App Store Freemium analysis: In app purchases in free iPhone apps

For the past few months, a number of people have advocated for allowing in-app purchases within free iPhone apps. I was not one of those advocates. I had also assumed that Apple would stick with its “free app will always be free” principle for iPhone apps.

However, Apple has now decided to allow “in app purchases” for free iPhone apps. So “free” iPhone apps can now become “freemium” apps  and developers can sell additional content or functionality/services from within their free apps. We’ll have to wait for a few weeks or months to see the impact of this change. For now, here are my thoughts on the new policy.[Warning: Long post]

1. Piracy: Apple’s announcement explictly mentioned that the new policy will “help combat some of the problems of software piracy by allowing you to verify In App Purchases.” I agree with this assessment and think that the new policy is going to help combat piracy. In-app-purchases don’t introduce any downside with regard to combating piracy, so it is easier to call a win for the new policy on this particular issue (the other issues are more complex)

Piracy is not a problem for us (Cascade Software Corporation) because the demographic profile of our users is likely to be different from that of those who pirate apps. However, piracy is a problem for many other developers (especially games developers) and so the new policy can help increase app store revenues for developers who are hurt by piracy today.  

2. App Store clutter: Apple’s announcement also states that in-app-purchases in free apps eliminates “the need to create Lite versions of your app.” Today, many developers create a free/lite  version and a paid version of the same app. With the new policy, developers may not need to release two separate versions of their apps. So some of the clutter may be reduced. However, see below for reasons why some developers may want to continue releasing two separate versions (Incidentally, so far, Cascade Software Corporation hasn’t released any free/lite apps. All our apps are paid apps.).

The “lite” apps contribute to a fairly small fraction of the total “clutter”. Most of the clutter is caused by poor-quality, cheap-to-implement apps and by the fact that many companies release 10-100 copies of the same app with the same code-base, but different content. So I don’t expect the new policy to have a big impact on app store clutter.

3. App Review ratings: I haven’t done a rigorous study of the numbers, however, from what I’ve seen over the past year, free apps have a much lower review rating than paid apps. Lower  priced apps often tend to have a lower review rating than higher priced apps.

It is tempting to assume that there always is a correlation between the price of the app and the quality of the app, but that isn’t necessarily true and it doesn’t always explain the differences in review ratings. I’ve seen lite/free versions of apps get lower ratings than paid versions of the same app and I’ve seen apps (with higher ratings) get lower ratings after price reductions. Today, all top five grossing apps have 4-star (3 apps) or 4.5-star ratings (2 apps), four of the top 5 paid apps have 4-star (3 apps) or 4.5 star ratings (1 app), while only one of the top five free apps has 4-star rating and none have a 4.5 star rating. The #1 free app (Photoshop.com) has a 3.5 average rating, meanwhile, the #4 top grossing app (as of today) is priced at $89.99 and has an average 4-star rating (out of more than 2000 ratings). Yet a recent review in the New York Times mentioned that this app and similar high-priced apps “crashed several times”.

My sense is that some users are more likely to download a free app without reading the description of the app. Partly, because of this, they are more likely to be unhappy with the app once they try it out (and these users are more likely to rate the app, compared to happy users). Users are also more likely to delete free apps from the iPhones and this is more likely to lead to a low review rating. On the other hand, the user of a paid app (and especially a higher-priced paid app) is more likely to have read the app description and is more likely to be someone in the app’s target market. So paid apps (and particularly higher-priced apps) are likely to get higher ratings. Freemium apps are likely to get lower ratings than they would have gotten as paid apps.

4. App Rankings: It is unclear on whether Apple will tweak its app rankings as a result of the new policy. Until now, the “top free apps” rankings and “top paid apps” rankings were both easy to understand. However, now the “free apps” listings will include freemium apps as well. A couple of months ago, our Economy app was #1 paid app in the “Finance” category. However, the Economy app has a niche audience and if it had been a freemium app, I’m not sure if the app could have become the #1 free Finance app.

