November 6, 2017
Category: Business & Strategy
It’s estimated that somewhere around 90% of apps in the app stores are able to be downloaded for free, causing many clients to wonder how app creators are able to actually make money. There are a number of different ways to earn revenue, or “monetize” your app, but no one of them is a silver bullet. The right paid user experience is heavily dependent on your target market, so it’s important to make sure you understand your audience before selecting a monetization model.
We don’t have the space in this post to talk about how to familiarize yourself with your market and competition, but we do provide those insights in our free e-book Inspiring Apps: A Business Perspective on Building Mobile Apps. In this post, we’ll review the most common monetization strategies available so you can figure out the best way to make money off your app.
As you read the options, we encourage you to think about what’s unique about your app and what people would pay for the ability to use it. Likewise, it’s important to contemplate your financial situation and timetable as you select a monetization model – can you initially forego revenue to gather users and perhaps gain more revenue overall? Some models earn more money initially while profits come later in others.
Option 1: Make Money from In-App Ads
This frequently employed model enables you to make money by selling advertising space within your app. The benefit to users is that the app, and potentially all of its features, remain free to them, while you obtain revenue from the advertisers.
In-app ads literally come in all shapes and sizes, with various placements and formats typically commanding different value. Moderate and targeted advertising is most effective, so your goal is to develop a sizable user base and gather information on the people who use the app. This enables you to acquire advertisers who are interested in reaching the types of users you have.
Facebook is an example of an app that does this well, gathering vast amounts of data that enable them to serve up highly targeted ads. Advertisers are willing to pay (for either impressions or clicks) because they feel confident their ad will be seen by the right kind of people.
While ads do offer advantages to the user, people can be annoyed enough by the ads to stop using the app. Interestingly, this has led to an another revenue stream – paying for an ‘ad free’ experience!
Option 2: Make Money from App Sponsorships
A relatively new model within monetization, sponsorship involves partnering with brands who provide users with rewards for completing certain in-app activities. No actual space within the app is dedicated to a traditional ad, but rather the sponsorship is integrated into the function of the app. The app creator obtain a share of the revenue generated when rewards are redeemed, in a way somewhat comparable to traditional affiliate marketing.
For example, a fitness app might partner with a sponsor brand to offer a discount coupon for gear. The coupon is obtained by the user if they achieve a particular goal. When the user makes a purchase with the reward coupon, the app creator is then paid a portion of the revenue from the redeemed rewards.
A similar ad-free sponsorship model has been created by apponsor. apponsor works to align brands with apps that might be utilized by their target audience. The brands pay the app developer a fee to sponsor the app, and in return, the app asks the user (on initial download) to sign up for the sponsor’s newsletter. The app then remains ad-free for the duration of use.
Option 3: Make Money from In-App Purchases
In this model, people are able to enjoy the app for free, but are offered the option to buy additional goods within the app. Users are often motivated to do so because the app experience is typically improved by the purchase of these optional features.
The model is very common in gaming where players buy items or gear, such as a sword that offers special powers or virtual currency, in order to increase their likelihood of success. For example, in Plants vs Zombies 2, there are upgraded/premium plants that users need to purchase if they desire to advance to to a higher level.
While extremely popular in games, in-app purchases are not limited to gaming. Music services like Apple Music offer in-app purchases in order to allow someone to buy a song. Similarly, cooking apps like The Photo Cookbook offer additional sets of recipes via in-app purchases. While the in-app purchases in most gaming apps are consumable (e.g. you use them up when you play them), the purchased content in these other types of apps are available in an on-going way once acquired.
Options 4: Make Money as a “Freemium” App
Another monetization model, commonly referred to as “freemium,” offers users a basic set of services for free, then provides access to premium or proprietary features for an additional fee.
Freemium models can be a great way to get users hooked on your product. Since there is no risk to downloading the app, they are more likely to give it a try. The skill comes in knowing how much access to offer so that all users are reaping benefits, while still gating features that people would be willing to pay more to get.
There are many apps in the business arena that do this well. Dropbox, a popular cloud storage platform, offers a free plan that enables some simple file sharing and backup. The storage limit is fairly small, but it allows people to see how easy it is to use the platform and entices many to sign on for more storage, for a fee. Similarly, Evernote, a platform that helps people to “capture, organize, and share notes from anywhere,” has a free version that works well for one person on a limited number of devices. As people experience the benefits of using it, they often want to have accessibility on more devices and/or see benefits to using it with a team – both services that are offered for a fee.
Option 5: Make Money from App Subscriptions
In this model, users pay to access content for finite but renewable durations. The model is very similar to the freemium model, but typically focuses on gating content rather than features. In both cases, though, successful apps are those that provide updates that regularly improve the app experience, ensuring that users want to continue their subscription.
Most subscription apps allow users to view a predetermined amount of content for free and then prompts them to sign up for a paid subscription to get more. Subscription-based apps offer steady source of reliable income, which makes planning and investing in upgrades much less risky. Many subscription models also offer discounts for longer subscriptions, which is a win-win for both parties.
Some of the most well-known subscription apps are those that offer music or news, such as Spotify or WSJ. In general, entertainment or lifestyle type apps are most suited to a subscription model since content can be limited to articles read or videos watched, etc. Venture Beat offers some great insights on how to succeed with this model.
Concluding Thoughts on Monetization
While we’ve been focused on how to make money from apps that are able to be downloaded for free, we’ll close by noting that there is also the option to generate revenue by requiring payment to download the app. The key to success with this model is solid marketing across all channels, as you must convince the potential user upfront that your app offers something unique. Further, since paid apps have only one point of monetization at purchase, ongoing marketing efforts are required to keep acquiring new users and more revenue.
While numerous options for creating revenue exist, the most successful strategy for your app will be the one that integrates well enough that it feels like a normal part of the app experience. We’re always happy to talk with our clients on which model – or combination of models – could be most effective for you, so please contact us.
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