Choosing the right business model for your game or app

When your game or app is ready to release to market, there are many options you can choose to make it big in the app economy. Currently "freemium" games are the hottest thing since sliced bread, but you can't just follow the trend—it's important to carefully consider which business model makes sense, based on the attributes of each game. There's a wide variety of strategies, including ad supported, premium, or hybrid models. But how do you choose?

Before diving into choosing the right model for your game, let's take a quick look at the different business models game developers often use today.

There are four basic models available to app and game developers:

Premium

Premium is defined as charging $.99 or more for an app or game. Premium was the predominant model early in the app store and it is used by some of the biggest names in the market like Angry Birds, Doodle Jump, and Cut the Rope.

Freemuim

Freemium is the practice of giving your app or game away for free and making money via in-app purchases (IAP). Freemium games currently make up 32 of the top 50 grossing apps on the iOS App Store including: Dragonvale, Rage of Bahamut, Poker, and Bejeweled Blitz.

Ad supported

Ad supported apps are, well, supported by advertising. Ad supported games typically include banner advertising or other types of in-app advertising. Some of the more common types of in-app advertising are:

• Banner advertising: Banner ads enable app developers to display small advertisements throughout the app, or on specific screens. Banner ads typically provide low(ish) eCPM (revenue per 1,000 impressions shown), but make up for this with high impression volume.
• Video: Video ads enable app developers to show short (15-30 second) videos during natural breaks in an app. Video advertising pays well (~$.025 - $.05 per video view), but it can have a negative impact on app retention because users tend to quit instead of watching an interruptive video.
• Offer walls: Offer walls are typically used in Freemium games and apps. They enable developers to provide users with free items, like currency, in exchange for taking an action such as: signing up for a free Netflix trial, liking an app or product on Facebook, and other related tasks.
• Interstitials: Interstitial advertising, like video, enables app developers to show full screen ads at natural break points in a game or app. In most cases, these ads market other third-party applications.

A good number of freemium games utilize some form of in-app advertising, including Temple Run. For example, Backflip Studios built up its business using banner advertising with hit games like Paper Toss and Ninjump.

Hybrid

Of course, you can implement any of the models described above in various combinations. The two most common hybrids are:

• freemium with ad-supported
• premium with in-app purchases (IAP)

When developing freemium apps with consumable items, the apps typically display offer walls or incentivized video views. If you are planning to release a title supported with banner advertising, it is a best practice to include an in-app purchase item to remove advertising. Some example apps that use this strategy are: Memory Matches 2 and Paper Toss.

There is no shortage of options and nuances within each business model. Making your initial choice is incredibly important to your game's potential success. In this section you'll learn some tips to help you decide which business model is most appropriate for your app.

The first rule to follow is: put what's best for your content ahead of what's best for your monetization. At this point in the app economy, consumers are well versed in the various models used to make money from games. If your model doesn't fit your content, you'll confuse consumers leading to low retention and revenue. Say it with me: content first, money second.

The second rule is: decide how you are going to monetize your app early in the development process. The absolute worst thing you can do is force a business model onto the app after the app is complete. Decide which model you are using at the beginning, and then build your app accordingly. If you're going to use banner advertising, you need to build space for the banner into the app UI. If you are utilizing interstitial or video advertising, you must design natural breaks in game play to display interstitials (video, rich media, and so on). If you're going to use IAPs, the game design must incorporate purchased items and allow users to purchase the items at appropriate times and levels.

If your game includes consumable items, it should be distributed using the freemium model. For example, a casino game which requires currency to "gamble" with; an RPG which requires some form of mana; or a time management game (Farmville) which requires one or more forms of currency. In these cases, use the freemium business model. The most important tool for freemium app developers is in-app purchase (IAP). IAP allows app developers to sell packs of content or consumable items at specific price points. When using IAP, it is important to test often and adjust pricing as needed to maximize revenue and end user engagement. If you are just getting started with IAP, look at the top grossing apps that utilize this method to get a basic overview of how IAP should be implemented. (Don't copy their app, obviously, but you can learn from their business model).

As freemium has become a more popular model, developers and publishers are adapting variations of the model for different types of games with fantastic results. Casual puzzle games can use the freemium model, if implemented and optimized correctly. For example, Bejeweled Blitz, one of the biggest brands in casual gaming, has maintained a top 50 grossing rank for the last six months. However, before you go down this path, remember that you aren't Popcap—and most likely you're game isn't Bejeweled. Tread carefully.

