If you are looking for a synonym of the term “gold rush” in the 21st century, it is mobile apps. How much do they generate? Billions, thousands, hundreds of dollars. Why so much disparity? Well, that depends on the app type and your monetization models. So, if you think your app concept will be a great hit among users, it is obvious that developing the app itself will take lots of time and money. Before dedicating yourself to such liabilities, you’d better ask the reasons and dynamics behind the numbers below to ensure you can gain revenue on a long-term basis.
Why risk then? The forecast numbers are jaw-dropping. According to SensorTower, between 2018 and 2023, the expected CAGR of user spending in app stores is 16.8% and it will reach $156 billion by 2023 while Statistica shows the predicted revenue of $ 935.2 billion. And, yes, free apps make money as well.
But how can you become a part of this profitable ride? It is clear already that having a great idea is not enough. To make sure it will generate profit, take a deep dive into HOW it can generate any money at all, and WHEN and WHY it is reasonable to use it. Our article will provide a thorough explanation of various models, their features and principles as well as help you figure out your way to their successful application.
Monetization Methods For Free Apps vs. Paid Apps
Speaking in rough numbers, as of 2021, there are about five million apps on Google Play and App Store according to Statistica. Impressive, right? Yes, the market is enormous. In contrast to any logical assumption, the top grossing apps are free. If the statistical data is true (and it is), free apps have surpassed the paid ones in terms of downloads and profit. Here's great evidence of the free app dominance.
When it comes to app categories, games are way ahead of any other segments. App Annie shows that as of August 2018, in the US top grossing apps are Fortnite and Pokemon Go on iOS and Android platforms, respectively.
Revenue numbers are truly impressive. Yet, this is not a sign or a rule that to make money from mobile apps you have to develop a game. Another chart as of October 2018, generated by the App Annie clearly shows that non-game apps are a real hit as well. For instance, Tinder, a dating app with a freemium model, managed to make it the 2nd and the 3rd place on iOS and Android respectively.
The next question you have in mind is - how can free apps make so much money? Surprisingly, even Google Play claims that 98% of revenue is generated by free apps. In addition, Gartner Research group published a report stating that customers are willing to spend 24% more on in-app purchases than on paid apps. Selecting such a strategy is rather understandable: once you see the app is worth your attention, you are more likely to spend money on it or in it.
However, the sheer existence and profitability of both app types indicates that either of them has some valuable features to rely on in terms of revenue. The key to success is identifying the specific traits and making the best of them in terms of monetization. So, our next issue is how this difference influences the ways to generate revenue for both.
Feature 1. Target audience. Obviously, free apps are capable of attracting more users, and, as a result, influence the visibility and number of downloads. Indeed, paid apps have to earn their customers in a more persistent manner. On the other hand, once such apps gain their customers, the latter are more loyal and product-driven. With free apps, no payment = no commitment = less engagement
Feature 2. Development and design costs. As free apps tend to be less expensive and/or complex, they require lower budgets.
Feature 3. Reputation. Free apps (even if not the perfect ones) may still be a perfect source of optimization ideas while paid apps have to be flawless from the start to make sure their audience is interested enough.
Feature 4. Promoting a brand. Free apps help to make your business known to a wider audience faster and easier. For paid apps, this task is not an easy one as people are reluctant to buy something they cannot try for free first (unless it represents a famous brand). Another case is shopping for established brands. What people are looking for is discounts and saving money, not spending it on subscription or premium features.
Finally, Feature 5. Monetization strategies. All of the factors mentioned above add up to the conclusion that free apps have almost unlimited monetization possibilities (which will be discussed in detail later) while paid ones have a narrow pool of options to choose from.
With all that in mind, whatever app type you intend to publish, remember: it will have competition. There will always be someone else with a better, faster, or more tempting offer. So, even with the more advantageous free app, the secret to gaining revenue is weighing your monetization options and choosing the best strategy.
App Monetization Strategies
Let’s look into more detailed data on how free apps actually generate money.
You might be easily tempted to simply apply the most effective money-making strategy and sit back waiting for revenue. Unfortunately, that’s not how it works. There is a great deal of a gap between how app users and app developers see the value of the app itself (hence, a user-oriented approach should be applied by default). In the same way these two groups perceive every single channel involved to make profit.
Thus, there is no universal method or a perfect combination of those to generate revenue with 100% certainty. What matters is providing the users with new experience and engaging various channels of interaction. So, the prime task of every app publisher is to mix appropriate strategies that in the end would deliver value both to the app owner and the end user.
