How Do Apps Make Money: A Complete Guide To App Monetization

How Do Apps Make Money: A Complete Guide To App Monetization

How Do Apps Make Money - App Monetization

The app development business is booming. With total app revenues projected to grow from $45,37B in 2015 to $76.52B in 2017. Are you an aspiring entrepreneur with a great idea wanting to grab your piece? That’s awesome, but slowdown there turbo. Understanding how your app will make money is the first step to building a successful app business. This guide will help you plan your app monetization strategy.

The way we use phones, tablets, and computers has opened up numerous new opportunities for brilliant, helpful, and sometimes plain distracting applications.

Most of our apps start as an idea for something useful or fun. The idea’s creator may or may not already know how to monetize the app, but the great thing about modern apps is that there are ways to monetize nearly any app that people want to download and use.

app monetization planning template

App production takes 4 things to be successful:

  1. A quality idea (pre-build)
  2. Idea research and validation (pre-build)
  3. App Monetization Plan (pre-build or during build)
  4. App Marketing Plan (pre-build or during build)

What it takes to have a successful money making app

Of course, major software publishers and giant corporations have a different life cycle for many of their apps, but the same principles apply to any kind of app. Without these pieces in place, even the biggest corporation will make an app that flops. With them, on the other hand, the tiniest idea can turn into a global phenomenon.

You won’t be fighting against the mainstream, either. According to a study done by App Annie and IDC, Mobile apps are the fastest growing advertising revenue generator across all platforms.

Mobile app monetization trends
Graph Courtesy App Annie, Mobile App Advertising and Monetization Trends 2013-2018: Freemium and In-App Ads Expand Their Lead, March 2015

Not only are mobile apps growing faster in terms of year over year revenue, they’re also a huge marketplace in terms of real dollars already. Total app revenue in 2015 was about $45.37 billion and is expected to grow to $76.52 billion in 2017.

App reveune numbers
Graph Courtesy Business of Apps http://www.businessofapps.com/app-revenue-statistics/
Data Courtesy Statista http://www.statista.com/statistics/269025/worldwide-mobile-app-revenue-forecast/

There’s plenty of room to grow, and there’s a big enough market to provide income for anyone with a good enough product. You just have to get the core strategies right in order to thrive. Each one of the 4 items for success deserves direct attention. The focus of this guide is the app monetization plan that you will need to be successful.

App Monetization Strategies

There are several ways that companies turn their software into money, and they’re all available to you as well. In some way, all of these models are just online versions of classic monetization strategies.

For example, charging per download is the same as putting a price tag on an item you sell off the shelf. Selling advertising space is the equivalent of selling radio air time or leasing a billboard on your property.

Remember, these app monetization methods are not exclusive. You can combine two or more of them, or even change from one to another at a later date depending on what is working.

app monetization planning template

Paid App Download

The simplest way to get money for your app is to charge a one-time fee for download. You get your money, the customer gets their app, and you’re both happy, right?

However, this app monetization strategy only works with certain conditions. If it were that easy, every app would charge up front. Over the past few years this monetization strategy has seen a sharp decline while other methods that we’ll discuss later have become more the norm.

Top app monetization strategies in major countries

That’s not to say that people won’t pay a download fee, but if you’re considering this avenue, you must understand what your app needs to be successful.The issues stemming from monetizing your app this way leads to three requirements:

  • The customer must believe in the value of the app before using it. It must have lots of good app store reviews or significant word of mouth buzz.
  • You cannot have competitors offering nearly equal but “free” or cheaper options.
  • You cannot have residual costs associated with upkeep for the app (you will not be able to predict upkeep costs against downloads).

Subscription

 

Rather than charge a one-time fee (or in addition to it), you may simply allow users to sign up for a monthly expense. Subscriptions make sense for apps with streaming services that are expensive for the providers. With subscriptions to monetize apps, the more people are streaming, the more revenue comes in.

Netflix and Hulu have app systems where there really is no service value without paying for the subscription cost. The offset to get consumers interested is usually a free trial period, but the subscription is the core of the monetization.

