There are many different business and revenue models available to help you make money from your application (or to at least regain the IT’s development costs). App success stories aren’t like lottery tickets. Marketing actually plays a huge and sometimes underestimated role in making sure your app will triumph.
Let’s start with the basics. First of all you need a solid business plan which supports all aspects from launching an app to making sure it survives in the store. A basic question is: How much revenue can I get from my app? And over what amount of time? We won’t go deeper into the variable of timing here, but once you picked your financial model or combination of models, you’ll need to pay attention to the ROI of your app, within a forecasted time frame for return. You don’t want to waste anybody’s time here, especially your own!
So here we go, relax and grab a coffee, we’re about to give you some insights into the main revenue models for mobile applications:
1. The Marketplace Model
2. The Freemium and Premium Model
4. Pay Per Download
5. In-App Purchases
8. Licenses and Royalties
1. The Marketplace Model
This model is known under many different names: the broker model, commission model, network provider or maybe it’s best known: the marketplace model.
The principle is simple: the application itself provides a peer-to-peer network to connect people, objects and services to each other or any combination of this.
The most important part of this model is that people are willing to pay for the value of this network. Why? In many cases, apps based on this model connect you with exactly what you want. In some cases, without the app it would almost be impossible to find what you’re looking for. As such, a contribution or commission per transaction or connection is a fair deal and people are willing to pay this. A very common used commission is 10%.
In these kind of models, the person who can earn money pays the commission, not the person receiving the goods or the service. Regarding AirBnB for example, it’s the host who can earn some pocket money so he or she has to contribute. Not the other. Seems fair to us!
How High Is the Commission?
You are free to set your own commission rates or percentages, but check with your financial advisor on the base of your business plan and pretty quick you’ll be able to set out a fair commission based on the prognosis of the app’s user base, it’s growth and the amount of expected transactions.
There are options when it comes to setting commissions within this model. You can: set a percentage on the transaction, a fixed fee or a combination of the two. A well know example of the last model is eBay, where the seller pays a fixed price to list an item and on sale, an additional commission fee.
‘Marketplace apps: it’s all providing valuable connections.’
In some cases, the application itself merely functions as a marketplace and may not own the goods or services listed in the application. This is really important when it comes to legal matters and liability, as the owner of the application cannot be held responsible for the content (goods, services) provided by its users. In these cases the responsibility lies on the user’s decision to use the platform. For example, if you had an awful date on Tinder, is the application to blame?
On a practical level everything is not so black and white, legal matters regarding apps are not completely fine tuned yet. We are gradually seeing the laws changing and assigning responsibility back to the owners of the platforms.
2. The Freemium and Premium Model
The freemium and premium model go hand in hand. As the name suggests, the freemium model won’t contribute much when it comes to revenue, instead it acts as the pathway to the premium version.
Under the freemium model, kick off by listing your app in the App Store or Google Play Store for free! The app should remain free, with premium, paid-for features or privileges added over time. As you can imagine, strategic planning and timing are crucial when opting for this model. You’ll need to have a stable and considerable user database before providing paid features. In general it’s better to provide a free app in the beginning and slowly add new paid features, rather than launch as a paid app from the beginning. Keep in mind that both the App Store and Google Play Store take a commission on paid apps and in-app purchases (premium model).
I think we’re all familiar with the hype of Angry Birds – a highly addictive (and for some of us, frustrating) game. Angry Birds is still free to this day but certain features require payment to unlock them. Users need to pay a small fee for the premium model or full version of the app. If you want to gain a lot of revenue here, make sure you get the timing right and that you also test the attractiveness of the paid features. If it’s not appealing enough or doesn’t provide enough added value, users may feel satisfied with the basic version of your app, and there goes your income…
Also known as paywalls, we’ll discuss subscriptions here as there are some similarities to the freemium/premium models. The subscription or paywall model allows users to pay for ongoing content and new feature additions.
A similarity is that both in the freemium model and the subscription model the user is not required to pay right away. The paywall app might be totally free to enjoy specific selected content, but if you’re hungry for more… then you need to subscribe. Examples of this model can often be found in web versions of newspapers. These offer free articles to read, but more in-depth pieces are only accessible for subscribers. News, lifestyle and entertainment apps provide content that can be limited in unities like an article, a video or a song, so the paywall model can be applied.
When users are provided with additional content or extra features, strategic timing can be important. For example, you may choose to allow the user to try your app for free for the first month, or the first ten times you use the app. Afterwards the user must subscribe for access.
When launching a fee based application there are two variables to take into account, the first one is the target group: Do you opt for B2C or B2B? If you target businesses instead of consumers you may ask for a relatively higher subscription fee, as this could be likely tax deductible. The second variable to consider is the subscription interval: Do your users renew per month or per year? You could also consider incorporating an auto-renew function. I think by now, we all at least experienced, how subscriptions are deducted from one’s credit card.
‘One of the most solid financial base to launch an application is the paywall. Revenue is guaranteed.’
Subscribe now! We’re all familiar with this, but when exactly do you set this paywall? This is a tricky question. You need to balance a few things here: the price of the paywall, the moment in which the user is able to see the restricted content, and the option to bypass (read: pay) it. It’s also import to balance the amount of content that is available for free versus the amount of restricted content. Apps with content gating usually motivate the app developers and marketeers to produce highly valuable and qualitative content.
