How do free games and apps make money?

And while many people do never spend a single cent in the games, the small proportion of people who do end up paying money often end up spending significantly more than if the game had been free to start with. According to the video above, only 1.9% of players actually make in-app purchases, but they spend so much they are classified in the same way Las Vegas calls their most valuable players: Whales.

You could illustrate a typical freemium experience like this:

It’s all down to the fact that the games are designed with lessons from behavioral psychology in mind.

While people can play almost all of these games from start to finish without paying anything, there are often restriction built into the game which are designed to cause a degree of limitation and frustration to progress for free players. The most common of these are:

• A limited number of moves which can be done per day
• A countdown timer which makes you have to wait for your actions to complete (often for several hours or even a day)
• Seeing premium items which don’t offer a gameplay benefit but change the look of a character, and can only be unlocked by spending credits

Almost all of these games use a “game credit” or currency, like gems, gold coins, stars, or hearts which you can spend to unlock items or remove frustrating limits.

And in order to purchase these credits, you pay using your digital wallet, paypal or credit card. These will often come in “bundles” of numbers which aren’t easily divisible in your head, like 12, 30, 75 or 150. And this weird exchange rate tricks your brain into making it seem like you’re spending less each time you use these credits.

This means that if you pay $29.99 for a pack of 75 gems, and it costs 4 gems to unlock a virtual outfit, how much did that item actually cost you in real money? It’s too hard for your brain to compute, and so it almost isn’t translated back to a real dollar amount, feeling instead like you aren’t spending real money. It’s similar to when you travel and are unsure of how much you are spending in a foreign currency.

Previous studies have shown that people will be more likely to spend money on an item using a credit card than with cash, because with cash you physically see and feel the money leaving you and you have a complete understanding of how much it is. Even with a credit card, it feels further removed.

Why Freemium isn’t all bad

If you think I’m painting freemium games in a negative light, you’d be wrong. The business model has actually helped

The business model has actually helped numerous small companies make the most of the maturing app marketplaces, especially with increasing broadband penetration, more efficient payment gateways and digital wallets. It enables smaller companies to have a more direct path to consumers and build long-term relationships with their customers.

The best examples of this, and where freemium is becoming the dominant business model is in video games. Historically, in order to reach the largest number of consumers you needed to have your game published through a mega-publisher like EA, Activision or Ubisoft, who could print the disks, put a marketing budget behind them and finance the production. But this often meant the creators giving up a larger degree of creative freedom.

Now, a smaller studio can release a game independently and get payment directly from the people using it over a longer period of time. The studio also needs to continuously improve and add value to the game, since if people stop using it, the studio will stop earning. So there is a mutually beneficial relationship of the games improving in quality over time, and a sustainable revenue stream for the studio while they maintain creative control.

I also think that this business model allows the market to regulate itself, with apps and games that are deliberately trying to extort their players quickly being overtaken by those which are actually designed to give a great experience to players who will never spend a single dollar in the game (the vast majority of people), and provide an actual premium experience to those who are willing to pay for it.

It’s something I advise all of my innovation consulting clients to do:

Make sure your baseline offering is already great, and then think of ways you could add even more value on top of that

But for now, I hope my friends don’t get injured trying to catch that next rare Pikachu near a cliff.

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