The curious case of Duolingo

This article explores how a free educational app manage to have a valuation of $7.7 billion despite the majority of its users not paying for it.

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Around 34 million people use the language learning app, Duolingo every single day. Some for well over a decade, making the company around $500 million annually and making it one of the top education apps in Apple's App Store for the past decade. And yet - Most people who use Duolingo do not pay. All of its lessons are completely free to access. Only around 9% of its users pay and less than 8% of its revenue comes from advertising. So, how does a free educational app manage to also have a valuation of $7.7 billion? And is the company's strategy sustainable? The answer lies in AI, A/B testing, its little green owl.

If you've ever used Duolingo, you'll have noticed it's less like a traditional language lesson and a lot more like a game. Users have lives. Get five answers wrong in a day and you'll run out of lives for that day. Lessons have progress bars and are laid out in a journey. Players gain experience points and streaks encourage users to play every day. That gamification is what helped attract some three million users within the first few years of its operations.

Despite an explosive growth in user numbers, they had a problem - revenues. They did not have a monetisation model when it had first launched. It is hard to build up new capabilities in an organization that does not generate any revenue. So, in 2017, the company introduced advertising, which now accounts for under 8% of its revenue. It also launched a subscription tier where users could pay $10 a month to remove ads and get unlimited lives.

The company went public in the summer of 2021 and saw a boom during the pandemic as users practiced languages while travel was limited. Today, Duolingo is around 12 times bigger than its main rival Babble by downloads with some eight million users who are now paying for the app. While that's only a small fraction of its overall user base, 80% of its revenues are generated from 10% of its user base. Duolingo's growth through gamification and subscriptions may seem pretty simple, but there is a lot more going on behind the curtain.

Every move the company makes is meticulously crafted down to the pixel, tested on unknown users, and refined using AI, rigorous A/B testing, and constant tweaks to its app. Whenever people are using the app, they measure how long the users use it for? Do the users come back the next day? and they try a lot of new things. When should they send a notification? What to say in the notification? Should the lessons be a little harder or easier? A little longer or a little shorter?

Take Duolingo's push notifications. If you forget to do your lessons and risk ending your streak, you'll get a little notification from Duo, the company's mascot, reminding you to return to the app. The messages on the push notifications started out simple enough, but quickly evolved to become the stuff of memes, including one particularly effective guilt trip:

Sending that got people to come back a lot because they felt guilty. This led to a 3% rise in retention. But crucially, the messages that you receive aren't the same as everybody else's. AI is used to start figuring out basically, like, which ones of these are more effective for particular users or at particular times of day or whatever and letting the more effective ones rise to the top and then get sent to more people.

The notifications are written partly by humans and partly by AI, however, the decision regarding which notification to send to which user mostly taken by AI. That could be part of the secret to Duolingo's success. The company gets so much data back from those attempting its free lessons that it has a huge database of information that it can feed to its AI algorithms. Duolingo users complete 13 billion exercises every week and the company is able to feed all that data to AI and use that to personalize the learning experience for everyone to make sure people are learning effectively and staying engaged.

At any given moment, the company is running hundreds of A/B tests like these where one user is given a different experience to another to see which one wins out. Around 5% of its user base act as unknowing guinea pigs for any given test. Duolingo has been able to A/B test their way into getting more people to pay them, into getting more people to use the app, more people to recommend it to their friends etc. The company says that A/B testing has been a key part of their success story.

However, its not all sunshine and rainbows. Duolingo's leading market position may have been achieved by giving away much of its lessons for free. That growth strategy may start to slow, especially as some users leave the app after mastering a language or giving up on it. That will require the company to increase the number of paying customers. So, the company is exploring some new ways to get users to part with their cash. It's new AI-powered Duolingo Max subscription costs around INR 5900 a year and allows players to role play conversations with AI-powered bots. Duolingo had previously tried offering such a feature offering conversational capabilities with humans. However, it was not successful as the users felt that they would be judged. What is interesting about AI is that people don't feel like the AI is judging them, even though it actually is judging them. But who cares, right? It's an AI. It's not another human.

For now at least, Duolingo's most lessons are free but it might not remain that way for very long.