The Business of App Design
Monthly Articles on App Design, Marketing, and Business

Paid, Paymium or Freemium

January 27, 2014 / Business

Choosing the right pricing strategy for any new app is hard, but if you choose the wrong pricing model, it can cost you thousands of dollars in lost revenue. In this article I'm going to cover the three main revenue models on the App Store and explain how to make sure you pick the one that's right for your app.

Lets start by looking at paid apps and along the way I’ll try to dispel the myth that paid apps are dead and that this type of revenue model is no longer worth considering.

Paid

Launching as a paid app is still one of the most straightforward and safest ways to enter the App Store. Regardless of what you may have heard or read, the paid app market is not dead. As long as you’re smart with your marketing and price carefully you can make a great return on your initial investment.

Paid apps work exceptionally well if you have an established brand or large following of loyal customers ready to buy your app on day one. Not to mention the fact that a paid app has the advantage of being able to generate publicity when it goes on sale or switches to free for a limited time.

While the paid app market is not dead, it has been in decline for the last 18 months. Paid apps now account for 36% of apps on the App Store, and Distimo reports that they only generate 4% of total App Store revenue. You shouldn’t let this put you off as you can still earn a decent level of income with the right app. I asked Ken Yarmosh from savvy apps about choosing between paid and freemium:

“Freemium is the general consumer expectation and proven model for entertainment, games, lifestyle, and content-focused applications. The data shows that paid apps—often complemented with in-app purchases—still dominate in business, productivity, and utility apps. Despite what app developers have hoped for and tried, unless you receive venture funding, I haven’t seen freemium work for the second grouping of apps.” - Ken Yarmosh

As Ken rightly points out freemium is probably best left for games and entertainment apps for the time being. The good news is that paid apps still capture the largest portion of revenue share in the Business, Education, Productivity and Navigation categories of the App Store. If your apps fall into one of these then paid is probably still the best option. I chatted with Ryan Cash from Snowman and asked him if he thought paid was still a viable option:

“I actually think Paid apps are going to make a big comeback. That’s not to say they’ll ever generate more revenue than Freemium apps (they won’t), however people are slowly learning that ”Free“ often means ”this is going to get expensive“ (a la Candy Crush). People are proving with their wallets that they’ll pay for Premium apps.” - Ryan Cash

It’s not just Ryan that thinks paid apps are making a bit of a comeback, I also spoke with Kepa Auwae from RocketCat Games. He also confirmed that he had the same feeling that we’re possibly about to see an uptick in premium paid titles:

“If anything paid apps seem to be getting stronger. It looks like people are more willing to spend $5 for a game, which even a year ago seemed like some sort of impossible dream for App Store developers. I’m not sure what the cause of this is, maybe it’s a small rising sentiment against games with IAP.” - Kepa Auwae

I really hope this is the case and that paid apps will regain a little more of the revenue share in 2014. I can honestly say that some of the best apps and games I’ve download on the App Store have been in the paid category. I’d strongly recommend that you think twice before making your next app freemium; in a lot of scenarios it will earn more revenue by being a paid app instead.

Freemium

Time and time again I’ve seen developers go straight to freemium and make pretty much nothing at launch because they give away too much or too little. It’s hard to tune your app or game perfectly for the freemium market. Unless you have some experience or know exactly what you’re doing, you shouldn’t consider launching your next app as freemium. I define freemium as an app that is provided for free, but revenue is generated by charging for extra features, virtual goods, and most commonly, in-game currency.

92% of revenue on the App Store is generated by freemium apps, yet they account for just 11% of the apps on the App Store. You’d be forgiven for thinking the number of freemium titles would be much higher than this due to the amount of press attention they receive.

I spoke with Kepa again about his thought on going freemium as I knew RocketCat Games had to learn the hard way when they released the excellent Punch Quest back in 2013:

“With Free, you really need huge download numbers to make money from it. It also needs constant updates and support to maintain interest, and I still think many free+IAP methods are detrimental to game design.” - Kepa Auwae

Some of the most popular freemium titles on the App Store are making well over half a million dollars a day, but the companies behind these games have been pumping out freemium titles and have had their own fair share of flops before stumbling upon a hit. They have huge amounts of cash coming in monthly so they can afford to have teams of dedicated people analysing in-game metrics, looking at retention rates and working tirelessly on ways to attract new users.

As a smaller indie developer gaining any serious long lasting traction with a freemium title is extremely hard. If you’re going to try launching a freemium title, you should proceed with extreme caution.

Paymium

Paymium is still relatively unknown and gets pretty much no press coverage compared to freemium. Paymium is going to become increasingly more widespread over the coming year, and incase you’re wondering exactly what paymium is, here’s my definition:

Paymium: An app that is paid for up-front, with additional revenue being generated by charging for extra features via In-App Purchase.

As with freemium this type of model can work perfectly well in place of yearly paid upgrades as you can add new features overtime with IAP to continue to earn revenue from your existing customers.

Paymium apps currently only account for 2% of apps on the App Store, yet they generate the same amount of revenue as paid apps. I believe now is a good time for developers to start experimenting more with this revenue model, I know It’s something we’ll be doing with a few of our apps at Realmac Software over the coming months.

What business model should you choose?

Whatever you do, make sure you plan ahead for your pricing strategy. Do it as early as possible. Don’t try and switch from paid to freemium at the last minute. I spoke with David Barnard from Contrast, and asked him to share his thoughts on going freemium:

“Paper from FiftyThree is a great example of doing freemium well. The app is functional without paying a dime, but users initially only get the pen tool. Anyone who likes the app and wants to use it as intended is compelled to purchase additional tools. Not all apps can accommodate that sort of freemium strategy, and many potentially great apps have been ruined in trying to contort the entire app around the monetization strategy rather than focusing on just building a great app.” - David Barnard

As David suggests, the best freemium titles are the ones that were designed to take advantage of it or are a natural fit. Just don’t try and force a particular payment model into your app and you’ll do just fine.

Most of the time I’d advise launching your app or game in the paid category. By doing this it makes it much less risky and gives you a higher chance of recouping your development costs up front. It also provides you with a safe path to freemium (should that be your goal). You can add IAP to your paid app, and continually tweak the experience until you’re happy with your conversion rates. Then it’s just a matter of switching the price tier to free.

If you go the paid route, then you should release your app with introductory pricing. If your target price is $4.99, then go with $2.99 or $1.99 at launch. Don’t feel like you have to start your introductory pricing at 99¢ (we made this mistake with Analog Camera). If you think you have a lot of good press coverage lined up and Apple have requested promotional artwork then you should definitely price your app above 99¢ to maximise launch revenue.

Pricing is a huge topic and impossible to cover in just one article, but I hope this goes some way in helping you price your next app and maximising its potential revenue. The most important thing to remember is to stay focused and work hard on producing a truly great app, choose your business model carefully then market the hell out of it.

Good luck, and if you have any questions on pricing or would like feedback on your next app, feel free to get in touch.

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