The “Freemium” Business Model and its Ethical Challenges

The word “freemium” is a combination of the words “free” and “premium.” The freemium business model allows users to use an app for free with the option to purchase premium add-on products in the app. In the case of mobile phone games, the “freemium” model, however, can raise ethical issues about its use and success.

Pokemon Go is an example of a mobile game with the freemium business model. Pokemon Go is free to download and play with users having the option to make purchases for premium items in the game. According to the Guiness World Records, Pokemon Go generated the highest amount of revenue by a mobile game in its first month. Due to it being free to download, Pokemon Go is also the most downloaded mobile game in its first month with 130 million downloads. These records showcase the success of the freemium business model for Pokemon Go. These successes however, come with some ethical concerns stemming from the nature of the model.

Freemium games typically set up a virtual currency for micro-transactions instead of actual money. A virtual currency like PokeCoins in the example of Pokemon Go creates a psychological barrier between the in app purchases and real currency spent. The exchange rates of real currency to in game currency are usually convoluted and prices of in app items are often priced at values that inhibit quick calculation.

In Pokemon Go, $6.98 buys 550 PokeCoins and the price of an incense is 80 PokeCoins This makes it confusing to Pokemon Go’s players how much an incense is in real currency.

A report by Lauren Keating published on Tech Times found that only 1.9% of mobile gamers make in-app purchases. The report also states that the top 10% of the 1.9% of paying gamers account for 48% of revenue from mobile games. These high paying customers are known as whales and are basically financing the freemium mobile gaming industry. Some would argue this is a major issue because these whales almost seem like gambling addicts who keep coming back to lose their money under the encouragement of the mobile gaming companies.

Image result for Gondola io

A report from PC Mag talks about how Gondola is able to utilise dynamic pricing in mobile games. Gondola is an app analytics company that claims to be able to track various variables about a mobile game’s players; how long they have been playing the game for, what model of phone they are using, how many in-app purchases they have made and so on. They provide these information to mobile game companies which in turn may tailor the prices of in-app products to individual customers based on their profiles and behaviours. An example of this would be increasing the price of PokeCoins if the data shows that an individual spent a lot of money in the last few weeks. This practice can raise ethical debates on its use as consumers of mobile games with a freemium business model are vulnerable to the tactics the businesses employ.

Some may argue that this model is the best way to attract consumers as people are generally put off by having to pay to download a mobile game. The freemium model has also proved itself to be very profitable despite the ethical concerns. Given the success and widespread popularity of this model, I suppose that the debate will continue for years to come.

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10 Comments

  1. Great post Sheng Kai! I think that the reason “Freemium” business models are so rampant is because of their success. I, personally, have spent many dollars on addictive games that on hindsight could have been used on other arguably better things. These apps, however, need to make a profit for their respective companies. What business model then, would you propose these app companies use?

    Liked by 1 person

    1. Freemium is an incredibly successful model. There are other models, however, that have the potential to be successful without the ethical controversy.

      One of these models is the “Free Trial” model. In this model, customers can download apps and use them for a stipulated amount of time. After the said duration has commenced, users have the option to purchase the app on their mobile phone’s app store. A popular company that utilises this business model is “Netflix”. Netflix provides a one month trial to new users where users are exposed to the full range of services and movies that Netflix offers. After the one month ends, the users will be given an option subscribe to their service, paying the monthly fee ofcourse (https://help.netflix.com/en/node/16282).

      This model does not resort to some of the tactics that are typical with freemium models, making it more transparent. There are however certain issues that can arise with the way companies adopt the free trial model. Netflix, for example, automatically deducts money from your card when the one month trail ends. They send a 3 day reminder via email before they initiate the payment but many people miss those reminders.

      There is no perfect model for businesses. Corporate greed can sometimes be overwhelming, driving companies to make questionable decisions. I think that the free trial model is a more ethically sound one. Let me know if you agree.

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  2. Hello Sheng Kai! I agree that freemium is a really effective business model. The way it attracts a large crowd with the free downloads/services then move on to offer premium priced value added components after some time is really smart!

    I have always seen people complaining about how a game is “sucking” their money, but as a casual gamer I always have the mindset that it’s a choice made by the individual. However, your article changed my view. I have never knew there is dynamic pricing in games and this made me feel a little deceived? Not sure if that’s the right word.

    In a business point of view, I understand that dynamic pricing is a strategy organisation use to maximise revenue and as customers, we are generally fine with that. However, in this case dynamic pricing is used in a way that is undisclosed to customers and if I were to find out from personal experience, I would probably drop the game straight and spread negative words about it which I believe would be the reaction of many others. Do you think it is worth the risk of losing your customer’s trust in the long run?

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  3. Thanks for sharing your knowledge and insights on the ‘freemium’ model. I myself have observed an increasing prevalence of ‘freemium’ applications on the mobile apps store. What are the reasons why companies are choosing to adopt the ‘freemium’ model over other models such as once-off app purchases?

