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App Monetization 101

Ian Blair

Tools like Buildfire make it easy and relatively painless to create a mobile app; even small businesses are racing to compete in the mobile app sphere. But creating the app is just the beginning; even if you created your app to function as another mobile marketing channel, you still want to recoup your costs and turn it into a solid source of revenue for your business.

Monetizing an app isn’t as easy as building it, unfortunately. Statistically speaking, about 2 percent of app developers are claiming over 50 percent of all app-driven revenues, and about 25 percent make nothing at all from their apps.

And…even though Candy Crush generates nearly $1 million a day in revenues, most mobile apps will be lucky to recoup their development costs, let alone become reliable revenue streams for their developers.

But that shouldn’t keep you from trying different models and techniques to monetize your app. Even if your app is achieving all your marketing goals, it’s always a good idea to try to turn a profit—and there are many paths to profitability for the savvy mobile marketer. Let’s take a look at the six most popular business models to monetize your mobile app.

How Do You Know Which Business Model to Choose?

Before we jump into the six main monetization models for your app, it’s a good idea for you to keep a few questions in mind, because they’ll help you weigh the pros and cons of each model as they apply to your app. It’s a good idea to settle on your monetization model before you actually build and launch your app, especially if you plan to use some form of in-app advertising.

Of course, your choice isn’t carved in stone; you always have the option to mix it up or add elements of other models as you see what works with your app.

Here are the questions to ponder:

➤What is your app’s value proposition? What problem will it solve for your customers/users?

➤Are there features and benefits users would pay to access? 

➤What models are competing apps in your niche using? Are they successful?

➤What is more important to you right after you launch your app: Attracting more users or immediately generating revenue?

These aren’t mutually exclusive necessarily, but some approaches are geared toward getting the most downloads post launch with revenue coming later, while others are geared toward achieving a revenue stream right off the bat. You need to decide what your timetable will be and what you will prioritize in your monetization model. Can you afford to wait to profit off your app? If so, how long?

App Monetization Models

1. Paid Apps

This method is pretty straightforward; you charge users a fee to download your app from Google Play or the App Store. You might think this is the quickest way to turning a profit and recouping your app developing and hosting costs, but you’d probably be wrong.

Consider this: Only 20 percent of paid apps get over 100 downloads, according to a study by Cambridge University last year. Even worse, only 0.2 percent achieved 10,000 downloads. On the other hand, over 20 percent of free apps reach the 10,000 download milestone.

So unless your app is astonishingly successful and beats all odds, your chances of recouping your costs, let alone achieving a reliable revenue stream, are pretty low, especially if your app is priced in the most common range ($0.99 to $9.99).

Of course, that’s not to say that you can’t monetize your app using the paid model. In fact, if you’ve created a truly unique and valuable app and done a great job promoting it on the app marketplace with amazing screenshots, descriptions, and plenty of five-star reviews, you can make a good amount of money from your app.

schematic-2

Image courtesy of darkskyapp.com

The Dark Sky weather app costs $3.99, but it handily competes against popular free weather apps. This is because it offers valuable, unique features that the app’s target audience is willing to pay for. The paid model might work for you if your mobile marketing team is able to convince your audience that the features and benefits you provide are better than competing free versions.

Pros

-revenue with every download

-users are typically more engaged with apps they pay for

Cons

-competition; it’s hard to beat the odds

-Apple and Google take a cut of the revenue

2. Free with In-App Advertising

Take a look at the free apps on your smartphone right now—chances are, most of them use in-app advertising to generate revenue. In fact, this model is fast becoming the dominant one for app developers. In a nutshell, you offer your app free in order to encourage more downloads and a wider user base.

Once you’ve acquired a stable user base, you collect data about them and use it to sell ad space on your app. You can do this on your own or partner with a mobile ad company.

Basically, you have two choices for in-app advertising: Banner ads and native ads. Facebook and Twitter have mastered the native ad approach within their apps with sponsored and promoted posts, but most consumer apps are better designed for banner ads.

Mobile users, however, won’t stick around long if your banner ads are too intrusive. A recent study by Medialets showed that ad size and placement make a huge difference in conversion rates and how well the advertising is received.

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Image courtesy of Medialets.com

Pros

-grow your user base faster, free apps are more widely downloaded

-mobile ad spend is a high growth industry; you should be able to sell ad space

Cons

-higher churn, users get tired of ads

-not good for important utility apps; intrusive ads interfere with essential functions

3. Freemium

As the name suggests, this is a hybrid monetization model that combines a free app version with basic functionality with gated functions the user must pay to access. The idea is that after customers download and use the basic app features, they will be enticed to want to purchase all the premium features to experience the app’s full functionality.

