Katarzyna Sobczak-Rosochacka
Head of Marketing
Our shared need for precision, fair play, and heightened tension during matches shapes a willingness to incorporate new sports technologies.
From simple games to productivity tools, there seems to be an app for every need and desire. The prevalence of smartphones combined with the increasing availability of the Internet has led to an increase in application downloads and use.
In fact, by the end of 2022, the number of app downloads worldwide exceeded 255 billion (Statista). With so many customers engaging with apps on a day-to-day basis, the way we communicate and entertain has changed and it has also created a complex ecosystem in which businesses can thrive. As web and mobile apps cover more and more areas and specialisations, users are willing to incorporate them into their daily routines. As a result, the competition between app creators to attract and keep users' attention has increased.
App monetization strategies have become crucial to enable companies to continue their efforts - it not only allows app creators to generate revenue, but also to further develop their apps, innovate, and respond to user feedback. However, app monetization is far from a one-size-fits-all solution. Different apps need to cater to distinct audiences with unique preferences and behaviours.
Fortunately, the toolkit of app monetization offers a spectrum of options suitable for various platforms, be it web or mobile, depending on your specific business goals. In the coming sections, I'll go into detail about app monetization strategies, exploring their characteristics, benefits, and disadvantages. Let's dive into this topic!
Turning your app into a source of income is a goal of almost every startup owner. However, how to make sure your app will be profitable and that the costs will not outweigh the profits?
Make a clear decision on your app monetization strategy early in the process. This should be a part of your product discovery phase, where you create a thorough business plan and carefully select a business model that aligns with your project's goals. By choosing the right app monetization strategy at the early stages of development, you'll have a better grasp of your app development budget and be able to estimate your app's potential earnings.
For a more comprehensive understanding of this topic, I recommend reading Gabriela Jarzębska's article on the software development life cycle, where she delves deeper into the various stages and steps to take in each of them.
App monetization is the essential process of generating revenue from users who engage with your mobile application. This involves employing various methods such as offering subscription services, displaying advertisements, or charging users to download the app. The key lies in striking the right balance between delivering value to users and simultaneously generating revenue to sustain and grow your business.
Having well-defined monetization strategies is crucial for ensuring the success of your business. When you choose the right app monetization model, you ensure that the revenue generated covers not only the costs of development, maintenance, and enhancements but also your living expenses. Without a thoughtful app monetization strategy, you are essentially left in the dark about your app's potential success, merely hoping for it to happen regardless of the consequences. This lack of control over your budget and uncertainty about revenue generation leave you reliant on chance.
A solid app monetization strategy allows you to invest more in your business's growth, helping you stand out in this competitive market while continuing to provide value to your users. To make that happen, it must be tailored to your users and their needs. For example, pricing too low may not sustain your business despite high demand and pricing too high may discourage people from making purchases.
By understanding how to allocate your resources to the app's enhancements and align your app monetization strategies with user preferences, your app will thrive as you increase users' loyalty. It means they will be more than happy to use it and… pay for it (again or even more)!
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In 2023, with a significant percentage of apps being available for free download, the question arises: How do these apps generate revenue without charging users upfront? There are various strategies employed by app developers to monetize their offerings.
According to Statista, only 8% of apps in the United States monetize by requiring users to pay for downloading, in contrast to a mere 3% globally. On the other hand, a quarter of U.S. apps generate income by incorporating advertisements, which is lower than the worldwide average of 35 percent of apps that include ads. These statistics highlight the diverse approaches app owners employ to strike a balance between providing free access to their apps and generating revenue through alternative means. So let's discuss the various options available for generating revenue through your app!
The In-App Purchases (IAP) model allows app creators to make free applications and generate revenue by offering additional features or services for a fee. This approach involves the sale of a variety of virtual items, services, and bonuses within the app. It can involve options such as ad-free experiences, unlocking premium content, as well as payments for specific services like booking a tour or a hotel room. In-app purchases can be divided into two types: "In-Store Money" and "Out-of-Store Money".
