Premium vs Freemium vs Subscriptions
Choosing a business model for your mobile app
(X-Posted from the Lattice Labs blog)
According to a report by Distimo, freemium accounted for 71% of Apple AppStore revenues in the US in 2013, up from somewhere around 50% in 2012. In Asia, freemium was 90% of App Store revenues.
Is freemium always the most optimal? What factors should you consider when choosing a pricing strategy?
Premium has very limited effectiveness today
With premium apps, users pay upfront. But the amount each user pays is fixed, regardless of how much utility each gets. Since users have come to expect apps in the $2 — $5 range (a few niche apps can charge $10 or more) there is no way to get higher ARPU.
In general, premium works in the following scenarios:
1. There is already a strong demand for your app — niche areas are good candidates here.
2. And there is not a lot of competition that will almost certainly drive the price down.
3. You have a strong brand and can establish trust with users so that they are willing to pay even before they download the app.
4. You don’t care much about reach — which will be much smaller because of the pay-gate into your app.
5. There are no ongoing feature or content costs that can drive up the average cost of of supporting a user to levels higher than what the user paid for the app.
Freemium helped create those million-dollars-per-day games
Freemium was popularized by casual games in Japan and Korea and has quickly become the winning model in mobile apps. It works really well in the following situations:
1. Competition from other apps in the App Store makes sure that users have other cheaper or free options (this has been the primary reason for most apps going freemium).
2. Reach (downloads) is important. You need large amount of users quickly to create network effects. For example, to drive virality.
3. When there are a small % of power users willing to pay significantly more than the other light users. The pay-as-you-go model facilitates this. Hard core users can drive as much as 50x revenue as the remaining users.
The mobile app economy has reached a point today where all of the above usually hold true, and so freemium is often the answer. Freemium does require some operational effort in managing your funnel, converting free users to paying users, and driving repeat purchases.
Subscriptions: the Holy Grail?
A subscription provides a guarantee of continued revenue and hence, businesses with subscription revenues tend to be considered more valuable.
The subscription price-tag is usually discounted from than the corresponding one-time purchase to incentivize the user into a longer term commitment. For example, Amazon gives you a ~15% discount to “subscribe” to certain household items.
But the subscription model does have a few drawbacks:
1. Like premium, there is a single price for all users, regardless of how much they use. This leaves money on the table as hardcore users who would have paid more now cap out at the fixed subscription price. Also, at times the subscription price may be too high for some light users who then do not sign up.
2. With tiered subscriptions you can set different prices, but it still creates ceilings on both price and consumption. Netflix has a 1 DVD plan for $8, 2 for $12, all the way up to 8 for $44. The lost opportunity? (a) A user can only do 8 DVDs. There may be a few subscribers who want much more. (b) A $44 price tag for DVD rental has a sticker shock. It is easier to charge $5.50 eight times than to charge $44 one time.
So when should you use subscriptions? Whenever you can — BUT it is important to make sure you are not leaving money on the table just to get a subscription commitment from a customer.
The ideal pricing strategy
At the risk of over-generalizing, a combination of freemium + subscription would be ideal for most apps: the app being free, with in-app purchases, and subscriptions being available for the regular buyers.
Not everything being sold lends itself to subscriptions. Impulse purchases typically don’t. For example, a power-up that helps you cross a level in a game, or an Instagram filter that makes this photo of yours look exceptional. In such cases, it is best to start with a freemium model and then offer subscriptions to your regular customers to drive purchases further. Content (magazines, music streaming, movie streaming) has more commonly been a subscription business. For these, it is a good idea to start with the accepted subscription model, and to remove any ceiling on purchases by offering more content that can be purchased in-app in addition to the subscription.
The mobile app economy is huge and growing even bigger. Get all the value you can out of it for your app.
