

Now, let’s begin.

Freemium as a Hook (or, the Zynga Psychology Handbook)

While a dollar isn’t really all that much to spend on an application, it’s enough of a barrier-to-entry to dissuade most people from taking that extra leap of faith. The same people that spend $4 a cup on Starbucks coffee aren’t willing to spend a quarter of that on a game or app that they can utilize for a significantly longer amount of time. The App Store has two built-in ways of dealing with this: pricing items in 99-cent increments (which we somehow feel as a smaller expense than one cent more) and in-app purchases.

The way that it will often work is like this: you spot a game in the Top Free chart of the App Store, you download the game and you enjoy your time with it for a while. You’re hooked.

Words With Friends 'Free', chock full of in-app purchases.

Words With Friends 'Free', chock full of in-app purchases.

Once you find yourself enjoying a game you’re going to be more willing to spend your money to continue the experience. It’s (exactly) like gambling: once you get that little bit of a reward, as long as you continue to get some reward you’re going to continue investing your time and energy. That’s why casinos will often give you free credits, or reward you with a small payout when you’re about to quit.

That first payment reels you in, slaps you on the shoulder and throws you back for more. Once you pay you’re more likely to continue to play, so long as new and better rewards are waiting for you.

In-App Purchases: The Modern Day Cheat Code

Ask any self-respecting gamer about the Konami Code and they’ll proudly rattle it off for you. The code, made infamous by Konami’s ridiculously difficult Gradius for NES, has made its way into popular culture and popularized the use of so-called Cheat Codes.

Up, Up, Down, Down, Left, Right, Left, Right, B, A

Cheat Codes are used by games to give players a bit of extra power in the game, unlock special characters or levels, or perform some other function that isn’t core to the game’s experience but instead a little bit of extra reward for playing with numbers and letters.

Today’s cheat code is the in-app purchase. Instead of allowing a player to access these bonus features via a hidden code or by searching online message boards, developers have found that they can charge users for the “privilege” of accessing these extra features and get a little bit more money.

This character in Hook Champ can't be unlocked in-game, you have to purchase her.

This character in Hook Champ can't be unlocked in-game, you have to purchase her.

My concern with this isn’t out of any moral outrage from players progressing through a game the easy way; if you’re willing to pay more money because you can’t beat a game on your own, that’s no skin off of my back. Instead, my issue comes from the huge fence that developers feel the need to build around their creations.

Either they have added something to the game that they didn’t want to be there in the first place or they have decided that what they made needed to be used as a tool to gain more money. Either way they’re sacrificing the integrity of the game, offering what, by nature, can only be an incomplete experience — unless you pay up, that is.

But, Nate, How Else Can They Make Money?

Well, little voice in my head used for dramatic effect, the answer is simple: charge money for what you create in the first place. Don’t hide behind some in-app purchase or the pay-to-make-your-life-easier model. If you’ve created something that is worth paying for, people will pay for it.

It’s a matter of math, time and ethics. While large user-bases are well and good, would you rather have one million people clamoring for your attention, whether it’s for technical support, feature requests or adoration, or would you rather devote your time to a smaller group of people? Do you have the devotion and time to give to those million people, or are you giving them a sub-par experience simply because you went for the higher user-base?

Beyond that, you have to ask yourself how you want to make money. Would you rather make your money by developing a product that people will naturally talk about and share with their friends, or would you prefer to make money by taking advantage of the risk-reward center of the human brain? If you want to include something in a game, why double-dip and make someone pay more money for it?

Is It All Bad?

In some cases, in-app purchases make sense. Many services (Evernote comes to mind, but there are others) incorporate paid elements for the core service but offer free applications. Since you’re paying for, say, Hulu Plus already, they feel that you should have access to their application for free, and I’m inclined to agree.

In this instance, in-app purchases are used to facilitate shopping that may otherwise include bouncing around the Web, entering your credit card information at least once, and then being tossed back into the app to get what you wanted in the first place. In-app purchases reduce a lot of the friction required during that exchange and save you some time.

The difference here is the distinction between free and freemium. Free applications may incorporate paid options, but are either fully functional or completely non-functional without a payment. Freemium applications, on the other hand, offer incomplete or broken experiences until you invest some money into the application or service.