Subscriptions can technically fall under other categories, as well. For example, the streaming music app Pandora uses a freemium subscription model supported by advertising.  To switch from the free version with advertising to the improved version without ads requires a monthly subscription fee.

Apps categories that are most successful with this type of monetization model are entertainment apps (news, magazines, video and music streaming, etc.), productivity apps (todoist, evernote, etc.), and educational (lumosity, foreign language learning, etc.).

 Evernote app monetization via subscription  subscription app monetization

 

In-App Advertising

 

Banners, Pop-ups, and Radio Ads

If your application is a product where users will spend a lot of time watching, listening, or interacting, advertisements might be a good option. Companies will usually either pay per impression or click. There is absolutely no shortage of networks for integrating advertising; you have plenty of options to choose from.

The disadvantage is that these kinds of advertisements might seem intrusive or interrupt the user’s experience. The key is to make sure that this type of advertising won’t push away your audience completely, eliminating demand and failing to turn into revenue. Sometimes the key is finding the right amount, type, and timing for your advertising. Matching the ads to your audience will also vastly increase your success.

Here’s a screenshot of apps I frequently use, Flixster and Bleacher Report, and how they’re using in-app advertising to make money.

in-app ads in-app advertising

Sponsorship

 

Getting a paid sponsor is different from advertising. This is where a company takes a little more ownership for backing your product. They may choose to integrate their brand into certain parts of your app, and you may need to present their logo in places outside of the app itself, like on your company website.

App sponsorship is growing in general, but it requires more hand-in-hand business skill and strategy than simply plugging in advertising code on an app.

One app category that seems to do particularly well monetizing via sponsorships are those centered around live events where users will be interacting with the app consistently during the event. This is an excellent way for brands to increase awareness and tie themselves to a hip event with an active, loyal community. A great example of this is Showtimes sponsorship of the South By Southwest app, SXSW Go.

app sponsorship - Showtime app sponsorship - SXSW

Freemium

 

In-App Purchases

 

Micro-transactions and digital content purchases allow users to improve their experience in exchange for money.

Of course, most of the app’s enjoyability will still be available. Many microtransactions in games, for example, allow users to speed up something they could already wait for instead.

The interesting thing about this method is that it allows everyone to enjoy the same app with some users contributing vastly more funding than others. Obviously, some people will not even pay, but there are two important things to note:

  • Since money is not the gate, there will be more users than if the same number of payers paid what they contributed for an app download. The non-paying users become promoters, though, who may attract other paying users.
  • If you combine this with another type of app monetization such as advertising, then your non-paying users could still contribute to your overall revenue.

As stated earlier, this method is both extremely popular and extremely effective for gaming apps. And it’s no coincidence that gaming apps are some of the biggest revenue generators in both Apple App Store and Google Play. Below you will seen some screenshots of in-app purchasing from the highly addictive game Candy Crush.

Candy Crush in-app purchases in-app purchasing monetization

Upgrade to Full Functionality

 

You may have an app that would be useful with a bare minimum functionality, but individuals and businesses might want to pay to unlock to its full potential. This works when you can offer:

  • More login time and memory space than the normal limits you might have on your app for free
  • Completely new app options that are sectioned off while free
  • Ad removal, if you already have advertising

Functionality upgrades can categorically be a one-time purchase much like acquiring an app with a price tag, or a subscription. These versions only fall under the category of freemium because the apps are still functional when they are free and the money is used to get premium versions.

Below is an example from the recipe app Yum-Yum, by upgrading to the premium version of the app users can access all recipes on the app and get rid of advertising.

in-app monetization methods full functionality app upgrade

M-commerce

 

M-commerce is a type of app monetization that focuses on gaining revenue by conducting real-life business in your app. The app is only a helpful tool or a cash register to facilitate making money for a product or service that lives outside the app.

If you own an online sales or service company already, or you have a brick-and-mortar storefront with actual goods and services for sale, M-commerce may be your best option.

