A couple different ways.
Some games generate ad revenue. Those simple tappy games where you never have to buy anything to advance, but you get an ad between every level, do this. Companies pay to advertise on games, and each ad watched generates a fraction of a cent for the creator of the game. Repeat over hours of play, with millions of players, and a game can churn out a tidy little sum without charging the players a dime.
Other games make soft walls in their progression where you can either grind at a menial, unfun task for hours to get to the next good part, and every round of grinding takes longer and longer, or you can pay a pittance to skip the grind and continue the story. Games like that can bleed a single player of hundreds of dollars, 99 cents at a time, over months.
Someone else mentioned “whale hunting” in this thread. Some games depend on a tiny fraction of their players getting way too invested and pouring huge amounts of money, for mobile games anyway, into otherwise free games.
A lot of games use a mix of strategies, like candy crush showing you an ad between each level, selling you small packs of power ups for 99 cents, and having a shop where you can buy a MASSIVE pack of power ups for $99, for those rare people who have the cash to burn on it.
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