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The freemium model is in the ascendancy when it comes to apps.

Paid apps peaked in 2013 according to Jon Reynolds, CEO of SwiftKey. SwiftKey provides an app bringing smart prediction technology to your mobile keyboard and, indeed, has itself gone down the freemium route.

The app used to cost $4 and was consistently in the paid charts, now it's free to download, with in-app purchases available.

So, what are the reasons for and consequences of the rise of freemium apps?

Penetration

Penetration is one of the 4Ps of mobile. The percentage of people boasting a smartphone is large enough to provide free infrastructure for businesses such as Uber. Penetration also makes the freemium model possible.

Jon talked (at a Quartz and General Assembly event during London Tech Week) about how SmartKey began as a paid app, chiefly to prove the value of the product. What would users pay for this app? How valuable a tool was it?

With smartphone ownership more than 50% in the US, and not far away in the UK, the sheer scale of adoption possible in 2014 creates the opportunity for other business models.

The trend from the East for stickers and customising mobile (via in-app purchases) is one that may or may not take off to the same heights in the West.

Even if it doesn't, the number of people who pay to personalise SwiftKey (by buying a new virtual keyboard) will be a percentage of a much larger number of users.

swiftkey

The curve of customer love

With big numbers of potential customers provided by smartphone penetration, freemium comes into its own.

This is because in-app purchases allow your most enthusiastic customers to spend a lot more than $4. It also allows those that wouldn't have paid $4 to perhaps pay $2.99 for an upgrade.

Most customers will fall into the green section under the curve of user numebrs against price paid (shown below). Essentially, the big spenders are in the long tail, and freemium allows for this tail.

long tail

Try before you buy

The obvious benefit of freemium. If you think your app is really good, let people use it and then sell them something else.

The easiest way to win a customer is not on faith but on action.

In-app advertising

Here's where scale comes into play once more. Mobile advertising is a key subsidy for all those beloved but unprofitable free downloaders. In the last year, mobile advertising has taken off.

By 2015, it's predicted to account for more than radio, out-of-home and magazine ads, with digital as a whole taking around 8% of global ad spend (and mobile representing 19% of digital ad spend).

Advertising from Google, Facebook and Twitter accounts for 70% of mobile ad spend, but in-app display networks, now often bought through programmatic buying are taking off.

The time smartphone users spend in apps is thought to be around 85%, so advertising in apps is proving lucrative.

The marketing cycle

More people are now at home with mobile marketing. Well-oiled machines exist at the intersection of mobile and the web. SEO, mobile PPC, app promotion through social and display advertising, push notifications to encourage engagement, email to encourage web browsing of mobile optimised content.

Free apps allow for another marketing channel to non-paying subscribers. The more comfortable marketers are with marketing across channels, the better value can be attributed to free users in the bigger picture for companies that have a range of products.

Spotify

There have always been free apps on mobile. Mobile users are accustomed to getting apps for free.

But Spotify might be the key service that solidified freemium. It might not be making money yet, but it sure sells a lot of advertising. And with so much music for free, uninterrupted at a modest fee, the user is increasingly feeling entitled to services for free, or at least their vanilla versions.

Check out the numbers for Spotify.

                     spotify logo

India and emerging markets

Emerging markets are generally big on mobile, and India is massive. To attain a big initial market share in emerging markets, apps will have to be free. This is obvious enough, but there's also the fact that devices like the Aakash tablet are being developed for use in India.

The tablet's production and connectivity is subsidised by advertising and content, which allows a very cheap price point.

If price points remain low for a while to come, apps for Android will be freemium or bust.

aakash tablet

Ben Davis

Published 18 June, 2014 by Ben Davis @ Econsultancy

Ben Davis is a senior writer at Econsultancy. He lives in Manchester, England. You can contact him at ben.davis@econsultancy.com, follow at @herrhuld or connect via LinkedIn.

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Comments (1)

Pete Austin

Pete Austin, CINO at Fresh Relevance

Must-read from Marco, "The market has shown that free apps will be downloaded at least an order of magnitude more than paid-up-front apps, and smart use of in-app purchase in a free app is likely to make more money. Over time, this trend has only become stronger and more clear."
http://www.marco.org/2013/09/28/underscore-price-dynamics

about 2 years ago

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