Make Freemium Paymium

Guest post by John Fletcher

Average iPhone app prices have sunk from $3 in 2009 to nearly to $1 this year and the defensive position is to assume they are heading towards $0.  Enter freemium: apps that are either try-and-buy or free to download and play but offer in-game upgrade purchases (or questionably, advertising).

But freemium economics can be a bummer.  Glu Mobile’s margins have shrunk since it went all-in with freemium.  Likewise, as Korea-based Gamevil has changed from a paid download model to in-app purchases, its operating income margin has grown in the wrong direction.

Freemium Success

But it’s not a total bummer.  We have at least three success stories to review:

  1. Way back in 2009 Tapulous’ Tap Tap Revenge 3 generated 5X the revenue from in-app song packs compared to paid downloads.  (Tapulous was acquired by Disney at a 2.9 forward year revenue multiple in July 2010, a relative deal compared to the other 50+ deals in our mobile media M&A database).
  2. Last year’s Smurfberry mania was so hot it forced Apple to require UN and PW log-in before in-app purchases could be billed.
  3. And this year’s case study: Natural Motion’s CSR Racing had an $11 mil. month this summer from in-app purchases alone.

And the games business is hits-based, so timing and predicting consumer tastes and preferences are key.  In addition, word of mouth is the best app marketing available and reviewers can sink half-baked apps fast.  So don’t go to market with a weak product.

Initial Quality Pays Off

Simply, the longer your game is played, the higher your chances for in-app purchases.  For instance, of gamers who made an in-app purchase, “44% did not do so until they had interacted with the app at least ten times,” according to a January 2012 Localytics survey.  So far it appears the most popular in-app game purchases unlock new levels or in-game upgrades.

So if the key to freemium is a high-quality and addictive game that is playable for more than several hours: how deep and entertaining is your gameplay?

For more details on the economics and trends in the US Mobile App/Second Screen/Game/Music/LBS and Video markets  you can also connect with me on Linkedin. Just click on my name below.

 John Fletcher has a decade of experience analyzing media and communication markets. He is currently the mobile entertainment Analyst at SNL Kagan.

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