In this instance, nobody has to give you money for just the app, per se (although you can still charge for an M-commerce app). They would ultimately pay for the product or service you provide, and you would allocate some of your revenue to the app as a cost of doing business.

Companies like Starbucks provide apps that let users manage their account or pay with their phone in order to ease transactions. This is M-commerce too, since they are geared towards making a real-world sale over any other objective.

M-commerce app monetization also helps with businesses that are currently limited in scale but could meet higher demand. If you run a local shoe store that could ship nationally, for example, you may want to create a simple app as a digital storefront. Users can browse your inventory, and if you are better than the competition or sell a one-of-a-kind item, they don’t have to search the wide web for your product.

Here are a couple of screenshots from two well known online stores, REI and Zappos, that have done a fantastic job at leveraging mobile to sell more product.

zappos mcommerce app REI mcommerce app

 

User Data

 

Some apps track what users do and either leverage it to sell marketing to outside companies or sell the raw data itself to companies for their own purposes.

Believe it or not, while Facebook and Google make their money from advertising, the only reason their ads are considered high-demand is because of all the usage data they store from every single user to target the ads.

From a marketing perspective, a company only wants to pay to show an ad to the most relevant audience possible.  Since Facebook knows where you live and what you talk about online, they can tell advertisers whether or not you fit their target demographic.

On the flip side, not every company can gather the same data as Twitter or Google. These smaller companies may simply pay a market survey company disguised as an online quiz to determine which Disney princess you are or where you should vacation. The online quiz is an app designed to make answering the market survey questions more fun, and rather than give you a coupon, they just calculate a decent answer. In fact, your interest in sharing the results can even make the app, and therefore the marketing survey, go viral!

If your app can gather relevant data that users input, then you may have a way to profit from user data. Dating websites, social media, quiz games, and shopping apps all do well gathering data for their advertisers or data purchasers.

 

App Marketplaces

 

You may have a great app without the rest of a business model to support monetization. That’s okay, because there are other businesses who might have everything else except for the app. When this divide happens, the best way to monetize your app is on an app marketplace.

App marketplaces work much like eBay, in that sometimes there are app auctions, and other times there are fixed asking prices for apps.

App marketplaces like Flippa, SellTheApps, and Fliptopia emphasize the ease with which you can sell your app (or buy one, if you’re on the other side of the business). You could explore any of these options, especially if you just want to bring your idea to life but don’t want to manage it afterward (or aren’t sure how to profit from it).

Flipping Apps Monetization Method

Narrow Down How Your App Will Make Money

 

Now you know that apps of any type can be profitable. You also know the ways that existing apps convert public interest into revenue. It’s time to apply this knowledge to your own app idea.

Remember, the main categories for monetizing an app are:

  • Download price
  • Subscription cost
  • In-app advertising
  • Sponsorship
  • In-app purchases
  • Upgrade to full functionality
  • M-commerce
  • User data
  • App marketplaces

There are a lot of choices, but your actual app idea will help to narrow that down. The process of picking your app monetization is specific, but it’s also easy with the right information.

How to choose the right monetization strategy for your app

app monetization planning template
There are two primary ways to determine how to monetize your app.

The first way is to look at an existing app that is very close in nature to yours. Simply copy their monetization strategy and make changes based on the data you get back.

If your app isn’t very close to an existing app, or it may be but you don’t have the research, the second way is to simply pick a broad category you fall into. Once you know the category, explore a list of options that work for the category and select one that you are interested in using.

What kind of app are you building?

 

If you are creating a variation of an existing application, you should probably use a similar app monetization model to the original.

For example, if you’re creating a mobile phone and tablet game that functions like Angry Birds, you might want to use the same advertising and freemium combination they do.

