The Catch-22 of Freemium Models (& How to Make Real Profit off Your App)

The freemium app model is an exceptionally popular one, focusing on offering a free version of an app to reel users in and then encouraging them to upgrade to access additional features.

There is, however, a crucial catch-22 to Freemium models: you need to make the app engaging enough for users to be happy to pay (earning you a profit), but you also need to ensure that the free version isn’t so good that users won’t bother upgrading.

In this post, we’re going to discuss the catch-22 of freemium models and what you can do to make sure that you are striking that balance and earning the profit you need.

Why the Freemium App Model Is So Popular

The freemium monetization model is one that you’ll often see in a large number of different types of apps.

The freemium model revolves around a free-to-download app that has in-app purchases or the option to upgrade for more features. This can happen with a one-time purchase or a subscription model.

This is a smart play. The free-to-download aspect makes it easier to be competitive in the app store against products that require payment upfront, because who wouldn’t like to save a few dollars? This helps you attract and retain new users, which is the primary goal of this model.

And then, once they’re already using the app and engaged, you can offer in-app purchases to offer more features or value. At that point, you just need to convince users to level up, but you’re not directly competing with all the other search results in the app store; they’re already invested in the tool. This can increase the odds of conversion significantly, even if the user was originally only interested because it was free.

It’s not without its potential risks, of course; if users download but never upgrade, there can be a failure to make a profit.

And that’s what brings us to the Catch-22 of the freemium app model.

The Catch-22 of the Freemium App Model Explained

The core objective of the free version of an app is to attract and retain new users.

That’s different, however, from the main objective of the app itself, which is to drive profit.

App developers and marketers need to find the right balance between attracting new users and monetization. This can be tricky.

You want your app to be incredibly valuable to your audience so that they’ll stay, keep using the app, and eventually make a purchase. But some tools end up creating free versions that are so valuable that users never convert.

Others keep the free version of the app so bare-bones that users don’t see the value at all, or don’t get much use or enjoyment out of it. As a result, they bounce, even if they ultimately would have been the perfect demographic for your tool. If you try to monetize too aggressively, you’ll end up decreasing the number of users who you can attract and retain, especially once some negative reviews start coming in.

One of our experts, Maxim Adamov - the Product Owner of Social Trading and Portfolio Management at Exness - has an interesting take on how to find that balance:

Aggressive monetization (in which you reduce the functionality of the free version) can be right for certain apps. It can, for example, work with complex enterprise products where you’ve got to buy an expensive pilot project just to give it a try. On the other hand, many mobile games use a soft monetization model which allows you to play for free forever. Other products are somewhere in between, where the free version is functional but limited (Slack, for instance). Fine-tuning the freemium model and finding the right balance between the value of the free and paid versions should be done through split testing and research.
Here’s what you have to bear in mind though: by reducing the functionality of the free version, you will also narrow down the potential target audience. The less obvious the value, the fewer users who already use your competitors’ products will want to switch to your product. Extending the free version of the app and reducing the number of paying users doesn’t necessarily mean that your profit will drop. You can still work towards increasing the LTV of paying users and increase profit. The higher the LTV, the more you will be able to spend on attracting new users.

You must find the right balance to get users drawn in without them becoming complacent with the free version of the app, and there are a few things that you can do to help with this.

How to Avoid the Catch-22 of Freemium Apps

Want to avoid falling into that dreaded Catch-22 trap of the freemium app monetization model? There are five strategies that our team recommends using to strike that perfect balance.

Give Users a Realistic Look at How the Overall Tool Works

When you’re deciding what you want to include in the free version of the app, you do need to make sure there’s enough value for the user to find it engaging.

Say, for example, you have an app that tracks what items users have in their freezer. The idea is that they don’t forget what they have, or have food that winds up freezer-burned.

You decide to allow users to input items and expiration dates in the free version of the app, along with the ability to set notifications when items are nearing an expiration date. This offers a base-level value that will keep users engaged. Without these core features, users will probably turn to a competitor’s tool.

That being said, you set up a paywall for features like the following:

Some users may end up sticking with the free version of the app, but some users who enjoy the free app might see that those features are worth upgrading for.

That being said, upgrading to a paid version of an app isn’t always just about accessing new features. Cloud-based apps are a great example.

Kirill Ignatkov, CEO of Cloud Mail.ru explains:

Be sure to give users a solid storage limit so that they can enjoy the free cloud storage to its fullest. For instance, we provide 8GB of free storage, which is enough to test the tool but not enough to use it on a constant basis. Once users reach the limit, they will more likely be happy to extend it by paying a fee rather than transfer all the uploaded content to another cloud storage. With freemium apps like Cloud storage, it’s important to make sure that the free version of the app not only shows the main value (uploading content) but also works quickly with no technical issues and offers enough space on the free version for the users to become loyal.

MyTracker’s Business Development Manager Elizaveta Gutnik shared this example:

A good example of how language apps monetize through ads and in-app purchases is LanguageDrops. They retain users by giving them additional attempts to learn new words, and the more often they use the app, the more attempts they get. That way, they generate more interest in buying an unlimited paid version of the app. This is widely used in educational apps.

