How can you be sure that you are moving forward with the best monetisation strategy for your app concept? We examine the ideal business models available to help you generate the most revenue.
When entrepreneurs and start-ups decide to develop an app, they do so with a variety of goals they want to achieve. More than likely, one of those goals is to make money.
In March 2015, a survey from App Annie found that 70% of app developers had an objective to earn revenue within the App Store (E.g. In-app purchases, paid downloads), while more than 45% wanted to generate income through in-app advertising (E.g. Banner Ads).
So the clear favorite goal for developing an app is to earn revenue, but what is the best monetisation model to achieve this?
As part of our Rocketfuel Workshop, I have collaborated with entrepreneurs on a variety of app projects to answer that very question. From my experience, the most effective monetisation models have been implemented based on the conceptualised app idea, the user experience it provides and what works in the current app market.
To help you move forward with the right strategy, let’s examine the three main monetisation models you can choose to generate income from your app.
The freemium model is considered to be the market-leading method for app monetisation. Under this strategy, the app is available as a free download with in-app purchases and/or subscription options for a defined price set by you.
From 2013 to 2014, app revenue generated from the freemium model grew by over 70% across both the App Store and Google Play. This substantial growth can be attributed to freemium’s appeal to a broader user base by eliminating up-front costs, while also creating ongoing revenue streams for entrepreneurs.
When applying the freemium model, there are a number of value propositions to consider so the model is aligned with the app and its user base:
- Usage – The app offers limited usage, so the user pays to raise or remove those limits (E.g. Tinder).
- Free Trial – The app offers full functionality for a limited amount of time, and then the user pays to continue using these functions after the time period is up (E.g. WhatsApp Messenger).
- Functionality – The user pays for virtual items, content, add-ons, upgrades, services or capabilities (E.g. Clash of Clans).
- User experience – The app that is ad-supported, so the user pays in-app to remove ads or through a separate paid download (E.g. Words With Friends).
- Combination – The app applies two or more of the value propositions (E.g. Evernote – Functionality, and Usage).
So what are the right value propositions to choose as part of your monetisation strategy?
Well, the most commonly used by freemium app developers are Functionality (55% of developers) and User Experience (43%). This makes sense when you consider that both can lead to ongoing in-app purchases from active users. However, Functionality and User Experience may not be applicable for certain app concepts and target audiences, so be sure to assess each value proposition in relation to your app idea and the market you’re entering.
Here are a few tips if you choose the freemium model for your app:
- Choose your purchase options wisely – Provide the user with multiple features they can pay for, but don’t charge for every valuable function the app offers! The user needs to perceive value from the free app’s functions in order to spend money on enhancing their experience. Also, make sure that the purchase is optional and not a necessity. The user will be eased towards a buying decision if the purchase does not disturb their app experience.
- Focus on WHY users should buy – By making the app free to download, the user has already been provided with their preference to ‘try before they buy’. This decision is based on emotions for the user, and so are their subsequent buying decisions within the app. So when determining which features to make available for purchase, focus on WHY they would spend money on it. Finding and presenting the emotional reason to buy a feature will guide the user towards purchasing it.
Freemium is the top monetisation strategy in most app categories. Source: Statista
Paid and Paidmium
Charging a fee to download is the most visible and easy-to-understand way of making money from apps. When applying this strategy, you can either do a once-off fee to download the full version of the app (E.g. Minecraft – Pocket Edition), or make it a paidmium app with additional in-app purchases (E.g. Card Wars).
The simplicity of this monetisation model might make it the most appealing, as it is the strategy that most closely resembles the traditional way of doing business. However, the success of paid apps is entirely dependent on the uniqueness of the product and the marketing of the product’s value.
Consider the psychology of the user when browsing the iOS App Store. Most people are not going to eagerly wait to pay even the small price of $1.29 for your iPhone app – unless they have a compelling reason to do so. The majority of apps are given away for free to create an audience and then generate revenue from them. Once you have that audience’s attention, you can find multiple ways to make money through in-app advertising, in-app purchases, etc.
Pay-per-download can be a good revenue source under the right circumstances, but for first-time app entrepreneurs who don’t have a proven track record and an eager audience of users, you’re better off giving away your app for free. Get users to download the app, and then make the money.
Almost 50% of the most popular games on Apple’s App Store are paid apps. Source: Apple
In-app advertising is a core strategy used to make additional income in conjunction with an applied monetisation model. It involves having ads (E.g. Banner ads, video ads etc.) displayed in certain places within the app. The advertiser then pays you a defined amount whenever users tap on the ad and are directed to a particular link set by the advertiser.
When utilised properly, in-app advertising can generate a profitable revenue stream for app developers. Research from market intelligence firm IDC found that 49% of developers used paid advertising within their apps in 2014, which was an increase of 7% from the year prior. This increase can be attributed to developers more recently focusing on app functionality and the user experience. Therefore, it is essential to find the right balance between monetising through app stores and monetising through in-app advertising.
You need to be strategic in order to make your app stand out in the mobile app market. This makes picking the proper format/s a key to maximising in-app advertising revenue.
Static banner ads and static full-screen ads are the highest earning formats for the majority of developers, with nearly 40% earning most of their revenue from banner ads and a subsequent 25% from full-screen ads. These are the recommended formats to apply for in-app advertising as they are less likely to affect the user experience and, in turn, generate the most overall revenue.
In 2015, Facebook combined app installs with deep linking so a specific in-app purchase ad opens once the app downloads. Source TechCrunch
So what’s the right monetisation strategy for your app?
When choosing the business model to generate the most app revenue, you need to understand your app product first and foremost.
Find the underlying value of the conceptualized idea. Examine the user experience it provides to the target audience. Research the current market your app will be entering.
For our recent app products, the most effective monetisation models have been a combination of freemium and in-app advertising, but even this strategy may not be right for certain apps.
If you have a large consumer base that you know WILL buy your app when it’s launched, then you should charge a download fee for the value it provides!
The decision you make will ultimately affect the success of your app in terms of download traffic and generated income. Choose wisely.
What other monetisation strategies do you think are effective for apps? Please share them in the comments below.