What’s the best way for an iPhone game developer to make money in the App Store? Answer: they should give away their game for free. According to data collected by analytics firm Flurry, games that use a freemium revenue model take in twice as much revenue as those that rely on an upfront cost.
The first half of 2011 has seen the App Store’s Top 10 Grossing Apps list list slowly become dominated by free social games like Smurf Village, Tap Pet Hotel, and Zynga Poker. Just a few months ago, popular $0.99 paid-app hits like Angry Birds and Cut the Rope used to rule the top 10. In fact, in January 2011, paid apps made 61% of App Store game revenue compared with 31% by freemium games. Now that number has reversed, with freemium games raking in 65% of all game revenue compared with paid’s 35%.
According to Flurry, only 0.5% to 6.0% of gamers actually spend money on freemium games, depending on the game. What developers hope for are known as “whales”—heavy spenders who can sometimes drop hundreds of dollars. In an article titled “Zynga’s Quest for the Big-Spending Whales,” Businessweek noted a gamer spent $75,000 in one year on a single freemium game.
Freemium game revenue may not always be on the up-and-up. Apple recently had to change the way its in-app purchases work after numerous reports of children running up hundreds of dollars in charges on their parent’s credit cards by “accidentally” buying Smurfberries in the popular Smurf Village iPhone game. A single purchase of Smurfberries went for as much as $99, which led some to speculate developers were deliberately taking advantage of the kids’ trigger-happy fingers. The trend even led to a FTC investigation and ultimately a class-action lawsuit.
Ultimately, Apple was forced to tweak the way in-app purchases are made. Now, in-app purchases require you to enter a password after you initially download a game. 15 minutes after making a purchase, you must reenter your password.
Traditional game developers are taking note of the freemium revenue model. World of Warcraft, one of the world’s most popular online games, recently got rid of its 14-day free trial in favor of allowing gamers to play as much as they want up to level 20. If gamers want to play beyond that, they must pay a monthly fee starting at $14.99 a month.
Flurry notes two advantages of the freemium model for game developers: first, more people are likely to try out a free game, and second, players can spend more money depending on their level of engagement with the game. Where someone buying Angry Birds might only spend the initial $0.99, a freemium model could land players who spend much more over time.