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CASE STUDY

 Give it away—and increase profits?

BY DAG BENNETT

It used to be that downloading games onto a laptop or smartphone generally cost 99c or $1. At that price, thousands of people bought games, generating a modest revenue stream for the game designers. But these days, there are many free games and millions of people who download them.
You might think that giving something away is a silly or risky strategy. However, many game and application designers have found that when they charge up-front for a product, sales stay small, but if they give the game away as a free download, millions of people will download it without thinking twice about it. Once they start playing, the games get ‘sticky’, or even addictive, and people will then become willing to pay for extra features to ‘up’ their game (e.g. new characters, extra lives, power-ups or special boosters). Even if only a small percentage of the millions of players buy extra features, the games makers still find they can increase their revenues.
One company that appeared particularly successful at this pricing strategy is Zynga, which capitalised on FarmVille and its other Facebook games with an initial public offering that raised US$1 billion. FarmVille is free to play, but players can purchase ‘farm cash’ that can be used to make crops immediately ready for market. However, by 2015 Zynga was still losing money.
This strategy of giving something away, sometimes called ‘freemium’ pricing, presents customers with what they see as a great deal by allowing them to use a product as much as they like, and then decide to give a couple of dollars to the game developer. Once they pay, they also tend to play more. In addition, customers can then be exposed to new game features and other, again initially free, games.
The buying process can be made simple by including a virtual store inside a game. Flurry, a mobile software analytics ‑ firm, estimates that about 65 per cent of all revenue generated in the iPhone app store comes from free games that charge for extra goods or features. Apple makes it very easy for people to make purchases within apps by keeping credit cards on ‑ le. Google’s app store, Google Play, on the other hand, initially struggled to generate revenue despite around 50 billion app downloads by 2015 because making payments was more difficult. The bottom line seems to be that free games can hook buyers, but purchasing has to be easy in order to deliver revenues.
The applications of freemium pricing are not conined to games—other companies that use it are LinkedIn for networking, Dropbox for ‑le-sharing, Hulu for TV shows, and the B2B companies Box and Yammer. And yet, freemium pricing is not a guarantee of success in the marketplace. To be successful, a company has to offer something that the market wants in the ‑rst place. Then it must ‑gure out the features that customers are willing to pay for, and at what price levels.

1. If a company has a freemium strategy, but is attracting few new customers, what might this indicate?

2. If a company’s premium strategy attracts a lot of customers, but doesn’t generate much revenue from them, what do you think they might be doing wrong?

 
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