Not Quite Freemium Economics

So, what happens when you combine something that is outwardly entirely available for free and incorporate several options within the game only available at a premium? You get the tiered business model that has turned the mobile gaming industry on its head: ‘freemium.’

“Freemium is not Free”

“Freemium is a pricing strategy by which a product or service (typically a digital offering such as software, media, games or web services) is provided free of charge, but money (premium) is charged for proprietary features, functionality, or virtual goods”

Spurred on by the recent episode of South Park that explored the now popular business strategy for mobile games and other services, I thought that a blog post looking at the model could provide some insights from a social media perspective. South Park creators Matt Stone and Trey Parker actually hit on a few very interesting points that make this process successful: the user does not mentally grasp the amount of microtransactions that take place, feedback from the user allows the game designers to know exactly how to target its consumers and that many of these games appeal to the addictive tendencies of human psychology.

Candy Crush is a popular example of a successful Freemium model

Candy Crush is a popular example of a successful Freemium model

To recap the episode and the basic concept behind this business strategy, a user will feel compelled to purchase additional in order to satisfy in-game achievements and goals. The idea behind this is that the game will be made more fun with these additional features unlocked. Consumers will feel that since the game is free to play, they have no prior costs associated with the product, making in-game purchases more likely. Coined by Jarid Lukin in 2006, this term encompasses one of the most popular business strategies for apps; moreover, the freemium-style business model is not a novel concept. However, it was not until recently that Google changed their app store to denote the fact that while the game itself is free, in-app purchases exist.

Reflections on Social Media

So how does this relate to social media? I see a few major takeaways that could be some interesting discussion points. First, social gaming as an extension of the freemium approach combines the social media subject with the particular business model. Like Farmville did in years past, mobile apps will continue to incentivize sharing with in-game rewards. This will help to hedge the effects of customer churn while also building game awareness on a social level. It will also help to fuel app growth.

Secondly, related to the importance of growth from a mobile gaming perspective, I believe that the “play now, pay later” approach is a useful methodology to promote high-growth in the early stages of any sort of software development. We can see this in a variety of different illustrations from across the web. But it ultimately boils down the ability to first foster a sustainable audience, and then monetize that consumer base. The freemium model is a staged one that is heavily reliant on the later stages of growth and development — see chart below.

The willingness to pay shifts over time, allowing the audience base to develop and grow

The willingness to pay shifts over time, allowing the audience base to develop and grow

And lastly, it will be interesting to see how, going forward, this sort of pricing method is incorporated in any number of ways. Just from the #IS6621 Twitter feed, we have seen stories involving paying for a redo on Tinder. You can buy premium services from Skype and Spotify, so who is to say that if Facebook implemented an incredible new feature, some people wouldn’t pay for it? It’s definitely something we need to monitor as managers, as it is becoming a somewhat ubiquitous presence in the gaming sphere; the transition to the social media sphere might not be too hard.

Screenshot from the South Park video game, The Stick of Truth

Screenshot from the South Park video game, The Stick of Truth

Oh, and ironically enough, while I herald South Park for exposing this sort of approach as potentially harmful and detrimental to users at a certain level, it is hard to overlook the fact that South Park: The Stick of Truth is guilty as well. So the lesson to be learned here is that the freemium technique is here to stay.

 

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Sources:

http://www.fastcompany.com/3038124/tinder-plans-to-monetize-its-dating-app-by-offering-an-undo-button

http://www.techradar.com/us/news/software/applications/freemium-games-in-the-google-play-store-won-t-be-called-free-for-long-1258084

http://mashable.com/2012/03/23/zynga-economics/

http://mashable.com/2012/06/08/freemium-gaming/

http://www.forbes.com/sites/avaseave/2014/08/28/for-freemium-companies-what-are-non-paying-consumers-real-value/

http://www.forbes.com/sites/avaseave/2014/08/27/choosing-the-perfect-strategy-for-freemiums/

http://en.wikipedia.org/wiki/Free-to-play#Criticism

http://en.wikipedia.org/wiki/Freemium

http://www.pocketgamer.biz/feature/57185/i-wrote-freemium-economics-to-encourage-better-f2p-games-not-more-says-eric-seufert/