Will This Change?

Oh, I hope so. I doubt that a lot of the larger corporations (I hate to pick on Zynga when it’s so many others as well, but … Zynga) will change their ways. They’ve found a business model that serves them well and they’re going to stick with it until it stops working or until their developers perform a mass exodus and they have nothing left to sell.

Where I see this changing is with the smaller companies. The companies that want to create something amazing for the sake of creating it, not a get-rich-quick scheme. If you have the talent, the vision and the passion, people will take notice of your product and spend more time enjoying it while giving you free marketing. Even though humans can be fickle creatures, we can also be fiercely loyal.

In-app purchases don’t feed loyalty, they feed addiction. They feed greed. Developers need to ask themselves which they would rather have: loyal, honest customers or customers that they only have because they saw the Free button in the App Store and couldn’t stop handing out money.


  • Arnoud

    Once Apple offers “Trial” next to Paid and Free, I think Freemium will become less popular.

  • Jay

    Nathaniel,

    You bring up some valid ideas… but when you mention “free” vs. “freemium”… free is never free anyways. We see ads which I am ok with. You say their is a moral issue with in app purchases… wouldn’t you need to say their is with advertising too? Same agenda… make money hoping people click on that desired action.

  • Linhy

    I’m glad you’ve covered this topic, it really annoys me seeing in-app purchases when I’m trawling the appstore, sometimes I won’t even bother downloading the “free” game (something to think about, developers). As Homer would say, they get you addicted and then jack up the price. I think I’ve only paid once for in-app purchase (for Zombie Smash) but it got boring and I lost interest after the initial thrill of killing all those zombies. One of the most annoying games riddled in-app purchases is Sims Freeplay which I managed to get to Level 30 without buying a single damn simoleon/LP. Take that, EA!

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  • Josh

    Pardon me, but why are you so against the Freemium model? Games aren’t hiding their extra content behind the veil of a In App Purchase, they’re appropriately monetizing games for the value that an individual is willing to pay.

    I think it should also be mentioned that on average less than 5% of downloads actually turn into an In App Purchase for a freemium model based app. I can see why you don’t like to purchase an upgrade, I basically never purchase an In App purchase myself. But I would completely disagree and say there’s no ethical dilemma or issue in offering an In App Purchase to speed up gameplay, or create a competitive advantage for those who wish to pay for it.

    Take your Sims example. EA is happy there are players like you out there, even if you don’t pay for the game, you enjoyed it, and that’s an extenuation of their brand. Additionally, seeing players who get that type of success motivates others to do the same. Some people want to take the fast road, some the slow road. It’s fair game either way. It’s actually the people who pay with an In App Purchase that allow you to enjoy that game the way you did for absolutely no cost to you. By monetizing the few who don’t mind it, they’re allowing many more people to enjoy the game they’ve created.

    It’s also important to consider that the vast majority of mobile games are worth a considerable amount more in entertainment than the $.99. I know I would much rather have the opportunity to play a game for free and use an In App Purchase to get extra features, than pay $5, maybe $10 upfront for a game I’m unsure if I will enjoy or not.

    That turned out longer than anticipated, but let me know what you think. I’m not trying to target you for your opinion at all, just trying to explain some of the economics behind the decision.

  • AA

    I kind of agree with both Nate and Josh. In-app purchase is important for developers to earn their living if people are not willing to pay $0.99 (or more) upfront. That said, in-app purchase only works if the game is really addictive and provided long term entertainment value. But, can anyone predict that a game I am developing will be addictive? there are thousands of games being developed every month and only a few make it top ranks to earn some decent revenue.

    Based on a study (http://ssrn.com/abstract=1924044) if developers are in top rank (say 200), they can sell about 80 downloads/day = $80/day (assuming game is priced at $0.99) but if they give it for free they might get 800 downloads, and like Josh said (5% actually selling in-app features) make $40 (with each feature priced at $0.99). So, I think in-app purchase is not useful when game is truly exceptional/popular. But it is hard to predict if a game could reach that level.

    In summary the answer to this interesting question is dependent on the popularity of the game. Thus a developer can provide a game for free with in-app purchase to continuously improve the game and maybe when it becomes popular start charging upfront for the game and stop the in-app purchase option. :)

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