In-store money purchase is when people buy things in the app using the app store, like the Apple App Store or Google Play Store. For example, imagine you're playing a popular mobile game like "Fancy Farm Adventure." In the game, you have the option to buy special gems that help you unlock new characters, power-ups, and levels faster. These gems cost real money, and when you decide to buy them, you make an in-store app purchase.
Out-of-store money is when people spend money directly inside the app, not in a Google or Apple App Store. It's like buying things online, ordering food, booking travel, or using transportation services - those are booked and paid for within the app itself. Out-of-store money transactions can generate more revenue for app makers compared to in-store purchases, mainly because they avoid additional fees imposed by app stores and are often related to real-world purchases that typically involve higher transaction values.
Let's say you're using a food delivery app - the money you spend on your food goes directly to the restaurant and the app makers, without involving an external app store for the payment. This type of transaction, where you're spending money directly within the app for real-world goods or services (like food delivery), is an example of Out-of-Store Money.
In-app purchases can be applied to a wide range of app categories, including gaming, transportation, travel, food delivery, and productivity apps.
Firstly, In-App Purchases add value to your users' experience. For example, when making gaming apps, developers create multiple in-game currencies, one that is earned through certain actions within a game and the other currency that is earned in very limited amounts through challenging gameplay or by purchasing with real money. It is always something that helps users speed up their progression in the game or level up their character.
Additionally, In-App Purchases can generate massive revenue. Statistics from Business of Apps indicate that they constitute a significant amount (48.2%) of mobile app earnings, compared to 14% from ads-based revenue and 37.8% from paid app downloads.
However, offering In-App Purchases also comes with certain drawbacks. Firstly, they can face user resistance when it comes to making purchases within the app, primarily due to concerns related to privacy and data security. Some users may be hesitant to provide payment information or make transactions within the app.
Additionally, app stores typically take fees on each In-App Purchase (in-store), reducing the revenue earned by developers.
Another potential pitfall is the perception of being a "pay-to-win" app, where users feel forced to spend money to excel or succeed in the app. Striking a balance between monetization and providing an enjoyable experience for all users is essential to avoid this negative perception.
Lastly, not optimising pricing strategies based on different geographical regions and user segments can make people less likely to purchase. If pricing doesn't align with local economic conditions or perceived value, it leads to missed revenue opportunities.
In the In-App Advertising Model (IAA), advertisers purchase advertising space within the app (so the costs are borne by them, not the users). This space allows them to display their ads to users who do not make in-app purchases or pay for a subscription.
In this model, it's crucial to find the right balance and adjust ads to the app type. For example, featuring a backpack ad may be suitable within a travel app but might not be well-suited for a gaming application.
There are many advertising formats that provide developers and advertisers with various options to engage users effectively while maintaining a positive user experience. Let's talk about some of them.
Native ads seamlessly blend with the app's content. They match the style and format of the app, making them appear more like organic content, and reducing user frustration. For example, on social media apps, native ads look like regular content but are labelled as sponsored.
Banner ads are small ads typically located at the top or bottom of the app interface. They are static and do not interrupt users' interaction with the app.
Given that users tend to overlook banner ads, full-screen interstitial ads have gained popularity. They appear at natural transition points within the app, such as between Instagram stories or levels in games. Their size and placement make them attention-grabbing, with over 51 percent of marketers, app developers, and publishers finding full-screen video ads to be the most effective for user acquisition (Statista).
Incentivized ads offer users rewards, such as in-game currency or extra lives, in exchange for completing specific actions. For example, users may watch an ad in the form of a video to gain a character upgrade in a game or download a report in exchange for a free trial or various discounts. These type of ads is commonly used in gaming and shopping apps.
Primarily used in gaming apps, playable ads allow users to engage with a mini-game that showcases the gameplay of another app. This way, users can experience the app's functionality before deciding to download it.