6 comments

  1. Freemium model is definitely interesting in the tech and social media space. There’s all these start-ups that are using technology to make consumer’s lives easier. Whether it’s Twitter, Uber, Tinder, or even LinkedIn, they’ve all been incredibly successful in customer acquisition. They have a great product, and they get active users to traffic their apps because they are usually free and convenient. The exciting part for these companies though, is when they’ve gotten a huge user base and they need to find a way to start monetizing these assets. Twitter’s ads and promoted content is working for now. We’ve talked a lot about Uber’s surge pricing, and Tinder+ definitely has some upside.

    But as I mentioned above, I think LinkedIn is a great example of a social network that has figured out the freemium model in a way that doesn’t intrude on their free users’ experience. It started as a completely free way to network with professionals that ran on (hugely profitable) advertising, but now offers a premium model for users who want a little more. According to their Wikipedia page, premium subscribers can pay for: “LinkedIn Business for business users, LinkedIn Talent for recruiters, LinkedIn JobSeeker for unemployed LinkedIn users looking for a job, LinkedIn Sales for Sales, Some elements of the various subscription services are also on a pay per use basis like InMail.”

    Other companies like DropBox have done the same. It’s about finding a sweet spot where your small number of paying users can cover the cost of your huge number of free users. It’ll definitely be interesting to see how other companies can use this freemium model moving forward.

    1. That’s a great point about finding the sweet spot. I think I came at the model with a bit of resentment because I was looking at it too blandly from the mobile gaming spectrum. But you’re right, LinkedIn and others have done a great job of adding value that is worth the extra cost.

  2. Good points. Freemium is really an interesting topic, especially through the lens of social media. Freemium and social media was raised when Ello was released. Another social media example would be Snapchat. CEO Evan Spiegel has indicated that in-app purchases will soon become a revenue source. I believe that with the release of Discovery, news via the service, you will be able to pay for upgrades in the content your receive.

    I think in all social media cases, companies are wise to implement this freemium strategy only after significant traction has been established (so they don’t run into no user growth, like Ello). While the SouthPark video is funny, they make key points. If a service is too good, there is no reason to upgrade. I use the iOS apps Wunderlist and Pocket, and they are incredible; my satisfaction however gives me no reason to upgrade. The service must have some aspect of “suckiness” in order to command in-app purchases. While I’m not sure about Facebook doing this, it seems reasonable for Snapchat to wave the full functionality of Discovery in front of your face, just begging to be unlocked.

  3. Its quite an interesting business model, Dan. Good post. You make valid points that its all about creating an ease in the purchase process, and then create incentive for up-sell once you’ve sold the value of the app to the user. I think one industry which is really struggling with this freemium model is cloud storage. Over time we’ve seen storage prices drop further and further, a lot of it fueled by price cuts of Amazon’s cloud service. The Business Insider recently covered an article about how it poses a challenge to tech companies. That said, I need companies need to be aware that once freeimum models become more widespread, competition might then be on which company offers rolls in more of the premium features into the initial free service to attract more users.

  4. Great insights. There’s a WSJ article we used to use in this class that talks about how hard it is to get freemium right. Of course, I’m not sure Candy Crush Micropayments is the same thing as freemium. You have to pay after a certain point to unlock the next set of levels (or rat your friends out for an invite). More of a “free sample” – the same strategy drug dealers use….”your first taste is free!”

  5. Interesting to note that Google changed their app store to denote freemium-model games! I know a lot of parents feel swindled by this pricing model after seeing their bill to the app store from purchases their children made when they got to use mom’s iPad – see this article: http://online.wsj.com/articles/ftc-sues-amazon-over-in-app-purchases-by-children-1405012533

    Great closing, might I add.

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