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From our previous article “Which Apps Generate Profit: Market Analysis and Breakdown”, you’ve learned that the mobile app development is insanely profitable.
To spare you the details, apps from both platforms (Android and iOS) have yielded a stunning $86 billion over the last year. It doesn’t take an expert to see that the market is ripe and ready for the taking.
There is one question, though:
“How do apps make money exactly?”.
More importantly, how do you persuade modern users to give their money for your app?
In this article, we’re going to answer that question elaborating on specific mobile app monetization models/strategies, their advantages/disadvantages, and how you can leverage that knowledge for your business.
Most popular ways to monetize mobile apps
First things first, we need to figure out which monetization models are used on the market today. In 2017, Statista conducted a research where they asked mobile developers to name the monetization model that worked best for them. Here are the results of the research:
As you can see, in-app purchases, in-app advertising, and paid downloads are leading the chart. Without further ado, let’s break them down.
In-app purchases
In 2017, about 50% of mobile app developers implemented in-app purchases of some sort in their non-gaming apps. At the same time, 79% of gaming apps had already been using this feature.
In terms of revenue, this monetization strategy is an indisputable winner. Today, in-app purchases account for more than 50% of all mobile app revenue. Last year, they generated $37 billion worldwide.
So how does this model work?
Typically, in-app purchases provide users with an opportunity to:
- unlock new features (e.g. upgrading to a pro version with more customization options);
- buy a subscription (e.g. a season pass in a mobile game, curated news subscriptions etc.);
- buy virtual goods (e.g. in-game items, extra points, virtual currency, etc.);
One of the most popular ways of implementing in-app purchases today is freemium-based apps. This monetization strategy assumes that you offer users an app that can be downloaded for free, but requires extra money to unlock some of its more advanced features or to buy virtual goods.
When using the freemium-based model you should be careful about the features that you exclude from the basic version of the app. It’s very important that the users can freely access the core functionality right after downloading the app.
For example, if your app takes black-and-white photos, users have to be able to take black-and-white photos without having to pay extra money. At the same time, you can move such features as the ability to crop, resize, and blur photos to the premium version of your app.
One of the most crucial aspects of in-app purchases is that they require well-designed incentives to purchase that don’t take away from the user experience.
This means you should think through every last bit of your app’s functionality to make sure it blends in seamlessly with the monetization model. However, once you prove your app is worth it, users will be willing to pay extra to.
Remember: people are lazy by nature. They will pay for the ability to achieve the same result in a shorter period of time, especially if there is competition involved.
One of the most vivid examples is the gaming industry. Whether its a PC or a mobile game, many players spend money simply to surpass their competitors or improve their user experience.
You can also implement some sort of a rewarding or referral system where users would receive access to premium features in return for inviting their friends or posts in social media. Such approach allows you to kills two birds with one stone. It drives more users to your app while solidifying the social media presence of your brand which, in turn, drives more users … Well, you get the idea.
Finally, there are subscription-based apps. Every smartphone user has heard of them: Netflix, Hulu, Apple Music, Spotify, and many others. Unlike freemium-based apps, users need to pay a monthly/quarterly/yearly fee to access the main functionality.
To put it simply, the advantage of this model is that it brings stable, recurring revenue and is well scalable. In other words, you can create several subscription plans to target different types of users. However, subscription-based apps are more challenging to monetize. They need proper marketing and high positions in app store rankings.
In-app advertising
In-app ads are another commonly used way of monetizing mobile apps. According to Statista, the revenue from in-app advertisement will reach $117.2 billion by 2020. For the record, it was only $40.5 billion just three years ago.
The benefit of such approach is that your app can remain free-to-download, encouraging more people to use it. There are several types of in-app ads:
- Banners are usually placed either at the bottom or at the top of your app’s interface. However, because of that, users find them more distracting than other kinds of advertising, which makes banners a bit ineffective.
- Transition ads are typically inserted between certain pages within the app. You can think of them like tv commercials as they are usually short videos. This type of in-app ad works best for mobile games as well as other app genres if implemented properly.
- Reward ads are launched after/during a certain event or a campaign in the mobile app. Users receive a notification, which offers them some sort of a discount, gift card, coupon, etc.
- Notifications appear in the status bar of the mobile device, letting the user know about the promoted content. The main downside of notifications is that they can be obtrusive, so you should be careful when implementing this type of in-app ad.
- Native ads are considered the new king in the world of content-based apps since they are mostly displayed in the news feeds. For example, you may have seen native ads on Facebook. The reason why they’re called “native” is that the format of the advertisement matches the look of the app, which makes it a great choice in terms of user experience.
However, if your audience doesn’t like the ads, you can still take advantage of the situation by allowing users to turn off the annoying messages after purchasing the ad-free version. Even then, you should be extremely careful about the content of your in-app adds.
Paid app download
Last but not least is paid app download a.k.a. upfront purchase. It’s the most obvious and straightforward way to generate revenue from a mobile app. In fact, this model is as old as the hills, since it inherits the way we’ve been doing business over the last few thousand of years.
Basically, you submit your mobile app to either of the app stores (or both) and set a specific price that users have to pay upfront before being able to download and use the app. On the Apple App Store, the price can range from $.99 to $999.99, wherein both Apple and Google take 30% of the cut.
It’s as simple as that.
Or is it?
Unlike the real world, purchasing things online involves a certain amount of risk and possible disappointment. Mobile applications are no different.
Without the ability to test this or that app, it’s impossible for users to form their opinion about it. Which, in its turn, makes it difficult for you to persuade them to pay, especially with so many freemium-based options available in both app stores.
That’s why, before choosing this monetization strategy, you need to make make sure that:
- You have a strong marketing and social media presence
- The app can offer added value over free and similar counterparts
- The value corresponds to the price
So unless your application is backed by a strong marketing campaign and offers some really convincing advantages compared to its alternatives, you should consider other monetization options.
The Bottom Line
There are several monetization strategies you can choose from. You just have to find out which will work in your case, and if it won’t, just try another one. Better still, you can combine them. For example, you can use the freemium-based strategy that includes in-app ads.
It’s also important to mention that each of the options heavily relies on marketing campaigns and media presence. The stronger they are, the more likely users will consider downloading and using your app.
Your focus, however, should still be enlarging your customer base; the number of people who actually use your apps. The bigger that number, the bigger the potential for monetization. So focus on making the app great and the profits will follow.
