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Study Finds Freemium Model Generates Big App Store Revenue

  
  
  
iStock 000000385270XSmallstudy by Distimo, an analysis firm that watches the AppStore market found that a strategy of providing free or low-cost apps, then charging for fuller functionality accounted for significant income for developers -- and developers may want to pay attention to that.

In fact, the Distimo study found that in-app purchases -- defined as upgrades to the free or low-cost app -- accounted for an astonishing 72 percent of Apple iphone app store revenue in July, up from 28 percent just a year ago.  

That could by why Distimo warns developers not to overprice apps or risk turning off buyers before they try your app. And it's not just iOS that's seeing this boom. Android introduced in-app purchases just last Spring and they already account for 68 percent of the revenue for the 25 top grossing Android apps.

The big lesson here is that if you offer something free, people are more likely to try it, and if people like the app, this research is proving that people will pay to see more. As developers (or any content producer for that matter), you make an investment to learn to use the app development tools, you spend time developing your app, and it makes sense to want to make some of that investment back by charging for the app

But like much of Internet economics, it's not the best path to making money. Instead, give it away or charge a nominal amount like .99 and then wait. If your work is good enough, people will buy it.

Companies like Box.net, which is holding its first Boxworks conference this week is a poster child for the successful freemium model. While Box began as web-based app, over time it has built support for a number of mobile applications including iOS, Android and HTML5 versions of the app.

Box has built the company on the freemium model giving away a free version of the service, while selling an enterprise-level pay version with increased functionality and security that larger organizations demand. And as I wrote in an article on Internet Evolution last year, Box CEO Aaron Levie originally charged for the service, but he and his partner quickly realized if they wanted the company to grow quickly they had to do things a little differently.

""If you want scale, you need low friction. Happy customers will pay you. If we continued to offer value, [we figured] some percentage [of customers] would be paying," Of course, Levie added, in order for freemium to work, you have to have a good product in the first place."

The key message there from Levie is the idea of making the transaction low friction and you don't get much less friction than free. The other key point is that the app has to capture your audience. Free isn't enough if the app isn't good enough and there isn't motivation to want that additional functionality you provide for that fee.

While it might seem counter-intutitive to give away your work, the fact is that this research has shown that free really can drive revenue, especially when it comes to apps -- so long as your product is good enough, that is, for people to want to see more.
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