Carousel ads display a series of images that users can swipe horizontally. Each image or text in the carousel can contain different content, reducing cognitive load and allowing the user to convey more information.
Sponsored list is a type of ad monetization strategy that involves creating selected lists or rankings of products, services, or content and then allowing advertisers to pay for placement within these lists. The goal is to promote the sponsored items to the audience in a way that feels natural and integrated into the content, rather than through traditional display ads.
In-app advertisements are suitable for a wide range of apps, especially those that are offered for free and aim to generate revenue. Some types of apps that commonly use in-app advertisements include:
Benefits of In-App Advertisements include their ease of implementation and relatively easy integration.
Their flexibility is also a key advantage, as numerous ad formats are available, allowing for customisation and ensuring ads blend seamlessly with the app's interface (without frustrating users!).
Additionally, in-app ads provide a valuable revenue stream for free apps, enabling monetization without requiring users to make payments.
The disadvantages of In-App Advertisements include the risk of ad fatigue, where users quickly dismiss or close ads due to overexposure to them, leading to reduced ad effectiveness. Sometimes, they can resign from using your app at all if the number of ads is overwhelming and prevents them from achieving their main goals. While designing an app with such a system incorporated, you should be cautious and focus on seamless user experience over ad exposure.
Then, there is the possibility of certain ads violating app store policies, which can result in consequences for the app's availability and position in the app store.
In the subscription model, users are typically initially granted free access to download the app (or a trial period in the cases of B2B solutions), after which they can choose the preferred subscription level and are charged accordingly after the period of time they choose.
There are several options when it comes to renewal payments. First, users can be charged one stable fee for using the app, gaining further discounts depending on the length of the subscription. The length you offer is up to you. The most common are monthly, quarterly and annual subscriptions, but for some applications one-day, 7-day or even half-year access may be appropriate (as is the case with the ibuk.pl portal, which allows you to rent and read books for some time).
Another subscription option, especially for applications that are in the early stages of development and need to gain funding, is the lifetime subscription model. In such cases, users are guaranteed lifetime access to the app for a one-time, higher fee. I have noticed that, in many cases, this is equivalent to the cost of a two- or three-year subscription. This approach allows you to quickly raise funds at the very beginning and is beneficial for early adopters who can become your ambassadors.
First of all, with a single, straightforward payment, users gain access to all of the app's features. This model not only results in smaller payments for users but also ensures a steady cash flow for app creators, making it easier to continually maintain and improve the app.
Moreover, the option for lifetime subscriptions allows developers to secure immediate revenue for further development.
Users can easily cancel their subscriptions anytime, which can lead to losing them as customers. The payments are smaller and spread out over time, so app creators don't get as much revenue upfront.
What is more, in the long term, if someone uses the app for many years, the lifetime subscription can be less profitable compared to other ways of making money from the app.
In some cases, one flat fee (with some time-based discounts) is not enough. Some apps, especially B2B ones, are more complex and almost no user (or company) can afford to pay for them all (or simply need the full capacity of the application). In such cases, it's reasonable to provide users with tier-based subscriptions that allow them to pay for higher usage limits, components or modules that they need and want to use.
There are many examples of such applications, but let's take a look at the marketing field. Solutions such as seRanking, Surfer, User.com or HubSpot offer not only more modules and extensions at each subscription level but also increased usage (e.g. in terms of the number of keywords or contacts in the database). The rules of regular subscription can also be applied, offering people additional discounts with the extended subscription period.
In tier-based subscription apps, users benefit from smaller, more manageable payments, ensuring they only pay for the features they truly need. For app creators, this model establishes a predictable and steady cash flow and also opens doors to a wider clientele, making it accessible to both individual users and smaller businesses.
The scalability of costs is a notable advantage; as infrastructure usage grows, so does the income, allowing for flexible adjustments to meet varying demands. Moreover, the ability to increase or decrease tiers offers a flexible pricing structure that can cater to different user preferences and budget constraints.
