Freemium social: a simple equation

Posted on: September 29, 2009


There is a real need for more and more organisations to embrace new ways of sustaining their online operations. However explaining monetisation avenues can be difficult – the how and why profit can be achieved just doesn’t add up for those struggling to hold on to models best suited to the old economy

I saw Paulina Bozek speak on The Rise of Social Games:  New Trends and Future Directions for Interactive Entertainment’ at LSE today – as part of ‘Orientation Festival 2009’. (Not sure what happened to Freshers Fair, but not being so Fresh anymore, the new title works for me).

I found her lecture very interesting, a walk through gaming history and the latest in social gaming innovations. She referred to the concept of disruptive innovation, essentially improving a product or service in a way the market doesn’t expect, often by conceiving simpler solutions to those currently dominating (in relation to the Wii and Songstar).

Although the material presented was not particularly new to me personally, what struck me was how well she explained social web principles to the mainly non-technical audience. She seamlessly introduced the freemium model – giving examples of the Zinger (Farmville) and Playfish games on Facebook – both of which make money via micropayments. Presentation of the freemium equation in this context was so simple, it could get even the most cynical MDs on-side. 

Total number of users x Conversion rate x Average Revenue Per Paying User (ARPPU)

This model holds that if you provide a useful service for free, and attract many, many users (millions if you’re lucky) – you can sustain your website or application by charging a fee to a small percentage of users. Paulina told us that Farmville have amassed 50 million active players in just 5 months, Playfish 82 million across several social games. We live in a world where the marginal costs of digital distribution approach and reach zero – thus working on creaming some money off the top makes far better sense than restricting the user base with pay walls for membership and other core social actions. It is surprising what people will pay for a virtual ornament for their virtual house – it is those extras that can be monetised. In other words, it pays well to welcome the free-riders and then pay special attention to that all important conversion rate.


2 Responses to "Freemium social: a simple equation"

[…] Comment! I wrote a post a while ago explaining how the freemium business model for websites works. As part of this I referred to farmville, a social game on facebook that charges for extras. […]

[…] high bar that’s been set by previous Zynga games – leading to this TechCrunch analysis focusing on number of gamers (but not harder to find success […]

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