Freemium model and Network effects.
In the app market, there are 3 main ways of pricing an app. One can make their app free, paid, or free with optional in-app purchases (freemium). Analyzing these 3 models, it is no surprise that freemium works best for generating revenue. Importantly, many of the apps at the top of the app store are connected with network effects. Games such as Clash of Clans, Candy Crush, and Game of War all have features where a friend enhances the experience by giving an extra life or playing with you. Because of this, the adoption of one of these apps can be modeled using the reservation price direct benefit model. In this model, the lower a price of an app, the lower the tipping point of its success. Furthermore, the lower the price, the higher amount of people will adopt the app at the stable equilibrium.
Free apps:
Here is where the merits of a free app strategy are seen. A new app can gain very few adopters and be passed its tipping point, thus increasing its odds of being a success. But a problem with this is the lack of revenue that is generated by this strategy. A free app only gets revenue through ads which are not a great source.
Paid apps:
A riskier strategy could be to make an app available for a price. Here, the odds of failure are increased, but an app can make a substantial amount more money if the tipping point is reached.
At this point, it seems like an optimal strategy would be to keep the app free for some time until it is popular, then start raising the price after one is past the tipping point. But the problem with this is that the app stores requires free apps to remain free for their lifetime. This makes that strategy not possible.
Freemium apps:
This model provides a pricing strategy which simulates having a free app and then raising its price. By making in-app purchases optional, the app is technically free so the tipping point is low. And having an in-app purchase structure that only comes into play when the user is already hooked on the app plays off of this well. By this point, the user has been playing for a while and maybe more of their friends have as well. This increases their direct benefit and reservation price. So the delayed pricing only charges money when the user is willing to give it. In this way, the maximum amount of users are attracted, and the maximum amount of money is extracted from each user.
This suggests that a freemium structure is best, and app statistics back this up. Most of the apps in the top grossing list in Apple’s app store have this structure. 90 percent of revenue generated by games in the app store has come from apps with this model, 88 percent in the social networking category, and 95 percent in the news category (Frazier).
Source: http://mashable.com/2013/12/19/paid-vs-free-apps/#M4UEW4SF2Sqs