Applications and services that are free to use on a basic level but able to be upgraded through purchases are making record amounts of money.
This business model encourages people to go from a free service to a premium, paid option, earning it the title “freemium”.
As popular tech site Mashable explains, the freemium business model has been around in the software world since the 80s, “particularly in the form of a free time- or feature-limited (‘lite’) version…to promote a paid-for full version,” Mashable says.
“The model is particularly suited to software as the manufacturing cost is negligible, so – as long as significant cannibalization is avoided – little is lost by giving it away for free.
The freemium business model then became more popular after the dot-com boom, with venture capitalist Fred Wilson describing it as his favourite business model in 2006.
Wilson gives some great examples of successful freemium businesses, including cloud storage site Box.com (“you get 1gb of virtual storage for free, but you have to pay for more than that”, Flickr and Skype.
Freemium businesses like the ones above have continued to boom as more and more people use the internet for everything from work to socialising, dating and playing games.
After all, this model makes it easier for people to try out a service before deciding whether to pay for more features, so it is quick and highly competitive.
The try-then-buy or add-on component of freemium businesses has also made them some of the most lucrative in the online world.
For example, in October 2013, it was revealed that the freemium game Candy Crush makes nearly $700,000 a day, largely thanks to purchases made by players.
Similarly, users of popular music app Spotify can stream free music, but they get better access and services by paying to upgrade – and many do upgrade.
The same goes for anti-virus software – which is often free to trial or run on a basic level, but costs money to upgrade – “soft paywall” news sites like the Times.com, that are free for a few articles but then require a subscription.
Perhaps the biggest industry for freemium businesses, however, is gaming.
Candy Crush is the example of the moment, but tech industry magazine Wired has previously said that the popularity of this model means that game developers now need to utilise it or risk missing out on millions of dollars in revenue.
“Of the 50 highest-grossing apps in the Games section of the iTunes App Store, only three do not support in-app purchases,” Wired reported.
“…for iOS developers, the choice is clear: Get on board, or pass up on big potential gains.”
Have Freemium Apps Made You Spend More?
In theory, the freemium model sounds like a win-win for businesses and consumers: you get to use a basic app or service and then make an independent decision about whether or not to pay for more features, while they get more revenue from the many that undoubtedly will pay for premium access.
But are freemium businesses tempting people to spend more money? In games, for example, is a competitive streak compelling you to pay for more points or features?
Or, when it comes to something like cloud storage or anti-virus software, are the premium services outlined tempting you to sign up for more?
The potential is definitely there, and the fact that a game like Candy Crush can earn almost a million dollars a day off it’s players suggests a lot of us are happy to spend money on these services.
For families or people that share their computer with others, there is also a risk that your account could be charged when someone else is using a freemium app.
The last few years have seen many parents voice concerns after their children have racked up thousands of dollars of debt using freemium games.
In one case, reported on the Huffington Post website, a Canadian mother had to deal with a $3000 debt after her twins started playing a “free” game that allowed for in-app purchases. Similar reports have been made in Australia, the US and the UK, with some purchases on these services costing up to £70 (AU$117.57) each.
The propensity of these accidental debts is so high that the ACCC began an investigation into in-app purchases on freemium games in September 2013.
In addition, the ACCC and other agencies have started engagement with platform operators, such as Apple and Google, to improve education and protect consumers when using these apps.
“Consumers need to be aware that ‘free’ may not mean free,” ACCC Deputy Chair Delia Rickard explained at the time.
“Games and apps in the ‘free’ area of an online store may be free to download but attract costs for in-app purchases. Some of these apps are marketed for children, who do not connect the game they are playing with spending their parent’s money in the real world.”
So even if you do not use many (or any) freemium apps, if your children do then you could end up footing a huge bill for something that was downloaded for free.
There is no doubt that the freemium business model has some huge benefits for consumers, with services like Skype and Dropbox revolutionising the ways we communicate.
But it is also clear that there could be a hidden price for the success of freemium apps and services. Being aware of the risks and costs, however, should make all the difference when it comes to how and where your money is spent.
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