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How to select the best app monetization model for your business

How to select the best app monetization model for your business

How to select the best app monetization model for your business
Andrii Kuranov

Author:

Andrii Kuranov

Content Manager

Category: Business
7 min read

Recall your childhood. Which day do you remember better, Christmas Eve or Christmas itself? We bet that the first one because imagining how you open a treasured gift is often feels even nicer than the gift itself. But now you have grown up, become a businessman and are seriously considering creating your application. Once again, we bet that you won’t resist the temptation to calculate the potential profit from this enterprise, habits from childhood will take their toll. But just before you do this, it would be nice to decide how this profit will come to you.

There are many application monetization models. Some of them bring more profit in the short term, some are designed for a longer game. The choice ultimately is yours. We just need to list them, outlining the key advantages and disadvantages. So, which application monetization models do exist. And which model works better under what circumstances?

Today there are a number of key application monetization models. No one actually forbids using several of them in the application at once. However, often owners of applications stop at one option, since the presence of advertising and paid functionality can alienate a potential target audience.

And here are the monetization models themselves:

  • Free applications with ads
  • Freemium
  • Paid Apps
  • In-app purchases
  • Subscription
  • Sponsorship

 

Free application with advertisement

This monetization model is one of the easiest ways to gain some profit from your software. Forget about the restrictions on download. The main goal here is to gain as massive user base as possible. Their behaviour's data may later be analyzed and sold to advertisers who are ready to pay.

The great example of using such monetization model is Facebook. Users don’t pay a social network at all, but Facebook collects huge amounts of data about them and launch targeted ads afterwards. And it works! In 2019, Facebook ad revenue was around $ 69.66 billion.

Pros:

  • it’s easier to attract users to a free application;
  • high demand for mobile advertising;
  • flexible management and a variety of advertising formats;
  • targeted ads.

Cons:

  • the abundance of advertising in the application can cause an increase in the Churn Rate and a decrease in the Retention Rate;
  • unattractive banners annoy users;
  • difficult to scale profits.

 

Freemium

User can get access to basic functions for free, but has to pay for unlocking full functionality. Dropbox, for example, provides only a few gigabytes of storage for free, which can be expanded for money.

In this model, the conversion is 0–3%, so it will be effective only with a large audience.

Pros:

  • in a free application it is easier to attract an audience than in a paid one;
  • it’s easier to convince the user to pay by letting him “touch” the product.

Cons:

  • it is difficult to strike a balance between basic and paid functionality;
  • it is necessary to gather a large audience, since most of the users will remain in the non-paying category;
  • one user pays only once.

 

Paid Apps

Another very common monetization model which involves payment to gain access to the application. This is the most reliable way to make money, but only if you are sure that your product really solves some kind of problem. Well, or you can set a minimum price tag to recapture at least coffee spends.

There are many examples of successful applications where this particular monetization model is used. Often these are programs for highly specialized specialists, such as Photoshop, or tools that are an improved alternative to those that come with the OS by default, such as a calendar or alarm clock.

Pros:

  • Funds are credited to the owner’s account with each new software download;
  • People who paid for the application are likely to use it often - because the money has already been spent;
  • In a paid application, there is usually no advertising that can annoy everyone;
  • This monetization model motivates developers to pay maximum attention to promotion and simplifies the calculation of ROI.

Cons:

  • Selling programs is quite difficult task, because competition in application stores is very high;
  • 90% of paid programs are downloaded less than 500 times a day.

 

In-app purchases

The most profitable source of income for developers is in-app purchase, a proven strategy for selling “chips” inside the application. In the application logic, it is important to think over this method immediately, so as not to change the application too much after release.

In utilities and games, premium features and tips are excellently sold, in games virtual currency is still on its rise, extra life for the character and everything that can be spent within or outside the application. In order for in-app purchases to sell well and regularly, you need to add them to logical and easily accessible sections of the application or show them in a pop-up window when the user needs these items most. It is important to strike a balance between the complexity of the application and the interest of the player: if the game level is too complicated from the very beginning, the annoyed audience will most likely delete it than pay.

