How Will Your App Make Money? A Guide To Mobile App Monetization
What mobile app monetization strategy drives the most revenue? There’s no simple answer to this question as every app is different. When creating a go-to-market strategy for your app, you need to research and ultimately choose a monetization strategy that is best suited for your app and overall business objectives.
App Annie’s Digital App Economy report shows the combined worldwide in-app advertising and net-to-publisher app store revenue is forecast to grow 2.7x from $70 billion in 2015 to over $189 billion by 2020.
Selecting the right mobile app monetization model is imperative for the success of any mobile app and consequently, can negatively impact the overall user experience if you choose the wrong strategy. How do you generate a decent stream of revenue without compromising the overall quality and user experience of your app? Choosing a monetization model that is best suited for your app can directly impact growth, affecting both revenue and user adoption. In this article, we discuss common app monetization strategies and how to identify which works best given the product you are bringing to market.
Before You Choose A Monetization Strategy
Know your audience. Before choosing a monetization strategy you need to determine and understand who your target audience is. Figure out your audience’s demographics and their app usage patterns. Start analyzing data and align your efforts according to their behaviors. Do they like to consume content via video for example?
Target a core set of users. Does your app solve a pain-point of a specific set of users or caterings to a general audience? Try to provide a lot of value to a specific set of users which typically results in profitability. This provides the opportunity to create an experience that is tailored to the needs of a specific user group.
Build a valuable product. Once you understand the value that your app provides your users, you can plan your mobile app monetization strategy around that. The more value you’re providing, the more your users are willing to pay.
5 Effective App Monetization Strategies
The majority of apps are launched with the intention of directly generating revenue. However, a very small number do so effectively: less than half generate more than $500 per month, and only 4% generate more than $500k monthly. Careful consideration of how you will monetize based on your product type, your user base, and market intelligence won’t guarantee profitability, but it increases your chances of success. Here are some app monetization strategies and when they work best:
With advertising, you can eliminate the cost barrier (pay per download) which will encourage more people to download your app. Advertising is often used in a mixed monetization model. Here are the most common ad formats:
Banner Ads are typically located at the top or bottom of an app and can often be ineffective because they are more distracting than other ad formats. They can also frustrate your users so consider the user experience before taking this approach.
Interstitial Ads are inserted at transition points in an app. They appear to be more like a tv commercial and are typically a video. It is popular mostly among games apps, often performing pretty good results if implemented appropriately.
Rewards Ads are triggered by an event in the app like acquiring a prize or achievement. The user will see a pop up where they will get a discount, gift card, coupon, etc. The owner of the app will also get compensated too. The user wins and so does the app publisher.
Notification Ads: These pop up in the mobile device’s status bar and make users more aware of the ad’s presence. These ads are a little more invasive and could damage your brands reputation so use them sparingly.
Native Advertising is used for apps that are content based and typically show up in the apps’ news feed. For example, Facebook adopted native advertising and has done exceptionally well. Native ad formats match the form, function, and feel of the app, therefore it is not interrupting user experience. That‘s why it is preferred both by publishers and advertisers.
When To Choose The Advertising Method:
- You don’t plan to monetize directly from users
- In-app purchases would interrupt user experience or not fit organically within the app
- The nature of your app results in frequent visits, long sessions
- You collect demographic & behavioral data
Mobile app advertising is an effective monetization method, but can be intrusive if the ads aren’t relevant to users, in turn, sacrificing the overall user experience.
2. Paid Download
The most obvious way to generate revenue through your app is by selling it in the app store. You should be able to showcase your app to be something new and unique, one which is different from similar free apps available.
With a paid download, users pay a one-time fee for downloading the app. This model can be challenging because it’s difficult to convince users to pay without having tried the app, especially with so many free options available in the app store. On the Apple App Store, the price can range from $.99 to $999.99 and Apple and Google both take 30%. Putting a price on your app is often a barrier for people to download your app.
When To Choose The Paid Download Method:
- You have a strong marketing & PR presence
- The app offers added value over free, similar options
- Value is commensurate with price
- You want to tie revenue directly to downloads
3. In-App Purchases
In-app purchases are selling virtual or physical goods within the app. Your app acts as a sales channel or a mobile storefront with this strategy.
When To Choose In-App Purchases:
- You have a retail, gaming, or services app
- Can profit despite app store fees
- In-app purchases add real value to users
- User experience is good enough to encourage repeat use even without purchases
In-app purchases have been the main monetization strategy utilized by top-grossing apps, particularly in games, but require well-designed incentives to purchase that doesn’t take away from the user experience. However, if your app doesn’t entice users to want more, they won’t spend more.
