Freemium becomes the app monetization model to beat

The news: Numbers never lie, and the numbers underlining the growth of the freemium app revenue model are nothing short of astounding. As recently as January 2011, freemium mobile games--i.e., titles that are free to download but offer premium in-app transactions like virtual currency and virtual goods--yielded 39 percent of gaming revenues in Apple's (NASDAQ:AAPL) App Store, far behind traditional paid game downloads. But just six months later, mobile app analytics provider Flurry reported that freemium games have grown to account for 65 percent of gaming revenues, with the number of consumers spending money within free games ranging from 0.5 percent to 6 percent.

While the vast majority of smartphone owners are still not spending a dime on in-game transactions, Flurry notes that players who immerse themselves in a particular title spend far more than the 99-cent download fee the developer might have installed in lieu of pursuing the freemium approach. "Since you gave away the game for free, your 'heavy spender' group can be sizable," stated Flurry GM Games Jeferson Valadares on the firm's blog. "With games often occupying more than 75 percent of all top 100 grossing apps in the App Store, [the freemium concept is] the single most dominating business model in the mobile apps industry today."

Flurry later reported that consumable goods--defined as "something that is depleted when used," e.g. grenades in war games or fertilizer in farming simulator titles--represent 68 percent of all in-app purchases across freemium iOS and Android games. That's more than double the number of durable item purchases (like armor in role-playing games), which account for 30 percent. Personalization items--purely decorative purchases that, while durable, do not add any actual gameplay benefit--make up the remaining 2 percent.

The freemium model isn't a universal fix, of course--some mobile apps pair better with business models like ads or subscription pricing. Flurry notes that the most popular in-app purchase (consumable or otherwise) is in-game currency, which can be spent to advance gameplay in a number of different ways; in addition, games that integrate consumable items typically monetize very well. But not all games are optimized for virtual currencies or consumables of any kind--for example, city-building titles, where progression is measured by the evolution of a metropolis made up of individual buildings, benefit from an emphasis on durable items. But for developers who can successfully integrate the freemium concept into their apps, the potential is enormous.

Why it was significant: Developers are making money. Flurry reports that roughly 3.5 million consumers are now making purchases within freemium iOS and Android games, spending an average of $14 per transaction. Purchases of more than $20 generate 51 percent of in-app mobile game revenues, and more than 5 percent of all transactions exceed $50, rivaling the prices paid at retail for popular console and PC games--a powerful indicator of the growth still awaiting the mobile segment as a whole.

No less important, the freemium model demands that developers create more engaging and challenging mobile games. With hundreds of thousands of rival apps vying for consumers' time, attention and money, a title's success or failure hinges on grabbing gamers from the word go and delivering an experience that demands additional investment. Games capable of pulling that off rank among the very best that app stores have to offer.    

Freemium becomes the app monetization model to beat