An example is the MeetMe program, a social application with the ability to purchase certain goods and services. Well, do not forget about most online games ranging from Dota 2 and CS:Go to Fortnite where the amount of cosmetics purchased exceeds all reasonable limits.

fortnite-on-the-rise

Pros:

  • A fairly flexible monetization model that can be successfully used by companies working in the eCommerce/mCommerce field;
  • In-app purchases are a great way to sell products or services with minimal risk;
  • The ability to purchase virtual goods can increase loyalty;
  • The margin is usually quite high, since sellers do not incur incidental costs like renting premises for real stores.

Cons:

  • Typically, application catalogs take part of the revenue from the sale of virtual goods purchased within the program;
  • Not so long ago, the US and EU authorities ordered Google and Apple to provide more details about the product in applications from the catalog for better user protection. In addition, in some countries, such as the Netherlands, Belgium, some US and Australian states, the sale of loot boxes (virtual boxes from which a random game item drops) is equivalent to gambling.

 

Subscription

A subscription is something similar to a freemium, however the user pays not for the functions, but for the content. Basically, this monetization model is used by application services that offer users a paid subscription and thus receive recurring payments. The subscription is somewhat reminiscent of the “test drive” of the application, after which you can buy the full version. For example, Tinder dating application has a Plus and Tinder Gold subscription, which offer access to premium features such as unlimited likes, an option to chat with people from anywhere in the world, rewind to return random swipes, one increase per month to be one of the best profiles in 30 minutes, etc. A subscription (paywall in some cases) may involve a certain amount of content for free. If the user wants to get more, you need to pay - usually full payment is provided for a certain time.

Various streaming services like Netflix are very fond of this approach. As a rule, the user is offered a free trial period, after which it is proposed to subscribe. In addition, according to the monetization model of providing subscription services, aka SaaS, many serious business applications, such as CRM, work.

Pros:

  • The subscription provides a steady flow of funds over a long period of time, and after the expiration of the term it usually renews automatically, unless the user has specified a different payment method;
  • Most users of such an application are quite loyal;
  • Subscription motivates developers to provide the most relevant and interesting content.

Cons:

  • This monetization model may not be used in all types of applications, for example, it is not very suitable for small and simple software with narrow functionality;
  • Determining when and where to place a paywall can be quite a challenge for the developer.

 

Sponsorship

Among all the monetization models presented, this method of monetizing the application is the newest. In the free application offers from the sponsor are shown: if the user reaches a goal or passes the next level, he receives a discount from the sponsor. The developer or publisher of the application receives a percentage for each executed offer.

Often, such sponsorships arise between applications and brands of similar subjects. An example is the Zeal Step sports app. In it, users receive the so-called Z-money for each step taken. This currency can be spent to get discounts in partner networks or prizes from sponsors.

Pros:

  • This is a very flexible monetization model that can be used in a large number of applications of various types;
  • Users who receive the award will be very loyal;
  • The developer of the program receives money, the advertiser provides information about himself to the user audience, while users receive rewards and bonuses.

Cons:

  • Due to its novelty, this monetization model has not yet been thoroughly tested by developers and marketers;
  • Requires a strong sales professional on the team and the gift of convincing sponsors.

***

What monetization model to choose? As numerous studies show, at the moment the most popular monetization model is in-app purchases.

the-biggest-driver-of-in-app-revenue

This is mainly due to the growth of the video game market. According to the analytic company SuperData, Fortnite 2018 revenue amounted to $ 2.4 billion, which is the highest annual rate in the history of games.

If developing a video game is not included in your plans - choose a subscription payment monetization model, aka SaaS. This monetization model is perfect for various business applications, such as CRM-systems. Read more about the pros and cons of this monetization model here. Look for specific ideas on developing SaaS platforms in our article Best SaaS startup ideas in 2020. And don’t forget that the most optimal is when the application not only brought excellent profit, but a minimum of money was spent on its development. How to do this - read our material How to minimize an app development cost.