Free or not too FreE
By Charles Brooks
Your townhouse has just been ransacked by barbarians, and everything you worked so hard to create has been destroyed. You now are presented with two options. Do you wait 24 hours to extract your revenge, or do you pay a mere $5 fee and strike back immediately. Welcome to the world of freemium games. In economics we learn that there is no such thing as a free meal. We understand that everything has a cost, whether it be a given price or a less obvious, implicit price. The relatively new and rapidly growing phenomenon of “freemium” games is showing the world how incredibly effective this business model has been. In 2013, the game developer, Supercell, made $892 million from Clash of Clans and another strategy-based farming game, Hay Day. In 2014, Supercell made $1.8 billion off of Clash of Clans alone. The fact that a game listed as “free” is able to generate almost $2 billion in one year is not only ironic, but ingenious.
Freemium is a combination of free and premium, and is a pricing strategy that provides a product with no initial cost, but charges a premium fee for specialized features and content. In 2015 it feels as though we’ve all heard names of Clash of Clans, Game of War, and Candy Crush; the list is endless. In 2014 freemium games dominated the iPhone and iPad game stores. The top ten most downloaded apps were all freemium games, as were the top ten highest-grossing games–the highest grossing game being Game of War. The freemium game apps have completely blown paid-apps out of the water. The question remains though: why does the freemium business model work so well?
The freemium model is unique in the way that it allows a company to exercise price discrimination down to each individual consumer. The lack of an initial price removes the main deterrent for a person to at least try a freemium game. Then, it is completely up to the customer to decide how much they are willing to pay for their gaming experience. The incentive to spend money increases as a player invests more time in his or her experience. If a person has spent a significant amount of time playing the game, the marginal benefit produced by a $5 dollar in-game purchase is increased in the mind of the consumer. This strategy allows a company to generate revenue while simultaneously allowing its customers to derive their own level of utility.
In 2014, 76% of all iPhone revenue came from in-app purchases. The most popular Super Bowl commercial of 2015 was for the freemium game, Clash of Clans, garnering over 50 million views on YouTube. Considering the cost of a thirty-second commercial during the Super Bowl is about $4.5 million, these numbers reveal just how massive freemium companies’ marketing budgets have become. The freemium game industry was heavily built on a foundation of word of mouth, however, and it now expands into these alternative measures. Even game players that spend no money are vital to the business model by spreading awareness and increasing its ranking in the app-stores.
The freemium model is similar to many industries in that it depends on the upper tier of their consumers to generate the majority of their revenue. The company SWRVE released a monetization report on the freemium game industry for the month of January 2014 which gives an analysis of the freemium business model, and its consumers’ spending trends. Only 1.5% of active players that were surveyed actually made an in-app purchase in January, and the top 10% of paying players contributed 50% of that month’s total revenue. An even more concentrated look shows that 13% of the total revenue came from just the top 1% of payers. These freemium based companies do not rely on large purchases, however. 67% of their total revenue came from purchases ranging from 1 to 5 dollars. This implies that the majority of these companies’ revenue generation relies on the habitual purchases made by their most loyal customers.
We’ve seen basic versions of the Freemium pricing model used in services such as Skype and Pandora, and can now see the evolution of this business model as it invades the gaming market. The overall effectiveness of this pricing strategy will cause further expansion into different sectors of the business world. Freemium is here not only to stay, but to continue to adapt to the consumer. So just remember, in 2015, “freemium” in no way means “free.”