If you’re thinking of ways to monetize an app, having an app monetization plan is essential if you want to push your app to the marketplace.
Unfortunately, if you’re an app creator, it’s a race to the bottom for the cheapest app on the market, which means you have to get creative with how you make money.
There are a number of monetization plans that could work for your app. You must know the pros and cons for each method.
It’s best to have your monetization strategy in place as soon as possible so you can have a focused path that’s ready for development.
The best policy for app monetization is transparency. The app market is chopped full of scam apps implementing sketchy practices to steal away money from their users.
Be ethical and upfront in implementing a monetization plan. If your plan is to just rip people off, this blog post is not for you.
At the end of this blog post we will give you the best mobile app monetization method, so stay tuned!
Table of Contents
The Freemium
Freemiums have picked up a lot of steam in recent years as one of the most popular app monetization models.
They work by bringing in users with a free version of your app, then once you have them sucked in, the user has the option to pay for additional add ons. It’s one of the most effective and scalable methods on how to monetize your app.
With a freemium model, you want to be growing, growing, and growing. The “free” listing on the app store is enough to build a small community from the beginning, but after that, you want to have free users coming in who could be converted into paying users over time.
An important caveat to the freemium model is you have to make upgrading worth it to the customers. Your free version needs to be good enough for the customer to use and want to come back to, but not so good that they have no incentive to upgrade from.
You need to strike the right balance, and you should be researching early on to find what your customers want the most.
Don’t underestimate the value of free users, as they can still be useful. In an article published by Forbes, Vincent Kumar, a professor at the Harvard Business School, estimates that a free user is worth about 15% to 25% of a paying user.
If you make your app too unusable for free users, they will get mad, leave, and trash your reviews. Conversely, if your free app is too good, you run the risk of not having enough paid users to keep the lights on.
There are many different approaches you can take to building out an effective freemium model monetization strategy. For this section, we’ll talk about feature freemiums, capacity caps, and free trials.
For more information on freemium models, check out this article by the Harvard Business Review.
Featured Freemiums
Feature freemiums are best for apps that are providing a tool. If you’re building a photo editing app, you might include special photo filters as a freemium feature add on.
Like all freemiums, your paid features need to add value for your users. For feature freemiums, your paid upgrade needs to fill a user’s niche.
You need to have the expectation that the majority of your users will not pay for an upgrade. With this in mind, keep a pulse on who are the people who get the most out of your app and what their needs will be.
Pay attention to reviews on competing apps and what your early adopters are saying. To help you with this process, create a buyer persona. Finally, prioritize what you want to develop first for your freemium features.
Capacity Caps
You see capacity caps most frequently associated with cloud storage and business apps. They work like this: users are given a fixed cap in their usage, and when they reach that cap they have to pay.
Capacity caps are often stratified with layers of payment plans. Oftentimes, the unit cost decreases as capacity cap increases. This can incentivize the heaviest using accounts to continue to upgrade.
Again, you want to make the capacity high enough to work for casual users, but low enough to incentivize heavy users to upgrade.
Free Trials
Free trials are another common freemium model, but it comes with the risk of losing a lot of users. Free trials are self-explanatory; they work by giving users your app for free for a limited time.
You can also use a free trial to promote freemium features. You want to make your free trial bulletproof, so users will want to stay. Even still, after the free trial ends, you will likely see a mass exodus of users.
Virtual Goods
The highest earning video game of 2018 was a free game. You’ve probably heard of Fortnite by now, but if you haven’t, it’s a free game where players can opt into paying for new player skins and challenges.
Fortnite made $2.5 billion (yes, that’s with a B) in its release year in revenue from a game where the only incentives for paying didn’t even affect the gameplay. This video by Wisecrack does a great job of explaining the economics behind this new monetization strategy trend.
Most game apps make money from selling virtual goods or upgrades. Sometimes this means gameplay upgrades, extra lives, or bonus levels; other times it’s just cosmetic customization.
Character customization in games has really caught fire in recent years. The reasoning is many players want to stand out. Character customization is built around scarcity; rare features demand more money.