In this part we will focus on models and their peculiarities to make sure you are fully armed in making a sensible decision on what and how to use.
What it stands for: This strategy is the most popular and simple to integrate. The Sweetpricing report states that this model is the only source to generate in-app revenue for 32.5% of the largest mobile providers. What an app owner needs is to display ads inside an app or go for affiliate marketing and receive payments from third-party ad networks. You will get paid either per impression, per click or per installation of an advertised application.
In order to make it work right, you need to remember there are 5 different types of ads displayed for monetization.
- Banner ad (placed either at the top or bottom of the screen) They do have the advantage of being not as intrusive as other types. The reason is once they appear, a user can still use the app in a normal way. However, the CTR rate of such ads is not high enough. Moreover, brand recognition is crucial to their success.
- Video ad (placed within the app, playing automatically for up to 30 seconds during a pause). Perhaps, one of the most satisfying options for users is another subtype of this ad - a rewarded video. Watching a commercial to the very end both guarantees getting perks and bonuses (in-app currency, points, game lives) and makes sure the ad is not ignored or blocked.
- Native ad (integrated into an app) Although they are still sponsored and their main aim is to promote a certain brand or product, being naturally blended into the app, they tend not to irritate or tire as much as the former types.
- Interstitial ad (shown at a certain point within an app at a full-screen pop-up mode) The user is given 2 strategies to follow - to close the ad by tapping the cross-button or examine the advertised product or service.
- Incentivized ad. This type shapes the image of the ad itself as it is seen not as a distraction but a rewarding opportunity. Once the users feel like filling out a survey or sharing ideas can be beneficial for their in-app experience, their loyalty, positive brand attitude and engagement may skyrocket immediately.
Bear in mind:
- Mobile app owners should be very careful in monitoring the users’ behavior and reaction to various types of ads. To generate revenue, make sure your target audience is entertained by the ads, not annoyed. Otherwise, they will just block those and your efforts will come to nothing.
- The perks you offer while applying rewarded videos or incentivized ads must be arranged in a smart way and promoted as a part of the app idea to involve the user. 91% of users pay great attention to the brand behind the ad, so don’t underestimate its power.
To put it in numbers: yes, a great deal of users consider advertising effective, but very often irritating. However, this model is still one of the most common: 50% of non-game and 79% of game apps make the best of it.
2. Referral Marketing
What it stands for: Closely related to the first model, referral marketing uses the in-app ad to promote an affiliate company (its products and services or even promote another app) and get revenue for installs, clicks or any other actions. There are even special network companies to help you find the best affiliate partner and software to integrate this concept into your app.
Again, there are several ways you can apply this model (the names of which speak for themselves): CPC (cost-per-click), CPV (cost-per-view), CPI (cost-per-install), CPM (cost-per-mille i.e. cost-per-impression), CPA (cost per action or cost per acquisition), CPS (cost per sale networks or pay-per-sale).
Bear in mind: selecting a certain type of referral marketing requires you to stick to it exclusively and does not allow applying others
3. Freemium and In-App Purchase
What it stands for: Selling virtual items to offer better functionality (game levels, additional features etc.) or upscale content. Every trade is conducted within the app store and converts into revenue for the app owner. Forbes points out that apps which integrate this model are capable of generating the highest profit for the app owners and this tendency is not going anywhere lower in the forecasts.
The features you offer in return for an in-app purchase may be consumable (applied only once like game lives or in-app currency), non-consumable (applied permanently like ad blocking, better functionality), and subscription (applied temporarily to get access for a limited period and extended it if necessary).
Bear in mind:
- You need to keep the paying audience interested
- When the model is applied inappropriately or poorly, be ready for negative reviews and decreasing number of users-users who do opt for premium options expect a lot
The stats on various researches prove all the advantages work if all the points are taken seriously. The latter is easily understood when you spot the difference between the first two positions and the rest of the chart.
4. Subscription Model
What it stands for: offering unlimited access to advanced features or content in exchange for a subscription fee (weekly, monthly, annually).
Bear in mind:
- Permanent updates of features and content are a must if you want to keep your paying audience.
- It is better to stick to one subscription strategy that you choose initially. Otherwise, changes in payment plans or schedules may result in kickbacks of the number of existing users
It is worth mentioning that according to the Sweet Pricing report, only 5% of the most successful apps engage this model, which makes subscription one of the least popular strategies for monetization. Yet, do not rush to sweep it off your mind as, when done wisely, it can be your unique source of revenue.
