Case Study: Revolutionizing the Mobile Shopping Experience
At Sourcebits, we’ve worked w ...
Illustration made for Sourcebits by Ravenfeller
App monetization should be one of the guiding principles for your app. After all, failing to strategically monetize your app could be the difference between building a successful business and having to scrap your efforts. Your approach to monetization will impact every element of your app and business – from the development investment and product features to your marketing strategies and investor pitch.
At Sourcebits, we’ve worked on hundreds of apps – and the most successful think long and hard about their monetization strategy. We often provide strategic recommendations about the business model that best meets the needs of each client. But the final decision rests with you. So this series of articles won’t dictate a standard monetization approach – it will provide information and challenge assumptions.
For this post, we’ll provide some background context on the mobile app marketplace, and evaluate the pros and cons of free vs. paid apps.
Paid apps are straightforward in terms of monetization – people buy the app from the app store and you keep 70% of the price.
Free apps require different strategies. The app itself is free for users to download (lowering the barrier to user acquisition), so developers need to make money in other ways.
The most common approach is advertising. In-app advertising can be executed in many different ways within an app. The mobile app advertising industry has grown rapidly, and in a future post we’ll explore some of the options and resources available. But in-app advertising should be used with caution. Developers that use advertising need to be very thoughtful about where, when, what and how they place advertisements within their apps. If the advertising detracts too much from the overall app experience, users will be alienated and retention can decline — which in turn cuts revenue from the advertising. (Many apps offer a paid version of their free app, with the selling point being no ads.)
Another popular monetization option for free apps is the freemium model. These apps are free to download and use the basic features. But they charge small in-app purchases (IAP) for a variety of perks, which can range from unlocking additional features to removing ads. Developers keep 70% of the IAP revenue – 30% goes to the store.
Since freemium apps first appeared in 2009, adoption has grown exponentially. While the freemium model has become the norm, developers often lose sight of the challenges to making significant revenue. For freemium to work, the app must be good enough to:
1. Keep people engaged
2. Provide a strong enough value proposition to pay
3. Give the impression the app is worth investing in
4. Have an economy capable of extracting hundreds and thousands of dollars from the few top users
Freemium can work very well (look at the top games grossing millions of dollars every month) – but it takes a lot of data and product refinement to optimize for revenue (see our free whitepaper on analytics and using data to drive product development). Meanwhile, paid apps have dwindled to a small fraction of the app ecosystem and developers often hesitate to consider the paid model.
However, app producer David Barnard, founder of Contrast, Launch Center Pro, and Perfect Weather, thinks the paid app model still shows plenty of merit and points out the freemium model won’t and doesn’t work for everyone.
“While using IAP might work for some, it’s going to be a miserable failure for others. The problem is, you have to have just the right combination of crazy download numbers, high prices, high conversion rates, and/or recurring revenue to make a freemium strategy pay off in the App Store.”
If your app isn’t capable of attaining (most of) these, you should consider launching a paid app. Read through our summaries of the pros and cons for free and paid apps to help you evaluate which model might be right for you.
In our next post, we’ll cover 5 questions you should ask yourself before deciding on your app monetization strategy.
Want to find out more about Sourcebits? Have an app idea or monetization question?