With the recent blockbuster success of Pokemon Go, people are asking how a free game has managed to pull in more than $160 million in its first month.
Welcome to the “freemium” business model, which over the past decade has quietly completely changed entire industries.
In the video above, Vox outlines the simple mechanics of how an app which you don’t have to pay for can make you pay real money for virtual goods (often called in app purchases or microtransactions).
It’s all about one of the greatest business model innovations of the past few decades, called a “freemium” service.
“Freemium” products are free to get started with, but with premium additions you can purchase to improve your experience
In fact, I even found an example of a 15-year old who spent $46,000 in a free-to-play game.
Fortunately, this doesn’t happen as often anymore, especially as smartphone makers Apple and Google and the industry have put in place new regulations to make it much clearer that apps may not be completely free, and allowing parents to turn off the in app purchasing functionality.
The way Freemium works
Even though children aren’t running up huge bills anymore, the business model is only growing stronger and more dominant.
Many of the world’s most popular games use this model, including arguably the most played game in the world, League of Legends, which made more than $1 billion last year despite being free to play. The producer of smash hit “Clash of Clans” made $2.6 billion in 2015, with $930 million profit. And as much as I hate to admit it, the Kim Kardashian: Hollywood game has allegedly made over $100 million