5. Sponsorship Model
What it stands for: involving sponsors in your market segment by posting their branded ads, information on their business or even adapting the app design to match their marketing needs.
There are two types of sponsorship deals: negotiated split of the revenue produced by the app and monthly sponsorship fee for its use or maintenance.
Bear in mind:
- This model can be successfully used for apps with a regular audience or those seeking to expand it through the existing loyal customers of the sponsor.
- Choose the brand wisely to satisfy your audience needs and conform to their expectations
Apps that make the most of this strategy: Weather Channel/Home Depot alliance.
6. Crowdfunding Model
What it stands for: using platforms like Kickstarter, Indiegogo, CrowdFunder, AppsFunder etc. to collect enough funds for app development, enhancement or marketing.
Bear in mind: In this model transparency is number one issue: be very careful with all your actions, promises and prospects.
Apps that make the most of this strategy: NGOs, start-ups and small businesses.
7. Email Marketing
What it stands for: The oldest of all models, email marketing aims at collecting user data (not just email addresses) to provide these users with marketing information of various kinds and attract their attention to advertise a product or service. Notifications may concern updates on your features, news etc. There are three main ways to collect email addresses:
- through Facebook SDK
- by asking users to provide their email in a pop-Вup screen in exchange for rewards they may use within this app
- by integrating third-party services.
Bear in mind: Data protection is of key importance in this model: always ask for permission to send emails and inform about the purpose of using this data.
Apps that make the most of this strategy: The Washington Post.
8. App Merchandise & E-commerce
What it stands for: using an app to sell physical items or branded merchandise.
Bear in mind:
- In order to provide a solid user shopping experience think about the compatibility of the goods and unanimous marketing strategy.
- Always opt for a user-friendly mobile version of any e-commerce platform. - The listing page in an app store should provide accurate information about physical goods
Apps that make the most of this strategy: Angry Birds game (every month Rovio Company manages to sell about 1 million branded items like backpacks, T-shirts or sickers while another 1 million of revenue is generated by plush toys make another 1 million)
9. Collecting and Selling Data
What it stands for: Collecting data concerning app usage, user behavior and preferences that can be used either for enhancing your own app or sold to outside companies and researchers is highly valued by researchers.
Bear in mind: Only relevant data is worth being purchased.
Now that you are fully aware of all the possible models you may involve, let’s have a look at how these work in real life for some of the most popular apps.
Google Maps uses multiple revenue streams:
- advertising (promoted pins for companies to stand out from the crowd and catch customers’ attention and local search ads to increase visibility of a certain business when it comes to rating in search results or getting discounts)
- providing APIs both for customized user experience and selling such functionality to as third-party service to other apps
- partnering with other services to help you order a taxi or food within the app itself is convenient (and profitable, again).
The focus point is: make customer experience your priority, advertising (or any other monetization strategy) should seem natural, not intrusive or superficial.
Slack, a game converted into a successful communication tool. This is a great example of how one model can blend into or even generate another model. The company engaged a lot of investment due to the freemium strategy.
Also, about ⅓ of the total customer audience uses premium options due to its flexibility as the price for team members within one organization is not charged once they stop using the app for some time.
Another clever trick is making partnerships with third-party startups who develop integration for the platform in exchange for Slack investing in them.
The focus point is: adjust to the needs of different target groups to ensure your users’ loyalty and make long-term partnerships.
Pandora, the company that shifted its monetization strategy from annual fee to using in-app ads and freemium model. Even the free version with banners, audio and video ads seems least invasive as it applies user data to target advertising making it as smooth as possible.
The focus point is: test, analyze and evaluate the monetization strategy you (and the competitors) are using; engage available user data as much as possible.
These (and thousands of other successful apps) have proved that it IS possible to make a free app profitable. However, there is no unanimous manual for everyone to follow.
Steps to Define the Best App Monetization Model
Thus, our most important task is to equip you with the step-by-step instructions on how to select the monetization model that would fit YOUR app best.
Having a successful concept and publishing a user-oriented app is enough in case this is your ultimate cause. However, to gain profit, it is necessary to make further actions towards planning your revenue.
Step 1. Market research
On this stage you really need to “dig deeper” than you thought. Either conduct a thorough investigation yourself or hire an experienced business team. What matters is detecting your competitors: both their operational and monetization tactics. Find out how they make money and try to analyze if their strategy is successful. Maybe, this will lead you to unexpected conclusions your competitors missed that can be used as your privileges.