With time-based plans, users have the flexibility to easily abandon the app since they are not committed to a long-term subscription. This lack of long-term commitment can lead to higher user turnover and a constant need to attract new subscribers. However, people often prefer lower financial commitments, especially when they are unsure about the value or usefulness of the app.
The third option, the most focused on real usage, is pay-per-use. We can understand this in two different ways - when users pay for actual use and when they pay per seat.
Pay-per-use is common with SaaS solutions such as AI/ML-based recommendation engines where you pay per number of requests (e.g. TeaRex.ai, OpenAI tools) or end-user applications that require payment for using its functionality each time (take the example of SurferSEO, which allows you to pay extra for using their brand new AI content creation tool when needed).
This type can be a standalone model or be implemented to support regular subscriptions when users need more items without scaling the basic costs. For example, marketing automation applications allow you to pay a small extra fee for the additional number of emails you can send per month or to expand the capacity of your database.
In the Pay-Per-Use model, users can get the quantity of items they need at a low cost without the need to purchase a subscription. This approach is scalable and allows users to pay based on usage. It means if they don't use the service, they don't have to pay. This potential to attract users is a significant advantage because users are attracted by the model where they only pay for what they use.
However, the monthly earnings can be uncertain and fluctuate since users may suddenly stop using the service, making it challenging to predict and maintain a stable income.
Another way to make a profit is to provide users with the tiered or full functionality of the app for a lower cost but charge them per seat. This means that companies (because it is most often used in B2B solutions) will pay for each user who is added to the organisation and will have access to it. In this case, you can offer one or multiple tiers as well.
A good example can be Notion or ClickUp. Some systems, like EngageBay, are going even further, differentiating the subscription value depending on the particular user access level.
Users under the pay-per-seat model typically enjoy full (or tiered) access to all features and functionalities of the service for a relatively lower cost. Economically, it's advantageous for users, especially small businesses, as they pay based on the number of seats (users), making it cost-effective for those with fewer users.
From the provider's perspective, it broadens the market by attracting a wide range of businesses, both small and large, due to its flexible and scalable pricing based on the number of seats. It's a win-win situation, encouraging wider adoption and usage of the service.
However, the Pay-Per-Seat model is not without its challenges. Maintaining the appropriate infrastructure is crucial, requiring careful cost estimation to ensure the model remains profitable and sustainable. It can be complex to anticipate when to scale resources to accommodate new users on existing accounts. Sudden spikes in users can strain the system, affecting user experience and requiring immediate adjustments in infrastructure to manage increased demand effectively.
On the other hand, the drop in the sudden amount of users might result in a lack of stable cash flow.
Often, apps employing the subscription model also incorporate a freemium component. This means they provide basic features and low usage limits at no cost, encouraging users to engage with the app without an initial financial commitment. However, to unlock the full (or wider) range of functionalities (or increase the usage limits) or to enjoy an ad-free and enhanced experience, users can opt for a premium subscription.
Take Spotify as an example. Spotify follows a freemium model, allowing users to listen to music for free with certain limitations (such as random song order and ads). However, to access advanced features like ad removal, unlimited song skips, and the ability to choose the order of songs in a playlist, users can subscribe to Spotify Premium. This combination of freemium and subscription models offers the flexibility that users need while providing app creators with a steady source of income.
The freemium model encourages more users to try the app because there is no upfront cost, leading to higher engagement and potential user referrals. Moreover, this model allows for diverse monetization strategies, including in-app advertising, purchases or subscriptions to premium features, providing flexibility to generate revenue.
The freemium model lacks a steady income per user, making revenue unpredictable for app owners. Moreover, advertisements, often used for monetization, can be irritating to users, impacting their satisfaction and potentially reducing user retention.
