So, you want to develop a social game for the iPhone? Considering the overall success of the platform and the plethora of new games getting released in the space, it certainly seems like a smart move. However, there is one question that should be thoroughly wrestled with by any developer: Should my game be free (hoping to monetize through some combination of advertising revenue and future virtual goods purchases) or not?

According to a presentation by Greg Yardley, CEO of Pinch Media (a company that has been tracking stats on iPhone apps), there have been well over 500 million downloads to date. Nevertheless, most apps experience a staggering drop-off on app retention – only about 20% of users continue to engage after the first day. After 30 days, less than 5% of the users who downloaded the app are still playing it, on average.

According to Yardley, the average paid app goes for $0.70, while the average free app is played around 80 times. So order to earn the same amount of revenue purely from ads, a developer would need a $8.75 per thousand runs – so assuming one ad per session, an $8.75 CPM. Given the state of the ad market, that would be pretty difficult.

For more of Yardley’s thoughts, check out his full presentation embedded below:

So what does all this mean? Well, if Yardley is correct, less than 5% of all apps using ad based models are or can make more money than one that charges initially and states that one would be better off selling the game unless “there is something inherent about the app that screams free….”

[via TechCrunch]