Monetization Strategy Example of Apps Using Strategy
App downloads Minecraft: Pocket Edition, QSeer Coupon Reader, iScanner
Subscription Streaming services like Spotify and Hulu
Banner and pop-up ads Games like Fruit Ninja or Angry Birds
Sponsorship Gayot (Marriott sponsorship)
In-app purchases Games like Candy Crush (unlock playability) and Hearthstone (access content quicker)
App upgrades Pandora (remove commercials and open new options)
M-commerce Zappos and Amazon Apps
Marketing data Facebook (targets ads based on usage)

 

What category of app are you building?

 

When you can’t just borrow from someone else’s app monetization strategy, it may be time to zoom out and see the broader strokes.

Look at the major categories of applications and see the list of options for how they monetize.

App Category Ways They Monetize
Online Stores M-Commerce

Advertisements

User data

Streaming Services Subscriptions

Advertisements

Games In-app purchases

Advertisements

Cost per download

News and Sports Updates Sponsorships

Advertisements

Social Media Interfaces Advertising

User data

Mobile Tools and Utilities Cost per download

Advertisements

Upgrades

Mobile Interfaces for Existing Products M-commerce

 

Which platform are you building for?

 

Whether you’re building for an open-source platform like Android or a tight marketplace like iOS, you need to know the trends.

For example, Google Play has more apps on its marketplace than Apple’s App Store, but the App store has twice as many downloads. Both marketplaces pay developers about 70% of the sales revenue, but each charges developers a slightly different fee per year to develop on their software. All of these details will affect your bottom line when monetizing.

For each platform you will ask yourself a few questions:

  • What is my potential audience size with this platform?
  • How much competition do I have for this platform?
  • How difficult will it be for me to develop for this platform?

These questions all stand outside of the normal issues of the app itself because the answers may dramatically shift your earning potential.

How much will it cost to develop this app?

 

Now that you know of some ways to monetize an app, you have to compare your earnings against your costs to verify whether your app is potentially profitable.

Your expenses will be massively different depending on whether you are going to actually develop the software yourself (or in your own company), or if you are going to use an outside contractor to create the project for you.

Residual costs will also be an enormous factor. For example, if your app uses server-side processing or streaming data from a source you provide, those things will require upkeep costs. If you ask for a one-time download fee without any other source of monetization, but your product costs you more money every month that people use it, you may have an unsustainable model.

Scalability plays an important part, too. Will your costs increase as your audience increases? While you may not have a lot of monthly expenses, your app may require a massive development overhaul to stay current and remove bugs. To grow your audience, you may need to assess whether the cost of improving your software offsets the gain of new downloads and users.

Track results to optimize your monetization

 

Different app monetization strategies require different metrics for success. For example, if you charge per download, then total downloads matter much more than the time users spend in the app. However, if you make money from advertising clicks and impressions, then you would certainly consider losing total downloads in exchange for more total user time in your app.

Apps should be measured differently depending on whether they’re being used on a phone, tablet, laptop, desktop, or console. Many of them cross over, so it’s not an exercise in futility to start by considering one potential platform.

For a mobile app, here are some key performance indicators (KPIs) to consider for optimizing monetization:

  1. Usage
  2. Lifetime value
  3. Retention rate
  4. Active users
  5. Session length
  6. Average revenue per user
  7. App load time
  8. User acquisition
  9. User happiness

Break ground on your app

Are you prepared to dive right in and turn your app into revenue? If you are uncertain of how to develop your app or monetize it, click below to download our App Monetization Planning Template as your guide or let one of our experienced app business advisors help you determine the best method for turning your app into a sustainable business.

app monetization planning template

 

2 thoughts on “How Do Apps Make Money: A Complete Guide To App Monetization

  1. Hello Ron,

    Nice article. You are missing though one of the latest trends in mobile app monetization, monetization with surveys. For example have a look here: http://www.pollfish.com. Monetization with surveys pay up to 20x more than classic advertising.

    Kind Regards

    Andreas

  2. Thanks, Ron Medlin, for sharing such a nice valuable post. Can you please suggest me one thing more. Actually, I want to promote my App. Which Mobile Monetization Platform I should choose like Moremint, Smaato & Appnext. It is beneficial for our app promotion or not???

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