I’m also guessing that some users look more closely at the “paid apps” listings because of the perception that “free apps” aren’t good quality apps. This may be another reason for some developers to release their apps in the “paid apps” section. (Note that I’m mentioning the “perception”, but -in this post-, I’m neither agreeing nor disagreeing with that perception)

Ultimately, unless Apple changes the current ranking system or introduces a new ranking system for freemium apps, it is possible that many developers may prefer to keep their apps in the “paid” category and release a seperate lite/free version of their app.

5. The old “race to the bottom”: Over the past year,a number of developers have talked about the race to the bottom and how most developers go with the $0.99 price for their apps because of (real or imagined) competitive pressures.

It is unclear on as to how the new policy will impact the race to the bottom. On one hand, “free” could become the new “$0.99” and many developers may release free(mium) apps instead of paid apps . On the other hand, some developers may feel liberated to charge a higher (and fair) price (through in-app- purchase) if users have already previewed the free portion of their app. (Note that I’m talking about pricing trends, but not discussing whether the $0.99 pricing strategy is good or bad. )  

6. Value to users: The most important impact may be the value that users get (or lose) because of the new policy. 

I’d like to believe that users will get more value out of the new policy because they’ll be able to preview the free portion of the app, gauge its quality and then decide whether to pay more for additional functionality. If that happens, it will be good for users and also for developers (because developers will get more downloads and it will also be easier to set a fair price for their apps without the concern that users may not consider buying an expensive app). On the other hand, some of the potential negatives – discussed earlier – (and the fact that users may expect free apps to be truly free) may result in confused users and lower app sales.

With the old policy, free apps could include links to their corresponding “paid apps”. So one can make the case that the new policy will not have a big impact on upsell possibilities. However, I think that more developers will use the upsell approach because of the new policy and users may prefer to make a purchase without exiting the app. Overall, I’m slightly leaning towards the thought that the new policy may have a neutral or slightly positive impact. 

For me, the introduction of in-app-purchases was one of the most interesting things about the 3.0 OS.  (V2 of the Economy app – which will be released to Apple this month – includes some new “free” features and it also includes “in-app purchasable” premium features. I’ll write about this in a new post after the release). So it will be interesting to see how the new policy of in-app-purchases-for-free-apps impacts the app store.

[UPDATE: Dec 21, 2009] It is now more than two months since Apple introduced in-app-purchases for free iPhone apps. At the moment, only one of the top 100 grossing apps is a free(mium) app. That app/game is ranked 91st. When I checked a few times last month, there was only free(mium) app in the top 100 grossing apps. I think that app/game got into the top 10 grossing-apps list and stayed there briefly.

However, overall, for now, current data does seem to indicate that my original assessment (about the new freemium policy not having a big impact) was correct. Just around 1% of the top 100 grossing apps seem to be free/freemium apps.

3 Responses to App Store Freemium analysis: In app purchases in free iPhone apps

  1. Akhlaq K. says:

    Great post Ram! Free apps tend to attract the most casual user and the rating may get hit due to insufficient value of the app for every user. The new Apple policy certainly gives iPhone developers more options, but a freemium version may not result in increased revenue for every app due to potential lower ratings.

    • Ram says:

      yes, as elaborated in the post, freemium apps are likely to get lower ratings than paid apps.
      One other point to keep in mind is that the ratings may not necessarily matter too much from a free app-download perspective. In the past, I’ve seen #1 free apps with an average rating 2.5 rating. Today, the #4 free has a 2.5 rating and some other top 25 free apps have a 2.0 or 2.5 star rating.

      As Ariely’s study showed, the Zero price/cost “is an emotional hot button”.
      Just like people download free apps without bothering to read the app description (and then rate the app poorly), they may also download freemium apps without bothering about the average rating.
      Once they’ve tried out the freemium version, users are more likely to base their purchase decisions based primarily on their own experience with the app.

  2. Jon Bonnick says:

    There is one more benefit I recently became aware of following a recent call from an App store reviewer from Apple… each app is allocated randomly so ‘Lite’ and ‘Full’ versions of the same app are usually reviewed by different people. In my case this has led to inconsistencies as reviewers interpret the guidelines differently. If I make the change from ‘lite’+’full’ to freemium I get greater consistency of review AND I lighten the load on the App store reviewing process…

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