Choosing The Right App Monetization Strategy
Build an app. Launch the app. Make lots of money.
Wonderful sentiment, but it’s a bit more complicated than that. There is a massive amount of choice for users, with over 1.6 million apps in Google Play Store; 1.5 million apps in Apple’s App Store; and almost 900,000 combined for Amazon, Windows, and BlackBerry users as of July 2015.
Furthermore, the majority of these apps don’t generate much revenue. According to Vision Mobile’s State of The Developer Nation Q3 2015:
- 51% of mobile apps are below the “app poverty line,” generating less than $500 in monthly revenue
- 19% of mobile apps do not generate any revenue
- Only 4% of mobile apps generate $500k + monthly
Building a sustainable stream of revenue from a mobile application requires a monetization strategy – just as any other business does. This post will discuss common app monetization strategies and how to determine which model best suits your app.
App Monetization Strategies
This model entails offering a free download, relying on advertising to generate revenue. Sometimes, revenue is based entirely on advertising but in many cases is used in a mixed monetization model that is combined with freemium service (more on this below).
Works best when
- You don’t plan to monetize directly from users
- In-app purchases would interrupt user experience or not fit organically within your app
- The nature of your app will result in frequent visits, many users, long sessions
- You collect demographic/behavioral data
Pay Per Download
Pretty straightforward. Users pay a one-time fee for downloading the app. While this model allows for revenue to be directly tied to number of downloads, it’s not necessarily the most lucrative model. For one, it’s difficult to convince users to pay for the app without first having tried it out, especially with so many free options available. Converting searchers to users requires a killer app listing, great press, excellent reviews, and a marketing plan that can communicate the value of the app over other, similar apps that are free to download. Furthermore, the lifetime value (LTV) of users in this kind of model isn’t necessarily higher than it is for other monetization models.
Works best when
- You have a strong marketing/PR presence
- The app is better than similar, free options (more features, better UX, etc.)
- The value is commensurate with the price, and users are willing to pay for it
- You want to tie revenue directly to number of downloads
The majority of apps on the market offer free downloads, with the ability to make in-app purchases. Simply, users are able to purchase items from within the app, whether physical or virtual in nature (for example, extra lives in a game or items on retail apps).
Works best when
- You have a retail/shopping, services, or gaming app
- You can still profit despite the percentage of purchase taken by Apple or Google
- The in-app purchases add real value to users
- User experience is good enough to encourage repeat use even without purchases
The freemium model offers free downloads of the app that include additional premium features that users have to pay for to access. This model works on the ability to attract free users, and entice them enough that they are willing to pay to access premium features. The advantage of this model is that users can try the app out before they have to pay for anything, unlike the pay per download model. The disadvantage is that it can be difficult to strike the right balance between offering too many and too few free features.
Works best when
- You want mixed revenue from ads and users
- Premium features add real value
- The free version is enticing enough to attract users and encourage the purchase of extra features
- You have a large user base/long app sessions
Similar to the freemium model, subscription focuses on gating access, but to content rather than features (the same model that many online publications/streaming services employ). Users download the app for free and are able to access a limited amount of content before prompted to pay for a subscription, functioning like a free trial. The advantage to this model is that it allows developers to generate recurring revenue. However, like the freemium model, it can be difficult to determine how much content users should be given for free before having to subscribe. This model is also quite limited by vertical, typically used for news or entertainment apps.
Works best when
- Your app is content-driven (news, music, video, etc.)
- The nature of the app encourages frequent, repeat use
Choosing The Right Model For Your App
Selecting the model that is right for your app will depend on a variety of factors, but your monetization strategy needs to be laid out prior to launch. As is stands, the app economy is leaning heavily towards e-commerce (in-app purchasing, particularly for physical goods).
With that said, business objectives will dictate the app monetization models that your app employs. Here are some things to keep in mind when planning your app monetization strategy.
Start With The App
At the basest level, you need to consider what your app does. What problem does it solve? How does it solve this problem? What is the service/purpose?
As already discussed, some models will lend themselves better to particular types of apps. For example, subscription models work best for services like music or video streaming, news and entertainment, and other applications focused heavily on content. In-app purchases, on the other hand, are lucrative for free-to-play games and apps centered around products, for example, shopping/retail apps.
Look At The Competition
When you are defining your product, competitor research should be a priority. Researching apps that are similar to yours or are in the same vertical is an important aspect of product development and determining potential monetization models. Namely, how are competitors monetizing? How well are their models working? Is there a gap that presents an opportunity for you? Can you do things differently to accelerate revenue generation?
Look At Your Target Users
Another aspect of product definition that is helpful for choosing the appropriate app monetization strategy is user research. Who are they? What do they want? Most importantly, what are they willing to pay for, if anything? As a general rule, users need to be shown value in order to make purchases. For apps that are pay per download, this value needs to be proven prior to acquisition; with free downloads, the value proposition needs to be proven through the experience or utility of the app.
Regardless of the app monetization model you choose for your application, remember that it is not an afterthought. It should be baked into your business plan well before the launch of your app. The last thing you want is to invest in a product that has no effective model in place for generating revenue.