A freemium app has gated features. In this strategy, the app is available for free in a freemium business model but some of the features are locked and unlocking them costs money. The app’s basic functionality is accessible by the user but he has to pay a price for using its proprietary or premium features. This helps engage and accumulate users who readily pay for extra in-app tools.
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.
Typically, in-app purchases for a free app allow users to:
- Unlock new features
- Purchase a subscription
- Buy virtual goods
- Purchase additional content
The top grossing apps in Apple’s App Store, the top 30 apps, are all free but offer in-app purchases.
When To Choose The Freemium Method:
- You want mixed revenue from ads and users
- Premium features add notable value to users
- Free version is enticing enough to attract users and encourage purchase of extra features
- Large user base/long app sessions
In-app advertising and freemium will continue to dominate other business models and according to App Annie, subscriptions will continue to be an increasingly important type of in-app purchase, as publishers continue to monetize apps.
5. Subscriptions Or Paywalls
Similar to the Freemium model, the content instead of the features are locked. A specific amount of content can be viewed for free after which the user needs to sign up for a paid subscription to view more content. Service-focused apps can do well with this strategy and earn recurring revenue. Examples include apps like Netflix or Spotify.
When To Choose A Subscription Method:
- Your app is content driven (news, music, video, etc.)
- The nature of the app encourages frequent, repeat use
Successful monetization comes down to preparing the most effective strategy. A proven technique is to not simply rely on a single form of monetization, but to instead implement the use of more than one strategy. While the market is flooded with different advertising options, studies have shown that the vast majority of developers are choosing from these 5 monetization methods.
In a recent study, Apptentive identified the most popular strategies mobile professionals use to drive revenue and found that in-app purchases and subscriptions were the winners. However, a combination of these strategies might prove to be the most effective for your app:
Business Strategies For Ancillary Products
While less common, there are a wide range of mobile apps that are created to support another product or service. Consequently, these aren’t typically developed with the intention of generating revenue. One example is an app we developed in partnership with a home services company, which allows customers to schedule technician appointments without having to contact a call center.
Many of these types of apps are designed with the intention of supporting key business objectives. In the home services example, the purpose was to allow users to access account and product details and easily manage their service appointments with the goal of improving the customer experience.
In the case of products that aren’t meant to generate revenue, you are not thinking about monetization goals, but rather how the product will help you achieve other key business goals. These goals should be determined during product discovery, where you should be considering:
- What the purpose of the product is (what problem are you trying to solve)
- How you intend to solve it
- How to know that you solved it (key performance metrics)
Your strategy, then, should center around how the product you are launching is going to contribute to the larger business goals you have outlined. For more on working with business needs and opportunities for your product, check out our Minimum Viable Product (MVP) Template.
Optimizing Or Building Monetization Strategies Into Existing Apps
In some cases, apps go to market and gain traction without a monetization strategy in place. Tinder, for example, focused first and foremost on product quality and growth, with revenue generation a roadmap item. When this strategy is used, products that are successful from a usage standpoint need to translate that success into monetary form.
When we discussed app monetization strategies above, we talked about cases where each is most appropriate. Once your app is launched, some of these cases can be proven with data – for example, users have long in-app sessions or visit the app frequently.
These data points can be used to determine either a) what monetization strategy you should implement if one is not already in place or b) how to optimize your existing monetization strategy. Some key performance indicators that can guide these decisions include:
- Overall app usage
- Lifetime Value (LTV) per user
- Retention and abandonment rates
- Active users
- Revenue per user (RPU)
- Length of sessions
Since your product already has a user base and you’ve been able to gather learnings about user behavior, you are in a better position to understand what monetization methods might work over others.
How Will iOS 11 Impact Mobile App Monetization?
At WWDC 2017 in San Jose, Apple announced the redesigned App Store that will make in-app monetization easier. When it rolls out in the fall, in-app purchases will appear on an app’s product page, with customers taken directly into an app or game to complete the purchase. Apple seems to be focusing advertising efforts within the apps themselves and reducing monetization opportunities on mobile browsers.
The new iOS 11, will bring some exciting new opportunities for mobile app publishers and marketers, however, the updates are mainly user-focused as Apple’s new iOS 11 is putting user privacy at the forefront.
Mobile App Monetization & User Experience
Monetization always needs to be considered in relation to the user experience. An advertising-based app may offer content for free, but users will turn elsewhere if the advertising is too intrusive or interrupts their experience with app content. Similarly, if a user has paid for a subscription to the app, they aren’t going to be happy if they see interstitial ads while watching a video (imagine for a second if Netflix served ads when you’re binge-watching Stranger Things). Keep in mind that non-skippable ads is linked to poor user experience.
Like other product decisions, monetization strategy should be approached with the end user in mind. The real challenge is finding not only the right strategy, but the right balance that will maximize revenue while also offering users the best experience possible.