Anastasia Grishina, Brand Manager at MyGames, shares her experience with how marketing experiments can impact retention rates significantly:

If users don’t understand what the product is about, it can negatively affect both the conversion and retention rates. For example, marketing experiments if not done correctly can reduce retention rate and other important product metrics. Before running such marketing experiments, you must be sure that your project metrics are stable enough to compensate if something goes wrong.

So, here’s the bottom line: Offering enough value in the free version of the app goes hand-in-hand with driving engagement, building loyalty, and increasing retention. This includes:

Monetize at the Right Time

Imagine for a moment that you log into Candy Crush for the first time, and before you can even start on the first level you see an ad pop up that asks you to buy five lives. It would be a no, right? And it might be annoying enough to get you to delete the app.

That’s a very different experience than being sucked into the hyper-addictive game, just barely losing a round, and not wanting to wait an hour to continue playing. Those five lives are a click and a few dollars away.

You’re much more likely to click to make that purchase, right?

Knowing when to ask for purchases and upgrades is almost as important as knowing what upgrades to offer. Anastasia Grishina shared her thoughts on this:

Integrate analytics into your app to see why users don’t perform a target action that you expect them to perform. For example, you expect users to pay after 20 minutes spent in the app, but it turns out that most of them leave in 20 minutes and don’t even get to the point of seeing the payment window. This means that something isn’t right, maybe even at the onboarding stage. If, however, you find that they do see the payment window but don’t make a purchase, perhaps you need to dig into the offer itself to see if it’s attractive enough for a first payment.

Elizaveta Gutnik adds about the timing of the "No ads" notification:

The timing of the ‘turn the ads off’ pop-up also matters. If you show it to the users who have already played through 30 levels and show a good retention rate, they will most probably be happy to pay to turn the ads off forever. Be careful with how much you charge for that: calculate the revenue from ad views and the forecasted LTV. Knowing these two figures will help you determine how much turning ads off will cost.

Think Like a Player

Monetization isn’t just about showing the right ad at the right time - you have to be strategic and understand players' habits on a deeper level.

These are the best tips that MyGames’ Head of Game Design Ivan Klevakichev had to share around monetization and engagement:

Create a habit - break a habit. On the one hand, you must create a habit among players to start the game. On the other hand, you must constantly push them out of their comfort zone whenever they find themselves in it - habits are no good here.
Create comfort - kill comfort. The early stages of game development are about getting maximum retention rates and then converting them to profit. Almost all monetization reduces retention, but the retention rate of paying users is so much higher than that of non-paying ones.
Think like a paying user. For that, you need to become one. Many free-to-play game designers don’t pay in games and are proud of that.
Remember that payment will mean a user misses some part of the game (even a very small part) for the sake of overcoming a certain challenge. Users leaving after making a payment because the game no longer excites them is a common scenario. It is therefore crucial to make sure that the part of the game they’ll be skipping isn’t particularly exciting - let them skip the parts where they have nothing new to learn and don't see much progress for themselves.
Remember that the most valuable resource of a player is their time. A player enters the game to spend time, but they still value it. You should sell the opportunity to save real time, but let them spend as much time as they want in the game (if they pay, of course).

Pay Attention to User Feedback

Direct user feedback is one of the best ways to assess whether your current freemium structure is working for you or against you.

Send out a survey to ask your users which features are integral to the tool. Sometimes the answer may surprise you, and you’ll always get a direct answer.

You also want to look at reviews. If reviews consistently mention “you can’t even use the app without paying” then that could be costing you potential users.

Imagine, for example, a freemium graphic design tool that wouldn’t let you download or save even a single image you create. This becomes dysfunctional. Make sure you’re giving users at least a few free downloads, or keep some of the coolest visual effects for paid models and keep all downloads free instead.

Elizaveta Gutnik recommends the following:

Analyze your funnel and find bottlenecks. If you find that a significant number of users leave your app at a certain point, include a pop-up at that stage asking for their feedback in exchange for a reward. You may get responses that will tell you what the problem is (‘stop showing that horrible ad’ or something to do with the product) while also re-engaging them.

Consider Other Monetization Options

The freemium app model is a solid strategy to entice lots of downloads and then monetize through in-app purchases, but it’s not always foolproof.

Even if you do want to rely on a freemium app, you can also take advantage of other monetization options.

It’s common, for example, for gaming apps to have in-app ads (including video ads) that bring profit to the app developer. Some games allow users to upgrade to skip ads, ensuring that the app profits one way or the other.

There are several different monetization options. You can learn more about them here.

Final Thoughts

Freemium models are a solid monetization strategy for many apps, but they don’t come without risks. The Catch-22 of freemium models is something that all app developers will need to weigh up, potentially adding a failsafe with other monetization options in addition to implementing the strategies we’ve discussed here.

Keep in mind that monetization tactics vary from app to app depending on the app’s genre, overall strategy, and audience. This is true for both freemium app models and others. Using detailed analytics to help you track your monetization efforts is essential, and you can do it for free with MyTracker.

Tags: monetization product analytics