If freemium is the right model for your content, the next decision involves whether you want to augment it with in-app advertising to create a hybrid business model. There are some benefits to adding advertising to freemium apps:

• You can make some money from the vast majority of users who don't pay. Statistics show that only 2-6% of users will purchase items in freemium apps. The remaining 90+% of users use your app for free. In-app advertising can help you monetize them.
• Advertising provides a way for your users to earn currency/consumables without paying real money. Though offer walls seem to be consistently under fire (especially on iOS), developers can still provide consumers with consumables in exchange for downloading other apps (on Android at least), watching sponsored videos, signing up for subscriptions, and other tasks.
• You can acquire new users via cross promotion. Some companies provide you with the ability to cross-promote your apps with others in their network (including my company, PlacePlay). Cross promotion is a fantastic way to increase your install base and drive organic traffic.

A final note of caution on using the freemium model: freemium is a focus of entrenched publishers with big checkbooks including EA, Gameloft, PocketGems, TinyCo, Backflip Studios, Z2Live, Storm8, and Zynga. These companies dedicate reams of people working on additional content and optimizing for both user behavior and monetization. They have tens, if not hundreds of thousands of dollars earmarked for marketing and user acquisition. It's hard to win in the freemium space.

The rise of freemium does not mean that the premium model is not a viable business model for games and apps. As we discussed earlier, apps like Cut the Rope, Angry Birds, Doodle Jump, Tiny Wings, and The Moron Test have successfully utilized the premium model to entrench themselves in the top 100, building very profitable businesses along the way.

How do you know if your app is best served as a premium game instead of freemium? The distinction here is getting a little grey, but if there is no natural, or obvious way to integrate consumable items in to your app, then utilize premium.

If you are using premium, please try to do the following:

Find a way to make a viral loop: if your consumers like your app, they will want to share it with their friends. Make it really easy to post scores to Facebook and Twitter. Make it really easy to invite friends via email and social network sites. Reward users for sharing your app with some form of free content. No matter which model you choose, you need your consumers to do your marketing for you.

Learn more about how to utilize premium app sales by watching a video interview with Berkeley Malagon of The Moron Test.

What about adding an ad-supported strategy too? The decision between premium and ad-supported is easy: do both.

It's well documented that it is substantially easier to get users to download free content vs. paid content (hence freemium's meteoric rise as a business model). Providing a free version of your app or game is always a good idea. The next question becomes: How do you convert those free users into paying users? There are two methods to convert free users to paid users:

1. Provide a limited, free, version of your app that includes a strong up-sell to the full version. Use analytics to understand user behavior and maximize conversions to the paid version of your app.
2. Provide a full, free, version that includes in app advertising and provide an in-app purchase item to remove those ads.

I have not seen any empirical evidence to suggest which of these options is best. However, there is a segment of the consumer base that will never pay for an app, so providing them with a full experience that includes in app advertising enables you to earn some revenue. Those users that do not like advertising can pay to remove it. The secondary benefit with this option is you can focus your marketing efforts on one version (free) rather than having to market two versions (free and paid).

There are pros and cons to each of the available business models. Each method represents a unique way to monetize your games. There are some things to keep in mind regardless of which business model you utilize for your app:

• Build social and viral hooks into your app. Make it as easy as possible for your users to share your content with their friends. Post scores to Facebook and Twitter (use Facebook Open Graph) and suggest that users like you on Facebook.
• Be aware of which metrics matter, and make sure you are tracking them. There are a variety of services that provide app and game analytics, so be sure to use them. What features do users like? What don't they like? Are they dropping out at certain points in your game? Are they sharing with their social network after they reach a certain milestone? If you don't utilize analytics, you won't know the answers to those questions and you'll miss opportunities to optimize your app accordingly.
• Be prepared to spend money to acquire users. As noted, only 2-6% of freemium players pay for something - so you need a LOT of users in order to make a substantial amount of revenue. The average cost to acquire an iPhone user in the United States is over $1.50. iPad user acquisition is approaching $2.50 per user. Android user acquisition cost is hovering around $1.25. That can add up to a lot of money, so be prepared to spend it.
• Finishing game development is fantastic, but it is important to begin marketing your game during the development process. Add approximately 50% more time to your development schedule for marketing and optimization tasks before development is finalized. Spending additional time on marketing and optimization will give you a shot at success in the market.

Hopefully this overview of the available business models helps you choose the right approach to monetize your games and apps. You can read more tips about how to make money in your games by visiting my blog on the PlacePlay site. Feel free to contact me directly with any questions you have about monetizing your games and apps.

In-app banner advertising and network cross promotion are two services provided by PlacePlay. We can also help you use Open Graph to post game scores to Facebook. PlacePlay provides a native extension that makes it easy for Adobe AIR developers to use the network alone, or in combination with iAd and admob.