In the past few years the number of free technology services has exploded. Tech industry giants such as LinkedIn, Skype, and Dropbox (to name just a few) all offer their products to consumers for free. Users love free things and Forbes predicts that “90% of app downloads this year will be of free apps.” While these apps and services may be free, there are several key ways that companies make money on them.
The first way is to offer a paid premium product for users to upgrade to once they are hooked on using the service. Free users are often subjected to advertisements, and paying for the service will remove them and/or provide additional functionality. This ends up seeming like more of an upgrade than paying for the service outright. LinkedIn, Evernote, and Pandora are a few of the companies that are successfully using this model.
Another method—popular with video games—is in-app purchases. The game is free to download and play, but additional features or levels may be unlocked by spending real money. Candy Crush Saga is making an estimated $633,000 a day from in-app purchases.
This freemium model seems to be paying off since 96% of the 100 highest grossing Android apps are free (AppAnnie). It’s no wonder that consumers seem to be moving away from “paid” apps and services. It will be interesting to watch this business model evolve and see if it expands to other types of businesses.
Have you upgraded a free app or service to a paid one? Do you think that freemium is a good business model? We would love to hear your thoughts!
-Aaron Baldwin, Designer