App Monetization: 6 Bankable Business Models That Help Mobile Apps Make Money
Why are you building an app? Yes, you want to cultivate loyalty, create company awareness, gain new mobile customers, provide a benefit, and more. Often, mobile apps are another marketing channel for your brand and after everything you’ve put into getting it launched, you also expect it to be a solid source of revenue.
Many people enter the mobile arena because they’ve become infatuated with the billion-dollar success of breakout apps like WhatsApp, Vine, and Instagram. Mobile is a big deal, but that doesn’t mean it will magically lead to a big deal for you. You need to build a sustainable mobile business, not just a one-hit wonder.
Think about this statistic: 2% of app developers claim about 54% of all app revenues. So, how do you join that alluring 2%? Have a well-thought out plan to profit from your app. And hash this out before your app launches.
If you’re an app developer or an app marketer with an ambition to make a profit from your apps, read on to learn about the six most bankable app monetization strategies you can use.
Identifying Which Business Model is Right for Your App
As we go through the app business models below, think about which would best suit your app. Start by answering the following four questions:
- What problem is your app trying to solve and how?
- What is unique about your app and would people pay for this?
- What else do you think your app users would be willing to pay for?
- What business models do competing apps use and how well have they worked?
Also, it’s important figure out a balance between your need to gain users with your need to earn revenue. Some app business models earn more money right off the bat at the expense of quickly acquiring tons of users, while others result in high downloads first and profits later. What is your timetable? Can you afford to initially forgo revenue to accumulate users? (It might be worth it, depending on your users).
Remember, app monetization strategies should be chosen and built into your app before you launch it in the app store. You can always iterate on these strategies as time passes or even change them completely, but approach mobile with the dual mindset of building an awesome app and an eventual business. Another point to keep in mind is that the below models are not mutually exclusive; you can absolutely mix them or use more than one as you see fit!
The Pros & Cons of the Top 6 Most Bankable App Business Models
Free, But With Ads (In-App Advertising)
This is a model you’ve probably seen frequently in the apps on your smartphone. In this business model, you remove the cost-barrier to purchasing your app and allow free downloads. Your goal is to accumulate a sizeable user base and gather information on the people interacting with your app. Then, this data gets sorted and sold to app publishers who pay you to place targeted ads in your app.
Facebook is a good example of an app that does this well. Its users don’t directly pay Facebook anything to download or use their mobile platform, but Facebook leverages a vast amount of their data to sell highly targeted ads. And this monetization strategy has proven quite effective for Facebook. The social behemoth reported a 151% increase in their mobile advertising revenue during the second-quarter of this year.
Summary: Essentially, you make money by selling data-driven advertising space in your app. You can do this independently or work with a mobile ad partner.
- Mobile apps are in a prime position to collect tons of data on their users (such as their in-app behavior and their location)
- Allows you to gain users quickly because people love free apps
- Can be effective if moderate and targeted advertising is used (ads are interesting yet limited)
- Mobile advertising spend will surpass radio, magazines, and newspapers in 2014 (lucrative and growing industry)
- Not an innovative model and people can get annoyed of ads, which may lead to app churn
- Mobile ads can comprise your app experience by claiming a portion of the already limited screen size
- This model won’t work for niche or utility apps that are designed to help users perform important functions (ads will be too unnatural and intrusive in this setting when people just want to do something quickly)
Freemium (Gated Features)
Similar to in-app advertising, the app is also offered for free in a freemium business model, but certain features are gated and cost money to be unlocked. In other words, people have access to an app’s basic functionality, but there is a charge for premium or proprietary features. The premise of this model is that you attract people to your app and give them a rich preview of what your app can do (without giving them everything). The goal is to accumulate and engage app users until they are willing to pay for additional in-app tools.
