FreemiumSFBay Freemium Ocean 150x150 Freemium   An Ocean of StudiesDuring the last few years several companies in the App measurement sector have published their latest results on research of user behavior. Some of them are very enthusiastic over Freemium Apps’ worldwide growth. At first sight, it seems to be true that the Freemium Business Model is working great; In-App-Purchases are the future! Problem solved — we all can relax now.

If only there wouldn’t be one additional report about user behavior. . . .

Who are the winners?

Lots of studies about the value of the Freemium Business Model were published in the last year. Specifically, the value of Freemium Apps in Apple, Google, and Amazon’s App Stores were highlighted. Since Apple announced in October 2009 that they would allow Freemium Apps and In-App-Purchases in their App store, the model kicked off and is now the company’s main revenue stream. At that time, developers and users still had many questions about the Freemium Model and how it could work. One of the most interesting questions was asked and answered:

“Who are the biggest winners here?” It’s the people who have been putting out free and ad-support apps. They now have a way to turn off those ads and to solicit donations. In-app purchase doesn’t have to be about buying and unlocking features. It provides a real solution for free apps to monetize, and for Apple to transform a huge part of their store into a paying model. - Erica Sadun, Apple relents: in-app purchase for free apps allows demo-to-paid , Oct 15th 2009

One year later, in 2010, developers slowly realized that there was the possibility of a great income stream with Freemium Apps and the In-App-Purchase. Two App analytic companies, Distimo  and App Annie, both saw a growth of Freemium Apps at this time. Still, they represented only a small percentage of this type of App overall in the App Store. At the end of 2011, Distimo’s Year-End-Report cited in TechCrunch stated that half of the revenue of the top 200 apps in the iPhone App Store were Freemium apps, (see Distimo’s report).  The number of apps using the Freemium model with the iPhone went from 29% in January 2010 to 53% in September 2010; and it was even higher in the Android Market at 65%.

2010, 2011, 2012, 2013, 2014, 2015, …

The next report that tried to glimpse into the future was published January 2012 by IHS. It said that in 2015, In-App-Purchases would rise to account for 64% of total market revenue, up from 39% in 2011. Another interesting study was published by the research firm Gartner in September 2012.  Last year’s total download of Apps was  25 billon, where 88.4% were free.  Furthermore, they reported that in the year 2012  there would be 45.6 billion Apps downloaded; therefore, 40.6 billion will be free Apps (89%).

Freemium is underrated

App Annie Analytics, limited to iOS and Android, published its end of October 2012 report on the revenue growth of Freemium Apps worldwide. Comparing IHS’s and Gartner’s numbers with App Annie’s, they have both underrated the Freemium Business Model completely. According to App Annie the iOS revenue global growth of Freemium vs. Premium Apps reversed course since January 2011, with 25% consisting of Freemium Apps and 75% Premium Apps. One year later, in January 2012, it was about 50% each. In September 2012, the proportions were 65 to 35% and it’s still growing. For the global revenue growth of the Google Play Store is it even more. January 2012 showed them at about 50:50 with a slight advantage for Premium Apps. In September 2012, the proportions were 75 to 25% – for the Freemium Apps.

Freemium – The Sorcerer’s Stone?

Until this point, everything was a big pro for the Freemium Business Model. It looked like the Sorcerer’s Stone as far as a way to make easy money. The right App, the right pricing strategy, probably In-App-Purchases and a huge revenue could be gained immediately!

Since App Annie Analytics monitors every purchase, (but not the use of) each app, it is not really surprising that the download rate is so high, the conversion rate is so low and the upgrade or In-App-Purchase to Premium stays almost the same. It seems that many users choose the Freemium version to try the app instead of spending money immediately for something they may eventually not need or like.

Just try ‘em, then delete ‘em

This theory is confirmed by the last report of Playnomics Quarterly US Player Engagement Study.  It says that 85 percent of free games an iDevice User downloads, he deletes after just one day. Apparently the user sees no value in the app and doesn’t get hooked on it.

Of those who don’t delete the App immediately, 95% became inactive after a period of three months.  This shows that the Freemium Business Model is not working the way the studies above are showing. Sure, it is working but only for a minority of the App-Vendors. The others are struggling to make this Model work for them to create revenue.

 The overwhelming reason why tech companies go “freemium” is that this model attracts a lot of attention. If someone is giving you a free sample or even better, giving you the entire product for free, wouldn’t you be curious to give it a try? After all, what is there to lose? - Bryan Janeczko – Founder, Wicked Start, The Profit in “Freemium”

Want to learn more about the Freemium Business Model for your business?

If you are in the Bay Area, join our monthly Freemium SF Bay Area Meetup for a chance to hear world-class speakers and make networking connections! If you can’t make it, you can always catch the summary, video and presentations.