How Do App Developers Make Money?

by PixelForce     Posted on

People don’t just get into mobile app development for fun. Let’s face it: apps (especially mobile apps) are resource intensive, require a lot of specialist knowledge, and take time and effort to develop. Depending on what your starting resources, skills, and end goal are, you may have to hire skilled Android and iOS developers, graphic designers, and (depending on the size of your project) support staff.

If you are a solo person looking to develop an app on your own, then you personally will need to be skilled in all areas of coding, graphic design, and marketing - or be willing to outsource the parts of work that you can’t do. You also need to potentially be willing to work with little to no income for the duration of the project if it isn’t being funded externally.

Consider this: what is the end goal of your project?

For some businesses and government organisations, it’s to raise awareness or provide a service that is funded for some initiative. For most businesses and solo developers though, the point of developing an app is to make money.

There are a few ways you can make money from your mobile app. Some options involve charging the user a fee directly, some are based on generating revenue from in-app advertising, and some are based on sponsorship opportunities.

How you should approach monetisation of your app depends on the type of app you’re developing, the user demographics you’re targeting, and how the user experience of your app will be impacted by monetisation. Payment gateways are expected in some apps, but will completely break the user experience in others. For example a payment to unlock and use additional features or more in-depth stats analysis makes sense in a fitness app and won’t be too surprising to a user, but attempting to charge a recurring subscription for a simple puzzle game or notepad type app may not make sense.

In this article we’ll take a broad look at the various ways you can generate revenue from your mobile or web apps.

To quickly start with a summarised list, the following are some of the possible monetisation models:

  • Freemium
  • Premium
  • Subscription
  • In-app purchasing
  • In-app advertising
  • Sponsorship deals
  • Fee based

There are a number of ways you can implement each of these, and ultimately the market is going to let you know whether a particular model works for your product or not. It’s better to start off with the right system that works for you and your customers though, so you can keep your customers happy and remain viable.

Let’s dive into how each model works, and which apps are using them effectively.

 

Freemium model

First up is the general app user’s favourite way to use apps. This model is especially common on the Google Play store, where freemium apps have long been overwhelmingly dominant in generating revenue through app related sales. Many web apps also tend toward a Freemium option to maximise their reach.

Android users are statistically significantly more likely to use an app for free (or to seek out the free alternative) and, demographically as a whole, have lower income and app expenditure on average than iOS users.

How does the “Freemium” model work and how does it help you?

The Freemium model involves creating an app that’s free to use, as the name suggests, but with limitations imposed on the user while they are non-paying. Access to full functionality of the app is usually unlocked by purchasing a “premium” upgrade, done as a one time payment for lifetime access - although there is an increasing trend toward ongoing subscriptions as the upgrade option offered to users.

In practice, the main draw for this style of app is to gain the largest possible market penetration possible and earn money through the 5% of users who are paying (keep in mind that of that, just a tiny fraction are responsible for almost half of all revenue).

Examples of freemium apps include:

  • Clash of Clans
  • Discord
  • Tinder
  • Strava
  • YouTube

 

Premium model

Unlike the “Freemium” model, apps using the premium model (also known as “paid apps”) typically charge users up front for usage. Premium apps providing a service or performing a specific function are a bit more common on Apple’s App Store, although Android users will still find some more popular and triple A games on the Google play store with an upfront fee.

Why is there a higher prevalence of premium apps on the App Store?

iOS users statistically have greater buying power and a higher average annual rate of app related spending, and spend as much as 4 times more on app related purchases annually when compared to Android users.

Examples of premium apps include:

  • Star Walk
  • Minecraft
  • TripView
  • Navigation Pro
  • Moleskine Timepage
  • Pocket Casts

 

Subscription

The subscription model uses a periodically recurring payment (most commonly this is either monthly or yearly), charging users to access functions or services provided by an app. Both premium and freemium apps can include a subscription service within them, although it’s often highly inadvisable to combine premium and subscription.

Subscriptions are an increasingly popular method of monetisation because it provides a continuous stream of income for the business, although when considering this route you should ensure your app provides an appropriate amount of value or you risk deterring users from using your app.

This model of monetisation has proven especially effective for streaming based services and services which offer ongoing creation of new content for users.

An app may require a subscription to access basic functionality, or may be free to use with limitations and access to additional features and functionality unlocked through a paid subscription.

Examples of apps that use subscription model include:

  • SWEAT
  • Spotify
  • Netflix
  • Tinder
  • Duolingo

 

Transaction fee based

Two-sided market style apps using this method are often free to browse, and revenue is made by adding an additional “final fee value”, or by taking a small percentage of any user-to-user sale made through the app.