A great example of a brand that capitalizes on this strategy is Angry Birds. The Rovio team (the creator of Angry Birds) released a free version of their addictive app. However, the app keeps certain features hidden (like being able to juice up your bird, additional levels, etc.) until users upgrade (for a small fee) to the full version. This allows people to easily play Angry Birds and become fans of the game without hesitating at the initial price. Once app users have conquered a few levels, they’re engaged enough to pay for the full-fledged version for more hours of fun.
Summary: In short, this monetization strategy allows you to tease users with a stripped down version of your app until they are hooked enough to happily buy additional features.
- This mobile business model makes it easy to build up a large user base and showcases your app so people get hooked (and then you can upsell)
- People who “try before they buy” are more likely to become engaged and loyal users later on
- Flexible model because it can be adapted to almost any vertical
- If you offer too few features for free, app churn will be high
- If you offer too many features for free, it will be difficult/complex to convince your existing user base to pay for an upgrade (upgrade won’t have much incremental value)
- App marketers must be careful not to provide a large segment of their users (the free ones) with an inferior app experience
Paid Apps (Cost Money to Download)
The paid app business model simply means your app is not free to download. If people want to use your app they must first purchase it from the app store. Paid apps can cost anywhere between $0.99 to $999.99, and brands make money upfront with every new user. They key to finding success with this model is in your ability to showcase the perceived value of your app with a killer app listing (which includes screenshots, five star reviews, etc.) that differentiates it from similar free apps. Put another way, the most profitable paid apps do a great job of selling their app’s unique features, be it design or functionality or brand.
For example, let’s look at Calendars 5, which is a paid productivity app that costs $4.99 in Apple’s app store. When you check out Calendars 5’s iTunes listing, the app immediately positions itself as a “smart calendar” that incorporates tasks, human language, and reminders in a clean and colorful layout. The app’s listing page includes rich screenshots that highlight its sleek design and stellar reviews about its superior functionality. Within a few seconds, the app is able to make a compelling case that it’s better than Apple’s default calendar and thus, worth the monetary investment.
Summary: The paid app business model is like a “pay then play” strategy that is propped up by your mobile marketing team’s ability to convince users to buy your app instead of free substitutes.
- App developers and app marketers earn revenue upfront with every new download
- People who have paid for an app are more likely to turn into engaged users (since they spent money to purchase your app vs. choosing a free one)
- In this model, the app does not usually have any in-app advertising thus allowing it to have a cleaner interface
- This model motivates app developers to focus on innovation since people expect paid apps to be the crème of the crop
- Selling an app is hard because app stores are so overcrowded (stiff competition from many free apps)
- App stores take a cut of the revenue from paid apps (Apple gets approximately 30%)
- Paid models are a shrinking part of app store revenue
- 90% of paid apps are downloaded less than 500 times per day (cost-barrier to gaining a large number of users)
In-App Purchases (Selling Physical/Virtual Goods)
In-app purchases are exactly what they sound like. In a nutshell, this app monetization strategy involves selling physical or virtual goods within your app, and then retaining the profits. In-app purchases can include a wide variety of consumer goods such as clothes and accessories. However, in-app purchases can also be virtual goods such as extra lives or in-game currency. Whatever your app is selling, make sure the in-app purchases feel like a natural part of your app.
MeetMe is an example of an app that has creatively incorporated in-app purchases into their social app. People can download MeetMe for free and use it to browse profiles, chat with people, and connect with locals. However, you can also purchase credits to enhance your visibility and gain new ways to interact with people. MeetMe’s purchase model has is lucrative because the app is able to clearly highlight the benefits of in-app currency.
Summary: The in-app purchases model is about turning your app into another sales channel (for physical products that are used in the real world) or a mobile storefront (for virtual goods which can only be used inside the app).