Many gaming apps are very successful with the freemium model. Rovio, for example, released a free version of the addictive Angry Birds game, which let users play through a few levels and tempted them with hidden features. Once the customers were hooked on the game, it was a small leap to get them to pony up for premium features.

This model requires a delicate balance, however. If your free functionality is skimpy, you’ll wind up with a great deal of churn. Give away too much with the free version, however, and you’ll have trouble setting your premium features.

Pros

-easy to implement if your app has advanced levels or features already in it

-“try before you buy” is generally a good business model

Cons

-it’s tempting to give your free user base an inferior product

-only works with highly engaged users

4. Subscription

The basic difference between subscription and freemium models is that unlike freemium, where functionality is gated, subscription models place content behind a pay wall. Most subscriptions are recurring and frequently auto renew.

This model doesn’t work well with all verticals, however. It’s best suited to entertainment, lifestyle, and news-type apps, where you can logically wall off content and limit the amount of content consumed (number of videos watched, for example, or number of recipes or meal plans downloaded).

Like their freemium counterpart, subscription apps, which are basically “try before you buy,” do better on the app marketplace in terms of revenue generation. It’s important to make sure that you test your subscription plans to get the right mix of free and paid content, and to give your users a superior onboarding experience.

 Pros

-lower churn due to engaged users

-regular, ongoing revenue stream due to auto renewals

Cons

-curating and/or creating the type of high-quality content your users will pay for

-not appropriate for all verticals

5. In App Purchases

 

share_of_worldwide_revenues1

Image via Statista

In-app purchases are the largest source of revenue in free apps; it’s expected to reach nearly $10 billion this year. In-app purchases work with a variety of different verticals, because you aren’t limited to selling virtual goods, such as lives for a character in a game. You can sell just about any physical good, as well, especially if the in-app purchase feels like a logical extension of the app experience.

While this model works well with mCommerce and eCommerce retail stores, in-app purchases of physical goods aren’t restricted to this vertical. Any business can offer branded merchandise through its app, for example.

Pros

-low risk/high profit, especially with digital or virtual goods

-flexible enough to support affiliate and partnership programs

Cons

-most app marketplaces take a sizable cut from digital and virtual purchases (up to 30 percent) in-app

-safeguards necessary to prevent accidental/unauthorized in-app purchases

6. Partnerships

If you have a customer base that’s a natural fit for another business, partnering with that business to offer their products or services in your app in exchange for a referral fee can be a simple but lucrative revenue source. It’s important that the other company’s offerings have value for your customers, however, and can be naturally integrated into your app.

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Sponsorship is a variation of this monetization model that works especially well with event apps, for example. Businesses partnering with or sponsoring the event can pay to have their content included in the app, up to and including product lists, website link, etc.

Pros

-works with any vertical

-usually well received by users since content is relevant and/or valuable

Cons

-challenging to find partners whose customer base aligns with your users

-revenue is limited to value of partnership agreement

Blending Models

More app developers are using blended models to achieve their revenue goals. The free version of your app, for example, can include in-app advertising that goes away once a user has upgraded to premium features or content. Paid apps can offer in-app purchases, as well, to enhance monetization. And partnership arrangements can be integrated with all the business models.

Just keep in mind that the best monetization strategies don’t interrupt the natural flow of the app experience and aren’t so intrusive to the user that they lead to churn.

Growth and Re-Engagement

No matter what models you choose to monetize your app, you’ll need to have steady growth in your user base—and you’ll need to keep your users engaged. In mobile gaming, for example, just 2 percent of the most active users generate 90 percent of the app’s revenue, so you’ve got to find ways to keep your big spenders and active users engaged if you want to effectively monetize them. That means continually looking for ways to keep your features and content fresh.

It’s also important to watch your marketing metrics (lifetime customer value, free to paid conversions, churn rate, for example), so you can spot weaknesses and target your marketing, engagement, and retention efforts more effectively.

Ultimately, however, your most important monetization strategy should be to ensure your business goals, target audience, and user base are in alignment. If your app is meant to grow awareness and engagement with your brand, you may not want to include in-app advertising, because the app itself is earning its keep by giving your customers new ways to find and interact with your business.

Keep in mind that very few of your free app users will ever click on a banner ad or cough up extra money for add-on features or content, so if you choose these monetization models, you need to have a deep understanding of what attracts your customers and motivates them to take action. This requires a deep dive into market research and your buyer persona.

In the end, however, successful monetization often comes down to trial and error, testing each of the models with your user base to see what works best, and adapting the most successful models to match your app experience.

 

Ian Blair

BuildFire Co-Founder. I'm a digital marketer by trade and an entrepreneur at heart. I'm here to help businesses go mobile and build apps more efficiently than before.

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