4. Pay per Download
This is likely the most easy model to set-up. You’re not offering a free app, and instead ask your users to pay right from the start. This is common, and many apps require a small fee such as 1€ or $1. When you choose this revenue model as the only source of income, make sure you have an app marketing army behind you, to ensure massive exposure with huge downloads, as volume download (if possible with an exponential factor) is what you’re aiming for.
‘It’s all about the perceived value of your app.’
You’re free to set your price in Apple’s App Store or Google Play, but make it reasonable. You can make money upfront with every new user, but you’ll have to convince them to grab their wallet and choose you instead of a similar free app (as there will be most likely a free alternative and if not right away, in only a matter of time). The key here is to differentiate your app in terms of unique features, functionalities, UX, design and branding. Yes, you’ll need them all. Make sure to go through our checklist to optimize the user experience of your app.
Take into account that Apple’s App Store and Google Play take a commission on paid applications. For every dollar or euro your app generates, both stores keep 30% of the revenue for themselves. So, do your homework well and make some forecasting about your potential user database and it’s growth.
5. In-App Purchases
This revenue model has some links with the above mentioned Freemium vs. Premium Model. In-app purchases are one of the options to allow people to pay during the experience.
The most popular in-app purchases model is under the form of e-commerce brands owning a mobile app as an extra sales channel. In 99% of the cases the app is free and similar to the website, where you look for the items you want, you pay for it and get them delivered at your home. It’s all about physical goods such as clothes, DVD’s, books, furniture etc.
The other category of in-app purchases involves virtual goods. These are usually part of the app’s experience, providing added value. Within the gaming category, the definition of added value can be found as new levels, extra lives, in-game currency or any type of virtual goods to be used inside the app.
A famous case is the Candy Crush Saga game where the fanbase spent billions of euros in the game alone, which has been the influence for many other apps. As such, this model has recently received quite some bad publicity because of abuse or soft regulations which let many toddlers and children make accidental in-app purchases. More regulations have been applied to both the App Store and Google Play Store in order to ensure app owners to be more transparent with their app store listing about in-app purchases. This may cause an experienced parent to not download these kind of apps for their kids.
App stores will usually take a big cut from the revenue of virtual goods, but not for the physical goods or services.
Profit margins can be high in this area, especially when selling through the web or mobile as of course, you don’t require traditional expenses like brick-and-mortar stores do (which may require staff and rent). Even better, within the two categories of in-app purchases, selling virtual goods contribute to a high profit margin at a very low risk. Another advantage worth remembering is user engagement. Buying virtual goods establishes a high level of user loyalty, a good base to indeed create recurring purchases.
Did you know that you can sell also advertising space within your app? First of all, you have to make sure your app is attractive to potential advertising companies. You need to establish a considerable amount of engaged users from which you track their relevant data. In our digital age, data means money. The app is free to download, but users pay indirectly by providing their data, which the app owner will use in a later phase.
Facebook is a good example of an app that does this well. Its users don’t directly pay Facebook to download or use their platform, but Facebook leverages a big amount of their data to sell to advertisers.
The key here is to optimize the user experience of your app when ads are being integrated. When this is executed poorly, it will definitely reduce your uses. This is without doubt the biggest challenge when using this revenue model. In our next section, advertising might even bring you added value!
This revenue generating model is pretty new, also called ‘incentivized advertising’. Similar to the previous advertising model, you need to gain a considerable user database and user growth strategy in order to be and stay attractive to sponsors. The second step is finding advertisers or sponsors to form a partnership with. It’s all about a win win deal for both your users, your app business and your advertising partner. The aim is to provide your users with rewards for completing some in-app actions. Hence the name “incentivized advertising”. The goods or services to be advertised are not presented in the classical way as a normal mobile ad banner would do, but are presented as a gift, present, super deal… you name it.
‘It’s a win win situation for everyone: users benefit from promotions, advertisers get attention and the app owner get a share in the revenue stream.’
A good example is the RunKeeper app. Users who track their running activity with Runkeeper can unlock exclusive rewards and promotions. The aim is to keep users engaged and increase usage where, as a reward you get promotion on new running shoes!
Depending on the relevance of the advertising partner, it can be the advertiser that makes users engage more with your app!
As the model is rather new, the regulations of Apple about incentivizing downloads and social sharing were revised. Be sure to keep up with the latest Apple and Google policies regarding publishing your app if you use any kind of sponsorship.
8. Licenses and Royalties
Once the mobile application is launched and has a considerable amount of users and engagement (we wish you all the luck with this), you might opt to resell your app after a few years.
There are two main ways to achieve this. The first one is through licenses whereby you resell your application at a fixed price to a third party. The application can then be applied on other markets both horizontally as vertically, but this will no longer be your business. On the contrary, when you resell your app through royalties, you maintain a link to the company you sold your app to. As such royalties are sold at a more moderate price, instead you’ll still receive a percentage of revenue generation through your sold app.
The eight above mentioned revenue models for apps are by far the most common. But as the mobile industry is never asleep, new monetization models will always be on the rise. Remember that many apps use a combination of two or more revenue models.
Be creative and good luck!
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