Wednesday, March 6, 2013

The Pros and Cons of Freemium

"Freemium games . . . are an almost unique case where companies can price-discriminate down to the level of the individual consumer." 

This is the view of Ben Holmes, who recently wrote a piece for the Wall Street Journal about the economics of freemium games. His point is that customers who try a game (or another product) without any risk or outlay can then decide what extras, if any, they're willing to buy. This means individual customers determine how much they want to invest in special characters or props or levels, after trying the game for free. Many will decide not to pay anything, but those who do want to continue will pay willingly for extras because they've discovered the value for themselves.

This freemium approach to pricing is paying off for some marketers. Evernote (which makes software for organizing notes and data) said in mid-2012 that consumer acceptance of paying for the premium version takes time. After the first year, only 1% of its customers were converting from the free version to a paid version. After the second year, however, 12% were using a paid version.
Fast-forward to 2013: Evernote now says 6% of customers are converting to the premium version. In other words, as it attracts more users and builds buzz, more people recognize the value and pay for the upgrade. As Evernote's CEO says: "The easiest way to get one million people paying is to get one billion people using."

Not everyone favors freemium. "The freemium business model certainly has its place, but getting the conversation about money out of the way up front allows your company to focus on user experience," writes Andrew Flachner in a different (also recent) Wall Street Journal piece. He says that customers who perceive the value from day one will be willing to open their wallets and, as a result, will be more committed to using the product.

When USA Today reviewed Real Racing 3, a freemium game from Electronic Arts, it complained about being "nickel-and-dimed" with "a freemium model that makes gamers cough up money often or wait it out." Here, the point is that a really good game should be able to attract paying customers rather than frustrating users with intermittent payment options.

Will freemium become more popular as a pricing strategy?

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