The subscription and freemium models are suitable for a variety of apps, especially those that can offer premium content or enhanced experiences. For example:
Subscription and freemium models offer several advantages. Subscription models provide a relatively predictable and steady cash flow, while freemium models increase user engagement and lower the entry threshold by allowing users to try the app for free before upgrading to premium features.
Importantly, these models reduce the reliance on ads, which improves the overall user experience (by minimising disruptions).
Disadvantages of subscription and freemium models require careful pricing level verification and constant quality optimisation to stand out and remain competitive in the market.
Additionally, user churn is an issue, because if the app fails to meet user needs, they may cancel their subscriptions. So, it's worth noting that not all types of apps are suitable for the subscription model. Some apps may have difficulty retaining subscribers if they don't consistently provide significant value or meet changing user needs. For example, simple utility or single-use apps may have difficulty maintaining a consistent subscriber base because users may not perceive ongoing value as justifying recurring payments. On the other hand, content-rich platforms, productivity tools, streaming services, and apps that offer constant updates and fresh content are often more successful with a subscription model because users see consistent value and are more willing to make regular payments.
Furthermore, you need to take into consideration app stores commission fees. But I'll tell you more about it in a minute!
Paid apps, also known as pay-per-download (PPD) apps, operate on a straightforward model where users pay a one-time fee to download the app. Once they've made this initial payment, they gain full access to the app without any additional charges.
This approach is one of the oldest app monetization strategies in the app industry. While they offer a clear value proposition, they may face challenges in attracting users compared to free alternatives. So, let's discuss in which cases paid apps work well.
The pay-per-download (PPD) model is suitable for apps with strong brand recognition, unique and distinctive features, and a well-defined value proposition. However, niche or specialised apps that cater to specific needs can also thrive under this model.
To make sure your app will succeed in the PPD model, it's crucial to do thorough market research and competitive analysis - success depends on justifying the value of your app compared to free or alternative options.
The benefits of the pay-per-download (PPD) model include providing a clear and straightforward revenue stream. Additionally, if your app offers unique and valuable content or features, and manages to stand out in the market, you can potentially achieve predictable and consistent income through one-time download fees.
The disadvantages of the pay-per-download (PPD) model include the potential reluctance of users to try an app, especially if there's no free trial available. Convincing users that your app's value justifies the upfront cost can be challenging, particularly in a competitive landscape with freemium or free alternatives. Users may be hesitant to pay without experiencing the app's functionality or benefits beforehand. That's why it is essential to communicate your app's value effectively.
App Data Monetization Strategy involves collecting user data with their consent and using them for internal purposes or selling this data to analytics or research companies. This approach can be the primary goal for some apps, offering them for free in exchange for valuable user data, or it can be an additional revenue stream.
Apps that could consider the app data monetization strategy include:
The app data monetization strategy offers several advantages. Firstly, it provides a reliable revenue stream, particularly for apps that struggle with other monetization methods.
Secondly, users can access and use the app for free, making it more appealing and accessible to a broader audience.
Privacy concerns of data monetization strategy are a significant issue, as users may worry about their data being shared or sold without their consent. To avoid trust issues and potential legal problems, you must prioritise ethical considerations and adhere to privacy regulations.
Furthermore, the demand for specific types of data may fluctuate over time and have an impact on revenue. For example, market researchers may prioritise certain data points or demographics at one point and then shift their focus to different aspects later.
App creators must also keep an eye on changes in data privacy regulations (such as GDPR in Europe). Stricter regulations may limit the types of data that can be collected and shared, affecting the market dynamics and the value of certain data points.
To overcome these challenges, if you are one of the app creators who want to gain revenue from data, you should use a variety of data sources, keep up with changes in the market, and be ready to change your strategies when needed. You also need to be transparent and build trust with users about how you collect their data to succeed in the long run. It's always recommended to be in close contact with a specialized legal company to ensure there won't be any legal issues.