As a game develops a community, secondary markets for skins and items will often pop up. If you develop a game, you should pay close attention to your community and what they value. Start a forum and search for where your community hangs out online.
Virtual goods are almost exclusive to games. Keep tabs on how to monetize an app in the wide gaming world to succeed in the mobile game arena.
Advertising
Advertising is one of the hardest business models for apps to succeed in. In order to generate significant revenue, you need to be receiving tens of thousands of monthly users.
For an app like Instagram, this is no big deal, but for a small app, this is one of the hardest ways to monetize an app.
To make this work, you need your app to be free and accessible so you can generate a larger audience. Then you’ll have to find a mobile app ad broker to place ads on your app.
You’ll have to negotiate what types of ads can be shown, like: banner ads, video ads, text ads, and more.
You’ll also have to negotiate how much you’ll be paid for each impression, oftentimes it’s hard to earn a good rate.
If your app shows too many ads, you can easily disenfranchise your audience. Many apps that take in ad revenue have other app monetization plans built into them.
If you just want to build an app for your existing brand and leave it, then advertising could be a decent option to make some money back.
Don’t expect to make tons of money off of advertising alone until you have hundreds of thousands of users. Consider combining the advertising business model with the freemium model as a monetization strategy, tastefully, of course.
Paid Apps
Once upon a time, the paid app model dominated the market in how to monetize an app. Now, they make up less than half of total app revenues. The rise of the freemium model has made paid apps look less attractive for users.
New app creators are at a significant disadvantage with the paid app model. Without a track record or a brand image, getting potential users to choose your paid app over a free app is almost impossible.
Paid app models are incredibly straight forward. You know exactly how much revenue you’ve generated from the amount of users you have.
Once you have paying users, it’s hard to generate more revenue from them. In order to make money, you need to get new people to download. This where effective marketing and premium design needs to step in.
To attract new users, you need to have convincing campaigns across multiple marketing channels. Your promotional images need to be clear and understandable to potential new users. You need to sell the benefit that this paid app is higher quality than that free app next door.
Paid apps aren’t dead. The most popular paid apps are often business, photo editing, and productivity apps.
If you have multiple paid apps out, you can sell them in a bundle at a discount to lure in more users. Create effective marketing campaigns for your app that is designed to convert users.
Subscriptions
Subscriptions have really become a popular and profitable way to monetize an app or software. Some of the best apps are subscriptions: Netflix, Blue Apron, Adobe.
Subscription apps take a lot of the same strategies of other app business models. First, you need to convince your customers to pay for your app. Then, you can incorporate freemium models for higher tier subscriptions.
You shouldn’t just have one level of subscriptions; your most avid users will want more eventually.
You are going to need to convince your target audience that this app is not only worth paying for, but paying for repeatedly.
You need to be continuously providing value, whether that comes from frequent improvements or consistently great products.
Of course, you are going to need to have great marketing to get users to sign up. Build relationships with your users, and listen to what they really want.
Retaining customers is the key to the subscription model. Your users are paying for a consistently great product that will work and get better all the time.
There are plenty of resources for subscription models. This video by Polymatter does a great job of explaining the allure of the subscription model, and this article by Zuora gives 9 keys to running a subscription business.
Subscriptions are one of the most sustainable business models when monetizing an app, but you’re never going to convince users if the benefits don’t justify the costs.
Conclusion
So what’s the best app business model? Here’s our answer: elephant, cheetah, mouse — that’s it! Okay you’re probably confused but hang with me.
Each of these animals have evolved to fill their particular niche. You would never call an elephant a failure because it can’t run as fast as a cheetah; these animals all have different goals. When choosing a monetization strategy for an app, you need to consider your goals.
What itch will you scratch for your customer? What do you as an app creator and a business need to survive?
In choosing a business model, you’re making tradeoffs. What works for one category, may not work for another. Adapt and find the right balance. You can combine aspects of different business models to know how to monetize an app that works for you.
Always keep an eye on the changing environment, and embrace innovation when you can. Most importantly, be upfront and honest with your users — they are your most important asset.
If you’re confused about certain stages of the development process or need professional assistance, reach out to us for any of your app development questions!