Users of this type of app may consist of individuals, businesses, or a mix of the two depending on the platform in question. The developer or publisher of this kind of app acts as an intermediary agent or middle-man to make the exchange possible, taking on some risk for the transaction and in turn making a profit through a fee.

Examples of in-app sales include:

  • Google Play
  • Apple App Store
  • Ebay
  • Amazon
  • Alibaba
  • Wish
  • Uber
  • UberEats


Free (Advertising)

If you want to make your app accessible to a wide range of people for free, an option that may be viable is in-app advertising. If your app is successful, it may be possible to sell screen space and clickable CTAs within your app to other companies based on the volume and type of user traffic your app provides. Be wary though, in-app advertising can be integrated seamlessly, but if you’re not careful it can also kill off your user base faster than you can react.

This method of app monetisation is especially common on Android, and many successful apps on the market offer full app functionality free of charge to users with the proviso that they are forced to watch or click through advertisements to do so. These apps often sell upgrades (or subscription plans) that are primarily intended to remove adverts and provide a smoother experience, and secondarily offering additional features.

Examples of apps that use in-app advertising include:

  • Spotify
  • Twitch
  • SnapChat
  • Instagram
  • Waze

 

Free (Sponsored)

Depending on the nature of your app it may be possible to have your app sponsored by a business or organisation. This will be significantly easier to achieve if your app is already on the market and has proven successful at growing and retaining a loyal user base. It’s also possible to more easily reach the audience at large, well established events that have an associated mobile app (such as at tech, medical, and gaming conferences).

Unlike in-app advertising, a sponsorship deal would associate your app itself with a particular brand (or brands), typically offering a less intrusive but more pervasive form of advertising. When setting up an app sponsorship, branded advertising may appear on splash screens, influence the colour scheme and style of the app, determine the name of your app, or even gain exclusive rights to your app’s audience for a specific period of time . 

Why would a brand consider sponsoring an app instead of buying it outright or using adverts though? And how could it be done tastefully or meaningfully?

Business and brand identity is complex, and for smaller businesses it can be more affordable to sponsor a piece of software for a limited time than to purchase the rights to that software outright. For example, a brand or organisation may want to reach the largest audience possible at the cheapest cost, without compromising on their values - or maybe they already own an existing app and may benefit from expanding their reach through an affiliation.

Mobile apps (especially of high quality and with lots of features/functionality) cost a lot to make. The cost of a basic app native to iOS or Android usually starts from upwards of $50,000, and with increasing complexity your app can easily cost in the hundreds of thousands to make.

For a brand that wants the reach and engagement without the heavy investment, it can be much easier to reach out to an existing app and seek out a sponsorship deal. Paying a few thousand dollars to put your brand on the splash screen, or to purchase the naming rights for a year or two with no obligation can be appealing to brands that don’t want to worry about the hassle of managing upkeep of the service themselves.

Some creative ways to utilize brand sponsorship include redesigning elements of the app to feature the sponsoring brand - for example in a popular game you could be healed by a particular branded drink, your character could drive a particular branded car, wear particular branded clothing, or use particular branded services. These types of inclusion do not break the functionality of the app and serve to add an extra layer of familiarity and affinity for the brand with consumers.

Examples of apps that use sponsorship include:

  • PCI Security Standards Council
  • New Orleans Dental Conference
  • American Academy of Family Physicians

 

 

In-app purchasing (cosmetics and miscellaneous)

Often used in conjunction with one of the previously listed monetisation models, in app sale of items that do not alter the core functionality of the app, but rather change the appearance (“cosmetics” in games and social apps for example) is an increasingly popular way for businesses to generate sales in games, social apps, or even for mobile devices themselves.

Of all the methods available for monetising your app, this model offers the most flexibility - you can add or remove cosmetics from the market without seriously impinging on the quality of the app, and drive sales through time-limited purchases that do not detract from the overall user experience.

Examples of in-app sales include

  • Skins for characters
  • Purchasing power ups or equipment in many free games
  • Mobile phone UI re-skins / layouts
  • Pokemon Go
  • Farmville
  • Candy Crush
  • Twitch

 

As you can see, while the type of monetisation model used is ultimately down to what works best for the needs of the business, there are general trends for particular types of apps using the same monetisation models.

Many fitness and analytical apps use an ongoing subscription model successfully, while more “fun” apps such as casual games or basic tools tend to be free to use with in-app advertising and optional purchases.

A final warning: It is important to choose a model and then STICK WITH IT. Your business strategy should be designed around the monetisation model and pricing strategy you choose, and should be long term and consistent. If you change things too much, or too frequently, you will quickly anger your user base and drive them away.

If you have a great plan for an app idea but don’t have the skills to get the job done yourself, then get in touch with us today to book a free 30 minute consultation and see how we can help. We’re Adelaide’s leading app development agency, let us make your app our next success story.

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