Monetizing apps in China – The Freemium model

There are many challenges facing web and mobile startups in China, including an incredibly dynamic market, keeping your staff from leaving you for one of your competitors and taking your Intellectual Property with them, and copycats that will appear within days of you gaining any interest from consumers or the press. But even if you are able to overcome these challenges and are able gain traction with your mobile or web app, it can be very difficult to get Chinese consumers to pay for your product or service.[1]

One of the approaches that is a good option in China, and is probably the most popular model for web apps in the US, is the “Freemium” approach. This is were you give users access to limited functionality for free, and then ask them to pay for “premium” or “advanced” features, generally through a subscription. While this model has the same structure as in the US, in China I have found that you have to give users more features in the free version than you would have to in the US. You need to work hard to prove your value to users through the free version, but have to also provide enticing options in the premium versions so they will consider upgrading.

An interesting hurdle I recently discovered is that automatic recurring payments aren’t a viable option in China right now. Whereas in the US users are fairly comfortable signing up for a subscription service and having their credit card automatically charged every month, in China web apps usually use a service like Alipay to process their payments because credit cards are still used fairly rarely. Since users need to put money into their Alipay account before any payments can be processed, the users have to reauthorize their payments every month. Essentially, users have to make a conscious decision to pay for your service every month.

The implications of this are rather significant. Whereas in the US, once you have convinced a user to sign up for a subscription service you just have to keep them happy enough that they don’t cancel it, in China you have to keep proving your value to your users so they choose to pay you again whenever their prepaid subscription period expires. This requires teams to continue iterating to ensure that users are seeing improvements to the app every month, and it also means that, when you’re planning your pricing strategy, you have to entice users to sign up for longer periods of time with discounts. For example, you could offer one month of service for one price, and then offer 3 months prepaid at a 10% discount, and 6 months prepaid at a 20% discount. While you would generally see discounted annual pricing in teh US, multiple lengths of time and discount levels are quite common for apps in China.

Freemium in China is certainly a viable option, although it’s not the only one. In future posts I’ll discuss different monetization strategies and will go into their strengths and weaknesses. Whichever model you choose, however, is fraught with difficulties in a country filled with competitors awash with capital and willing to quickly clone your app and offer a free version that includes your premium features.

My advice to entrepreneurs and development teams is to keep iterating as you listen to your customers. By iterating quickly and intelligently you have a good chance of staying ahead of your competition and convincing your customers that you’re worth paying again when their monthly subscription fees are due.


[1] In a future post, I will analyze this common complaint made by the tech startup crowd in China (myself included) to see if the available data support this claim

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