Step 2. Discover the target audience for your app
Remember, these are people’s pains, not the publisher’s or the developer’s, that make the app wanted. Think of monetization strategies in terms of being inspiring/amusing or tiresome/irritating for your audience. Also, try to estimate how much they are willing to spend (that would directly influence what you should offer to pay for).
Step 3. Shape your app concept
Never underestimate a catchy name, concise and tempting app description as well as visuals for previews to attract users in the app store.
Step 4. Choose a monetization model (or combination of those)
While selecting the strategy, bear in mind it always depends on the app type (engaging a sponsor means the brand behind it should never contradict your app idea while start-ups should not overuse the advertising option). The model must be both relevant and organic, the one that would blend with the app itself. The option of a mixed monetization model is a win-win for both the app owner and the audience as sensible diversity in online marketing is essential. Also, pay close attention to data collection for your own app’s sake to analyze audience pains and wants and, consequently, boost user experience within your app.
Finally, think of each method through the lens of your app, your consumers and your product. Ask yourself if it can bring value and make any difference.
Current Trends in App Monetization
Finally, before sitting down to map out your model, think of the issues of validity, relevance and coherence. As it happens with any sphere, there are certain tendencies, shifts and fads that influence the marketing strategy and the monetization models application. It is especially vital to consider in 2021 when the world is still going through the pandemic crisis.
The last two years managed to transform the economic landscape at local and universal levels as well as altered consumer habits. Indeed, you don’t need a crystal magic ball to guess how drastically COVID has changed the user behaviour and influenced the revenue streams. The schools are closed, the restaurants work as takeaways only, your vacations are either postponed or cancelled and you are quarantined half the year. Well, mobile service and internet connection to the rescue! In the first quarter of 2020 people spent 20% more time on using apps in comparison to the previous year.
Over 23 billion USD was spent in app stores during this period. Customers are even more reliant on apps now but they have adjusted their preferences and locations as well as revised their spending policies. However, the scale of such work and life conditions disruption seems to have benefited app popularity. The number of daily active users have been experiencing constant fluctuations: from rapid increases to temporary peaks and steady return back to normal.
Logically, content and media, grocery, education and entertainment, medicine delivery and health/fitness apps have been of great importance during self-isolation and lock-downs.
With this data in mind, we’ll try to share some insights on how to apply the previously mentioned monetization models against this pandemic background wisely.
- Yes, there is a definite rise in the app downloads and user activity. But that also means that there are more competitors trying to engage this vibrant audience. Our first tip is: use the freemium model sensibly. It’s popularity is going to work to your advantage. Offer app users this healthy solution along with valuable free content and you will ensure a memorable user experience. However, be ready to offer relevant content and adapt quickly like 7Mind, a meditation app, which provided its users with free content (that can be upgraded to the premium version) for stress-relief and handling anxiety during the pandemic.
- Another tactic is enabling a subscription option for educational or entertaining apps. Yet, this time, instead of offering crisis-combating methods, try focusing on the positive distractions at this nerve-racking period: learning new languages or painting techniques you have never had enough time for. Also, study your numbers again and re-define subscription plans to suit the altered audience needs.
- What’s next? The famous in-app advertising. Yes, it is and will remain a good way to monetize your free app as long as you adjust your priorities: the success comes when you manage to find the balance of that very app in the right time and the right place. Oh, and the right audience as well. Again, the brand you advertise should be compatible with your app messages and purpose as well as the COVID-shaped market. For instance, if it is a medical app, why not involve an insurance company?
- Do not bombard users with numerous emails and notifications in order not to be blocked once they are tired of your intrusiveness. There’s too much “hustle” everywhere as businesses are struggling to catch the customers’ attention by any means. Instead, try native ads and in-app purchase models to make the whole process more natural and wanted by the consumers themselves.
All in all, do not make your users feel crowded by your online presence in their phones. Yes, notify them you are still working and offering great stuff in hard times but let them feel it’s all relevant and optional.
We do hope that this article will help you realize it is possible and highly profitable to monetize a free app. What you need is thorough analysis of the market and your target audience, a well-planned strategy and being prepared to alter and update when it is required by the market and any other circumstances. It is a given now that free apps make money but choosing the right model for generating revenue is the background of getting users’ awareness and loyalty.
Think of profit in terms of getting your customers’ approval and satisfaction, remain true to your core ideas but do not forget to grow. However, reinventing the wheel is not an option: use the models described, adapt them to your needs and user preferences, try to find what is streaming and what is missing within your market segment and enjoy the ride.