The 'Freemium' model

The "Freemium" business model for apps - in which apps offer some services for free, incentivizing users to try an app before paying for additional features is becoming more and more common in the top grossing apps on the various mobile app stores. The primary source of income for many freemium apps is in-app downloads.

A recent study by Flurry found that mobile phone games which are free to download, are actually making more money than those that charge.

Many companies let you download apps for free, rather than asking $0.99 to download a game you have never tried. when you become an passionate player, they you into paying quite a bit more than $0.99 for in-game virtual goodies like farm crops or power boosters. In June 2011, among the top 100 games in the iTunes store, free games generated almost twice as much revenue as games that charged to download.

The Freemium Business Model

The word “freemium” may be less than four years old, but the business model it describes – offering basic service access for free and then charging for advanced features – has been around for decades and is utilized by some of the Web’s most successful companies.

The working: Everyone gets your product or service for free, forever. But those customers who really like it, and find most value in it, will have a strong temptation to upgrade to a “premium” service which has lots of additional goodies and come at a price. It is a strategy for pricing by customer segmentation. It also requires a lot of insight into your customers and how they use your product to know what you want to giv for free to entice your user yet ensure you have some core features available for the paid versions.

Examples

Pandora - Since its launch in 2005, the company known for giving away “free” music to users has expanded to 20 million unique visitors. In 2009, it brought in $50 million in revenue – all the while as a freemium business

Skype- The popular internet calling service is free for those millions of customers who use it just to call or videochat between two computers anywhere in the world. Skype only charges if you want to use it to call a landline phone.

Some more examples include Flickr, Dropbox, Evernote, Spotify and recently announced Apple's iCloud music service.

With a high conversion rate and its ability to create an incredibly loyal audience, freemium has become a cornerstone of many successful startups and is definitely worth considering before you decide you pricing and go-to market strategy. But beware, not all Freemium products actually break even.