- This app business model works particularly well for eCommerce/mCommerce brands and is flexible enough for other verticals too
- In-app purchases can help app marketers make comfortable profits with the lowest amount of risk
- Buying virtual goods can lead to deeper levels of engagement (growing monetization strategy)
- The profit margin is usually high with this model because brands don’t have the traditional expenses on mobile that brick-and-mortar stores do (like staffing and rent)
- Flexible model which can also be adapted to include affiliate programs and partnerships that drive referral revenue
- App stores usually take a cut of the revenue for virtual goods (but not physical goods or services) purchased inside an app
- Recently, this model has received bad publicity because government officials are pressuring Apple and Google to add stricter regulations to prevent children from making accidental in-app purchases
- Apps will need to be more transparent on their app store listing page if they include in-app purchases (which may prevent some people from downloading)
The paywall app business model is similar to the freemium model except that it focuses on gating content, not features. Paywalls allow an app user to view a predetermined amount of content for free and then prompts them to sign up for a paid subscription to get more. This model is best suited for service focused apps and allows brands to earn revenue on a recurring basis.
An example of an app that utilizes this app business model is Umano, which transforms news stories into podcasts. Umano allows users to listen to a limited number of stories until they sign up for a premium subscription. With this strategy, people get to use all of Umano’s best features, but for a fixed amount of time until they are engaged enough to pay for unlimited use and content.
Summary: At its core, this model is like a “pay later” or “free trial” model because users get to test drive the app, but then need to sign up for a subscription to bypass certain content limits and restrictions.
- People get to experience all of your app’s features which increases session lengths and lowers app churn
- This app business model results in a continual weekly/monthly/yearly (depending on your setup) flow of revenue since subscriptions usually auto-renew
- Subscribers are more likely to be loyal and engaged app users
- Subscriptions and content gating also motivate app developers and app marketers to ensure they curate high-quality content that is worth paying for
- Does not easily translate to all verticals (most suited for news, lifestyle, and entertainment apps since they can limit content like articles read or videos watched)
- It can be hard to determine where and when to place a paywall (what is the right limit to place?)
Sponsorship (Incentivized Advertising)
Of all the app business models listed in this post, this is probably the newest entrant in the mobile world. Sponsorship entails partnering with advertisers, who provide your users with rewards for completing certain in-app actions. In this model, brands and agencies pay to be part of an incentive system. Your app earns money by taking a share of the revenue from redeemed rewards. This way, you can incorporate advertising into your app that actually enhances your app’s ability to engage users.
An early adopter of this app business model is RunKeeper. RunKeeper uses incentivized advertising to motivate its users to track their running activity with their app to unlock exclusive rewards and promotions. This strategy lets RunKeeper monetize their app without disrupting their app’s experience with banner ads.
Summary: In the sponsorship app business model, advertisers gain inclusion in your app by funding rewards for your users, who earn these rewards by engaging more with your app.
- Innovative app business model which can be adapted for many verticals
- This advertising strategy will likely be better received by app users because it is relevant and related to an app’s purpose
- App developers and marketers earn revenue, advertisers get more ad space, and users benefit from free promos
- This form of advertising can be aligned with your app’s conversion funnels
- Mobile marketers need to be careful about what actions they incentivize within their app (Apple has been cracking down on incentivizing downloads and social sharing)
- This app business model has not been as thoroughly tried and tested as the other ones (results and success may vary)
Apps Are Trending Towards Blended Models
Last year, Developer Economics published a chart (featured below), which shows the popularity and revenues from five of the most bankable app business models (excluding sponsorships since it’s so new). Interestingly, it shows that advertising is the most popular app monetization strategy, but subscriptions are the most profitable.
As the app landscape becomes more sophisticated, we should expect to see a trend towards more blended models. For instance, you can start with a “free, but with ads” model and then offer users a paid upgrade to an ad-free version, which is a “freemium” approach.
The end lesson here is: don’t just do what others have done before, adapt and iterate on each app monetization strategy to make it work for your app. In this post, we highlighted the standard methods to generate revenue with your app, but only the creative and courageous app marketers make it rain money.
RunKeeper app image courtesy of Boston Business Journal