Have you ever wonder how the companies that offers free services make money? Such as Evernote, Facebook, Twitter, LinkedIn, Maps (from Google), Github and so on… or if it is even profitable to keep free users using their services. We would into different revenues models most used today and hopefully will throw you some light next time you decide to roll your own startup!
Let’s start first giving some perspective what models are actually giving the most revenues. In 2013, App store free apps brought the 71% of the revenue! More than paid apps… how’s that even possible!?
Ok, let’s discuss some revenue models to understand this. There are 3 main models:
- Freemium: apps are free to download and use. However, some advance features are available after paying for them (e.g. new levels, specialize features, more capacity, and so on).
- Premium: users paid upfront the fixed price for the application. After you pay for it you are able to download it and usually new software updates are free.
- Subscription: users paid a fixed amount which is charge automatically every certain time. Magazines in the iOS News stand is good example of this subscription based model. Subscriptions has generally lower prices than premium accounts .
Freemium is not as “free” as it might seem in the surface, there are indirect ways of getting revenues:
- Advertising: the application/service is free to use, but it contains ads or couple of minutes interruption banners in order to raise revenue. This model is usually applied along with freemium apps and promise removing adds when users opt to premium accounts or sign up for subscription fees.
- Transaction: the application is free to use generally and charges a percentage or fixed fee with every users’ transaction made. For example, it allow you to publish your item on their site for free but when you sell it, it charges you a fee. Or publish a project in a app and when it reaches certain goal a percentage fee is applied.
- Online lead generation: collects user’s information some times in a exchange of a product or service and then resell the information to companies interested indirectly. It’s different than the selling data model because the information is not sell to 3rd party directly, but the application can present ads depending on the users’ interests, likes and behaviors or also do affiliated sales.
- Donations: (it’s self-explanatory) Services/apps are free but it encourages users to contribute throughout donations to support the developement.
After reading these you might have more clues why free apps are so much win nowadays. They helped to create those million-dollar-per-day games! In market where there is enough competition, having a free option will take you to a large numbers of users quicker because of the low barrier to entry. For instance, Whatsapp had at certain point 10k of daily downloads, after moving it to $1 it download rate drops 10 times, they finally opted for yearly subscriptions.
Subscriptions is also a model worth doing a special mention. It brings a steady flow of income to companies and usually comes in different tiers to fulfill users need. But, it has to be flexible enough, because it might limit hard core users which might be willing to pay more for taking the product to a new level.
Click at the companies logos to see if their revenue models are profitable or not. You might get surprised!
If something is not accurate please leave a comment or if you are wondering about a company not listed here, let me know and I will add it :)