If you’re an iPhone app developer, free versus paid can be a difficult decision. Notwithstanding widely-publicized success stories, most free apps don’t make any money for their developers.

One solution: use a free, watered-down version of your app as promotion for a paid version. The freemium model does work but it’s hardly perfect. The problem: Apple doesn’t offer a way for app users to easily upgrade from a free version to a paid version. Developers have to create two different apps and app users have to install both.

Until now that is. Yesterday, Apple sent an email to developers announcing that the in-app purchasing functionality that is currently available within paid apps will be available in free apps:

In App Purchase is being rapidly adopted by developers in their paid apps. Now you can use In App Purchase in your free apps to sell content, subscriptions, and digital services.

You can also simplify your development by creating a single version of your app that uses In App Purchase to unlock additional functionality, eliminating the need to create Lite versions of your app. Using In App Purchase in your app can also help combat some of the problems of software piracy by allowing you to verify In App Purchases.

This is big news for developers. With in-app purchasing, the number of ways to effectively employ a freemium model with iPhone apps increases significantly. In my opinion, this could pave the way for a second iPhone gold rush.

A couple of reasons:

  • Savvy developers can now create more compelling free apps. There possibilities for in-app purchases are virtually unlimited. But because in-app purchases were only available with paid apps, the market for in-app purchases was far smaller than it could be. After all, not everyone with an iPhone is willing to purchase paid apps and there are plenty of developers who would be more than happy to employ a model in which they give their apps away for free but sell additional content and functionality in-app. Now that developers can create free apps that offer additional content ad functionality for purchase in-app, expect the market for in-app purchases to grow exponentially.
  • Upselling is going to be far easier. Getting somebody to who has downloaded the free version of your app to go through the process of purchasing and downloading the paid version can be tough. The need to purchase and download a completely separate app creates a lot of friction. Now that developers can upsell paid content and functionality and the app user won’t have to purchase and download a separate app, upselling will be easier and the barrier to completing the sale goes down significantly. The best developers will be able to develop user experiences that drive impulse in-app purchases.

In short, this move by Apple was a no-brainer and I expect it to boost the amount of opportunity in the App Store economy. Of course, there will no doubt be fierce competition as users are bombarded with free apps that try to upsell them on paid content and functionality but the reduction in friction should be welcome by iPhone app developers.

Photo credit: katielips via Flickr.