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    1. I’m glad you’ve enjoyed my post! I can concur with your observation that there is indeed a growing trend towards the ‘freemium’ model. This can be attributed to a number of reasons.

      For one, once-off app purchases requiring payment to use the app on the get-go may intimidate and deter many potential customers from getting the app. They simply may not want to invest money into an app they have never tried before. In such instances, ‘freemium’ apps and apps offering free trials may prove to be superior in engaging this group of consumers.

      In addition, the ‘freemium’ model creates opportunity for a continuous and cumulative source of revenue from individual users. Rather than receiving a one-time, fixed amount of earnings per user, the ‘freemium’ model first draws the user into downloading a deceptively free app, then entices them into making repeated in-app purchases once they are hooked. Furthermore, this also creates room for the company to introduce new in-app purchases sequentially and indefinitely, which in turn generates further revenue.

      This means the company can essentially tap into its pool of high paying customers (i.e. the ‘whales’, as described in my post) to generate the bulk of its income – and this can oftentimes turn out to be substantial, as evidenced by the success of Pokémon Go. According to Sensor Tower Store Intelligence, Pokémon Go has raked in an estimated $2.6 billion in player spending to date – and it is still earning (https://sensortower.com/blog/pokemon-go-revenue-may-2019). In fact, its most recent introduction of the franchise antagonists Team Rocket into the game in end July this year had fuelled player spending to a whopping $110 million in August – a record amount in three years (https://sensortower.com/blog/pokemon-go-revenue-august-2019)! Amazing how an app that was launched in 2016 can continue to boost their profits through in-app purchases, huh?

      These are just some reasons I can think of, and there are likely many others. I would be interested to know your thoughts on other possible factors contributing to the success of the ‘freemium’ model!

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  4. Hello Windy, thank you for your input on this debate. I think that it depends on the degree of negativity that the game creates. Companies like Supercell, creators of the widely popular Clash of Clans, Clash Royale and Brawl Stars mobile games widely use the freemium model and yet their games are highly successful. In 2015, Clash Royale was the highest grossing mobile game (https://newzoo.com/insights/articles/clash-royale-revenues-top-80-million-in-first-month-making-it-worlds-top-grossing-game/). Brawl Stars, their newest game grossed $5.1 million on its first week of launch (https://blog.apptopia.com/brawl-stars-grosses-5.1m-in-first-week-of-global-launch-doesnt-compare-to-clash-royale). The freemium model is definitely working for these apps. The freemium model fails when there is no incentive for customers to purchase the added benefits, the features are of low importance to its customers and there isn’t a sense of urgency (https://openviewpartners.com/blog/7-reasons-why-companies-fail-with-freemium/#.XZOn8UYza70). It is easy for a freemium business model to fail, however, with the success of companies like Supercell, I think that with proper management of the model, the risk of losing customers’ trust is a reasonable one to take.

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  5. A very informative and insightful read! Freemium indeed is a brilliant business idea in drawing large crowds but one of the biggest criticisms is that it can be potentially addictive. Attractive premium deals resulted in gamers to perceive that they offer better value and splurge on it. What do you recommend to overcome the problem?

    All in all, great read and I look forward to reading your new blog post!. Keep up the good work. Cheers! 🙂

    Liked by 1 person

    1. I think that the freemium model is currently the most effective business model for apps. I agree that businesses need to make a profit. Profit, however, should be generated in an ethical fashion.

      Businesses can act more ethically by discarding or limiting elements of the model that can cause controversy. Examples of these are the ones mentioned in the article like the confusing exchange rates and the use of dynamic pricing on individuals.

      Some mobile games have their players go on a long “quest” and threatens them losing all of their progress when they die in the game but give them the option of purchasing a lifeline through in game currency that use real money. A YouTube video by Vox summaries these examples in a well made video (https://www.youtube.com/watch?v=fKK9nVLvhGM). Do take a look and tell me what you think!

      Like

  6. Hey, interesting post! I did not know that “freemium” could be so damaging. I play Pokemon Go as well but being a casual gamer, I have never spent any real money on the game. This makes me “resistant” to the freemium model I would say? Anyways, this got me wondering, what can an individual do to protect themselves from the effects of this model?

    Do check out my blog as well!
    https://brendachanpc.wixsite.com/bchanpc

    Liked by 1 person

    1. There are many ways that individuals can protect themselves against the tactics freemium apps use. To prevent push notifications, users can disable notifications from the chosen apps under the settings of their phones. Freemium game apps typically entice users to purchase in game credits in exchange of convenience. For example, a building that requires 12 hours to build can be immediatly finished with the purchase of gems, which require real money. I would suggest users to place more emphasis on the parts of their life that are offline. Find a hobby or maybe hang out with friends, this will help distract them from the urge to spend money on the games in the quest of game progression.

      Like

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