February 23, 2014

TANNIN: Why freemium is becoming the dominant business model for mobile apps

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by TSVI TANNIN

There are three main models for how mobile apps make money:

The main issues for the paid model are that consumers are reluctant to pay for things on the internet, and there is no recurring revenue for the developer. Not only does the developer have to show that the app is valuable enough for the consumer to jump the “do I really want this” hurdle without a demo, they also have to come up with major product revisions (think Microsoft Office) that allow them to finance continued development and maintenance of the app.

The issue with advertising is that mobile ads SUCK. Users hate them, designers hate them, developers hate them, and ironically, advertisers hate them because there aren’t any great metrics for tracking ads on mobile and it isn’t clear that people are interacting with the brand in the way advertisers want.

Pop ups are like a bandaid; a subpar ‘one-size-fits-all’ solution to creating revenue. They’re covering up the fact that the developer hasn’t figured out a way to transform whatever they’ve created into something valuable enough for the consumer to buy, or meaningful enough for a brand to invest in. The trick to hitting a homerun off the back of advertising is to provide a ton of value to the marketer while diluting the user’s experience as little as possible. There are some great examples of this like how Google allows advertisers to serve ads to people who want what they’re selling, or how Flipboard creates a dynamic way for users to interact with brands through curated magazines and beautiful full page ads. I’m not arguing that pop ups are worthless — they fueled much of the internet’s initial growth and continue to support many services today. However, companies that rely solely on advertisements are leaving money on the table.

Freemium solves the issues of paid and ad-based monetization by allowing developers to charge based on the consumer’s willingness to pay. Dropbox is a perfect example of a successful freemium business. Dropbox only has 8 million paid users, and that’s enough to power the service for the other 192 million people who don’t pay a dime. I absolutely love Dropbox but would not be willing to pay $10 a month for 100GB of storage since I don’t mind my small data cap. But if I was, for example, a professional photographer, whose livelihood revolved around keeping my thousands of pictures safe and accessible at all times, I’d pay the monthly fee in an instant. Because there is no barrier to becoming a user, apps that operate in this manner have potential for tremendous user growth and don’t have to sacrifice user experience in order to make money.

To be clear, I don’t think freemium is the right solution for all apps. There are plenty of apps, such as Duolingo, that have found innovative ways of making money without the freemium model. In an age where people are unwilling to pay $4 for an app that provides lasting value, but don’t think twice about paying the same amount for coffee, developers need to be wary of charging upfront or ruining the user experience with ads.

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