Application developers today enter the mobile arena with the hopes of creating the next Clash of Clans, Angry Birds, WhatsApp or even Yo!. But just because they have a great idea for the next game, messenger or fitness app doesn’t mean that success is guaranteed. Developers today need to understand that consumers are finicky, and they must delicately balance the user experience with a monetization strategy so that both company and user win.
While the app economy is hyper competitive, with large developers fighting to increase their share of app revenues, there is a tremendous opportunity for middle-market developers to carve out their piece of the pie. Be it from paid downloads, ad networks and/or in-app purchases, developers must carefully consider the best business model that will cultivate loyalty and long-term customer retention for their apps (then let those dollars keep rolling in).
To that, there are multiple business models that developers must consider (more on these in a minute):
- Completely free with in-app advertising
- Freemium/free download with in-app purchases
- Paid apps
As such, the developer must choose its business model carefully so that UX considerations and revenue generation can be aligned; and knowing when it’s time to pivot and adjust the business model is also critical to lasting success. Projecting where revenue is going to come from is paramount to creating long-term and successful apps.
To choose the business model, developers must consider key factors, including:
- What category does the app fit in and how are competitors monetizing? It’s not just knowing what category the app fits in, but also as important is its subcategory. Understanding what models work for established and successful apps provides a hint to the best method to use.
- What is unique about the app versus competitors? How does the app differ from others in its category and, as such, is there a reason to copy or differentiate from what they’re doing from a design perspective?
- What features would consumers pay for? Some features are ubiquitous across all apps within a category. If those features are already considered table stakes to compete, creating new, unique features can entice a user to lay down their cash.
- What is the timetable for generating revenue? If the app is well-funded, then the developer may be able to wait longer to generate money. However, developers that work on tighter budgets may need to monetize quicker to support operations and growth. Paid user acquisition and offering in-app enticements to download and use an app can be effective ways of acquiring downloads and moving up app store charts. Developers must understand that the lifetime value of these customers and balancing that with acquisition costs is critical to knowing if this is viable.
Those are a lot of factors to consider, each with their own set of considerations. Your sweat equity and potential livelihood are on the line. If you’re reading this, you’re probably vacillating with the No. 1 question: What is my go-to-market strategy? With that in mind, let’s take a look at the four most popular business models for launching an app and weigh the pros and cons of each:
Completely free with in-app advertising
In this model, consumers can download the app at no cost and play the game without ever spending a dime. The goal with strategy is to quickly generate downloads and then gather information on the users so that publishers pay to insert targeted ads in your app. The longer they play, the more ads they see, and the more money the developer makes. This is why a stellar UX is crucial for apps utilizing this model.
- Easy to generate downloads, as there is no cost to try the app.
- Mobile apps can collect a ton of data on their users–including in-app behavior, location, age, sex, gender and more–that is extremely valuable to advertisers.
- Spending on mobile advertising is on the rise, and there is no shortage of companies looking to target an app’s audience when it aligns with their target customers.
- It is a highly effective way of promoting long-term use if ads don’t dominate the users’ experience but instead are limited to expected instances during use.
- Depending on how the ads are displayed, it can compromise the user experience by taking up valuable screen size.
- The app or its content needs to keep bringing value to the user so that they continue to use it and advertisers remain interested in its active user base.
- Too many ads during use can be annoying to the user and lead to churn and abandonment.
- It can take time to recoup investment while generating a sufficient user base to support the app.
Freemium/free download with in-app purchases
This strategy involves offering the app for free download, allowing consumers to try the app with no risk. The app is then monetized by selling goods within the app for a profit or by offering premium features at additional cost. In-app purchases can include virtual goods such as in-game boosts, virtual currency, ad removal and/or add-on features.
- Also easy to generate downloads, as there is no cost to try the app.
- Can be used by multiple app categories due to adaptability.
- Easy to determine and adjust premium features based on history of user purchases.
- Virtual goods and data-driven selection of items placed for in-app purchases can lead to deeper levels of engagement and reduce user churn since they are invested in the app.
- For gamers, in-app purchases can make game tasks easier or reduce the time it takes to level up creating a desire to purchase more and more.
- Flexible model that can include affiliate programs and partnerships that drive referral revenue.
- App stores take a cut of purchases made within the app or on the marketplace.
- Apps historically have not been always been transparent about their in-app purchases and have received some bad press about children spending thousands of dollars in-game.
- Balancing what is free and what is paid for can be challenging. Too few features and people will churn; too many and people won’t pay.
- Difficult to align the free experience with the paid experience since it is initially being offered in a limited capacity.
Usually, this model focuses on gating content instead of features. Users get access to a predetermined amount of content for free and then must subscribe to get more. This model is best suited for service-focused or content-heavy apps, and it allows brands to earn revenue on a recurring basis.
- Users can experience all of your app’s features for a set period of time.
- Improves in-app session lengths and lowers user churn.
- Provides a continuous flow of revenue since subscriptions usually auto-renew.
- Subscribers are more likely to be loyal and engaged app users.
- Puts the onus on the developer to create more and fresh content to keep users subscribed long-term.
- Does not work for most verticals.
- It can be hard to determine where and when to place a subscription paywall.
These are exactly what they sound like: Users pay to download and use the app. The key to finding success with this model is in the ability to showcase value of the app in stores so that people know before paying exactly what they’re going to get.
- Revenue is earned upfront with every new download.
- Paid users are more likely to use the app for longer periods of time since they’re invested.
- Cleaner interface and user experience due to lack of ads.
- The developer can focus on innovation and not monetization, since people expect paid apps to be extremely robust.
- Most users eschew paid apps for less feature-rich free apps.
- App stores take part of the revenue from the download cost.
- 90 percent of paid apps are downloaded less than 500 times per day (cost-barrier to gaining a large number of users).
For app developers, their go-to-market business model will be just as important as the type of app being developed. Strategies can always be changed, and none of these is mutually exclusive; finding the right mix of monetization strategies and balancing that with the user experience is ultimately what will help get that app to No. 1 on the charts.
Sergei Kovalenko is the co-founder of mobile app capital provider Aprenita.
Image courtesy of Shutterstock.