Text by our friends from Gummicube – leader in providing App Store Optimization and App Store Intelligence
While every app developer wants to say they made a successful app, the fact remains that they still need to turn a profit. There are many ways developers can go about monetizing apps, and each strategy comes with their own form of success depending on the type of app. But how does a free app make money?
Apps can use a variety of options to improve their revenue stream, and the three most common forms of monetization are:
- Upgrading to premium
While these forms of monetization are the key to increasing any app developer’s bottom line, they still beg the question of how much money can be earned?
Monetization Broken Down
Even though the above methods of earning money apply to any form of “free app,” let’s look at one type of app fares. Mobile games, which are often offered for free, tend to make millions and even billions of dollars each year; while the games industry generated a little over $108 billion in revenue, mobile games accounts for over 54% and generated $59.2 billion.
While the exact numbers will vary from person to person, the average user spent around $35 on “freemium” games and apps in 2016, and that number is only expected to rise. Around 47% of the in-app purchases or premium upgrades people bought cost between $9.99 and $19.99, and around 6% cost between $0.99 and $1.99. For mobile games, however, around half their profits came from the dedicated players, around .15% of their users, who were willing to constantly spend to get ahead.
So how can other apps besides games put these monetization efforts into practice? Let’s break down each type of effort and how it can help app developers.
Monetizing with Advertisements
Advertisements are exactly what you would expect: banners ads or commercials that show up in the app. Ads can be:
- Small, unobtrusive banners at the bottom of the screen
- Pop-ups that show up every couple of minutes
- Large videos that show gameplay or UI and more
The more clicks they get, the more developers earn, but too many ads will drive users away.
One way apps try to entice their users to stay is by including in-game currencies that often make viewing advertisements optional. In return for watching a 30-second video ad, the players will receive a small amount of the game’s currency, encouraging them to view the ads regularly. This in turn brings profit to the developer, advertisers and the users.
Upgrading to Premium
For many apps, free versions provide just a small sampling of all the features the app can offer. All other features are locked behind a “premium” paywall. So while a user could very well enjoy the app for free, the temptation to upgrade to premium grows more appealing the more they use it.
Often times, apps will offer free versions with advertisements, or premium versions without any. That may be the only difference, or one of several, but some customers will be willing to spend a dollar or two just to make the advertisements stop. The goal is to encourage users to upgrade to premium, not to pester them in to it.
Take, for example, Spotify – the app is available for free, and the unpaid version offers optimized playlists, recommendations, and full-length songs to anyone. However, there are some caveats: free users can only skip songs so many times per day, and short advertisements will play between songs.
As a result, Spotify sees a stunning 27% conversion rate, turning over a quarter of all free users into paying customers. Given that the industry average is closer to 4% conversions, Spotify’s success is nothing short of impressive.
Microtransaction and How They Work
Microtransactions are purchases made available within the app to provide certain enhancements or in-game currency at the cost of real money. The prices can start off small to nearly a hundred dollars for a far more significant amount.
Microtransactions are everywhere within mobile games, from casual phone tappers to the most intense of action games. “Candy Crush,” one of the most popular mobile games, earns hundreds of millions of dollars annually through microtransactions. They can also be seen frequently in mobile apps referred to as “gacha games,” short for “gachapon,” the Japanese term for vending machines that offer little toys in capsules. Players can slowly earn currency by logging in and completing events
over time, or they can spend actual money for a larger quantity at once.
Developers need to be careful as some apps that offer microtransactions have recently come under heavy criticism due to users spending large sums of money without the guarantee of succeeding, if your app is a game offering any sort of “loot box,” be prepared for the controversy.
Now that developers know the different forms of monetization, they simply must ask:
- What kind of app are you providing?
- Is it one where a few ads on the side won’t interfere with the user experience?
- Can you offer premium services without crippling the free version?
- Would users be willing to spend repeatedly to gain new features?
Consider what services the app offers, and what it’s worth to the users. From there, developers will be able to figure out what monetization option is right for them.