How to make money with a 'freemium' model

According to Nintendo CEO Satoru Iwata, the free-to-play games model "devalues" software. No surprises then that the gaming giant won't be embracing any free-to-play policy. While Nintento's long gaming history and ability to consistently innovate in a very competitive market puts it in a strong position to dictate terms, for most businesses grabbing market share increasingly depends on a free-to-entry strategy.

Iwata is right of course. If we could get away with it, we would all charge vast sums for what we produce but unfortunately the market is extremely competitive and there is a try-before-you-buy expectation on the internet and now mobile that is hard to ignore.

Offering consumers a free app or product is an increasingly essential sales and marketing tactic. The difficulty is knowing how to make money from something you've given away for nothing.

It's free but at a price

The obvious advantage of offering products for free is that you immediately remove a major barrier to entry. What you need to work out next is a pricing model that will enable you to claw back the money you would have made if you had initially charged.

With mobile apps, for example, it is possible to build-in plans for selling advertising into a free game and an upgrade path with new levels, characters and so on. In-game advertising can be lucrative if you have big download numbers.

Once users are pulled in and playing the game, the likelihood is that a small but passionate percentage can be converted to profitable, paying users. At the moment we are earning more from these upgrades than we would have if we had charged for the apps in the first place.

So the rewards can in fact be greater than the risk for a freemium app. It comes down to the strength of the idea and understanding the market into which the product will be pushed. You need to evaluate what people are prepared to pay for. For example, in one of our games, Paper Glider Bomber, players were happy to pay for extra bombs as it helped them get further in the game.

Managing risk

Of course, not all users will convert into buyers and depending on the product, conversion times vary. What this means is that revenue streams can be under serious pressure if it takes a while to get users to pay for something.

It is important to mix it up a bit. If everything is free then you could be waiting ages to see the returns, even if those returns are healthy. Cash flow will suffer if you throw out too many products for free at the same time. It needs a staggered launch approach. There also has to be a plan to throw in one or two premium paid-for products too - you may want to consider doing a "Lite" and a paid version.

The bottom line is that the risk has to be managed. Not all ideas will fly so spreading your bets makes a lot of sense. That's why we've launched 35 iPhone games in our first year - we've learnt a lot, achieved 20 million downloads and are now making seriously good profit.

Play to win

Ultimately, there are too many great businesses that have launched using the freemium model to suggest that it doesn't work or the risk is too great. Dropbox, Flikr and SurveyMonkey are just some of the better know freemium success stories.

In apps, it's a great marketing tool and for a new business in particular, it's a great way to test the market and use the power of social media and viral marketing to drive interest. There are other revenue streams too, so it just comes down to learning, adapting and refining your model to make sure that free doesn't equate to an unsustainable business model.

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