How to Research and Define an App Monetization Strategy
In the context of creating your go-to-market app strategy, a logical extension of this is diving into how your app will generate revenue. For this, you need to research and ultimately choose an app monetization strategy. This post will discuss common app monetization strategies and how to identify which works best given the product you are bringing to market.
We’ll also discuss two other scenarios that are less commonly covered:
- How to create business strategies for apps that aren’t meant to directly generate revenue (for example, an appointment booking app for a home services company)
- How to build monetization into or optimize monetization models for existing apps
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:
Free download of the app with advertising the method of revenue generation. Often used in a mixed monetization model.
Works best when:
- 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
Users pay a one-time fee for downloading the product. This model can be challenging because it’s difficult to convince users to pay without having tried the product, especially with so many free options available.
Works best when:
- 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
Users purchase items within the app, whether physical or virtual in nature (for example, extra lives in games or items from retail apps).
Works best when:
- 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
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.
Works best when:
- 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
Subscription focuses on gating access, but to content rather than features. Examples include apps like Netflix or Spotify.
Works best when:
- Your app is content driven (news, music, video, etc.)
- The nature of the app encourages frequent, repeat use
Another prudent step is to research competitors’ monetization strategies while you are doing competition research. You can gather insights into how they are making money and what model they are using to do so. For more in-depth data, you can gather market intelligence from sources like App Annie to see which model is performing better given your category of application, which can give you an idea of where the most opportunity lies.
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.
Existing apps that have already been launched – whether a monetization strategy is in place or not – share a similarity: they have the data to make informed choices about how to monetize.
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.
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).
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.