Indeed, there is no need to choose one method of gaining income as you can opt for a hybrid app monetization strategy. This model allows you to combine multiple revenue generation methods, diversify your income sources and potentially maximise your overall revenue (rather than relying solely on a single monetization strategy).
The hybrid monetization model can be beneficial for various types of apps. However, it is particularly suitable for gaming apps, as they often excel in combining both in-app advertising and in-app purchases effectively.
Other categories of apps that can also benefit from a hybrid monetization approach are content apps, social networking apps, productivity apps, and many more.
The advantages of the hybrid monetization model include flexibility and profitability. It allows you to generate income from various sources, catering to different user preferences. By diversifying your revenue streams, you reduce reliance on a single source of income, making your app potentially more profitable and resilient to market fluctuations.
This approach provides the freedom to adapt to changing user behaviours and preferences while maximising your overall revenue potential.
However, the hybrid monetization model also comes with some drawbacks.
It often demands increased development resources, including coding and testing, to implement multiple monetization methods, potentially adding complexity to app development.
If you're an app creator, you need to strike the right balance between revenue generation and providing value to users: if your app focuses too much on generating revenue at the expense of user value, it can become overwhelming and overcomplex, ultimately driving users away.
You need to think about app store fees while considering your app monetization strategy. These fees are typically calculated as a percentage of the revenue generated from app sales, in-app purchases, and subscriptions. Their purpose is to cover the costs associated with maintaining and operating the app store platform, which includes tasks like hosting, security, payment processing, and customer support.
Now, I will discuss some of the key points about the app store platform fees.
For the Apple App Store, app creators are subject to a 30% commission on every paid app download and in-app purchases of digital goods and services. However, for apps earning under $1 million annually from App Store sales, there is the possibility of qualifying for Apple's App Store Small Business Program, which reduces the commission rate to 15%. Additionally, for subscription-based apps, the commission rate is lowered to 15% after the first year (Statista).
In the case of the Google Play Store, the fee structure involves a 15% commission on the first $1 million in revenue earned by an app each year, covering both paid app downloads and in-app purchases of digital goods and services. Beyond that threshold, the commission increases to 30% (Statista).
It's worth noting that besides the Apple App Store and Google Play Store, other platforms like the Amazon App Store and Microsoft Store also have their own fee structures, typically ranging from 15% to 30% (Statista). You should carefully consider these fees when planning your monetization strategies and pricing models for your app.
Statistics show that the most popular monetization strategies are paid ads. In the USA, one-quarter of apps generate revenue through ads, while the global average stands at 35% of apps, including advertisements (Statista). This means that ads play a significant role in the monetization strategies of many app creators. However, it does not mean that you should follow the majority!
Choosing the right monetization strategy for your app is a critical decision, influenced by various factors such as your app's type, target audience, goals, and market trends. Understanding these factors can help you make informed choices.
Determine what your app actually does and consider its purpose. Does it solve a specific problem? Does it entertain, educate, or inspire people?
For example, while subscription models may work well in the news and entertainment industry, they may not be suitable for gaming apps (at least if you do not offer such open access as XBOX Game Pass). In this case, players are used to free-to-play models where they can access the core game for free and then make in-app purchases for virtual goods or premium features. Moreover, gaming apps often rely on continuously releasing new content, updates, and events to keep players engaged. Subscribers may expect a consistent stream of exclusive content, which can be challenging to sustain without overwhelming development resources.
On the other hand, in the case of B2B solutions, if you offer a marketing automation platform, you would prefer a tiered subscription over one-time fees or in-app purchases.
Understanding your target users' preferences, behaviours, and spending habits is crucial for choosing a monetization strategy. You should take into consideration factors like their willingness to pay for apps, demographics, and earnings before deciding on a specific model.
Study the app market and analyse your competitors' business models before you make a decision. Identify successful apps in your niche and explore how they monetize, as this can provide valuable insights into what works well in your industry.
Make sure that your chosen business model aligns with your app's value proposition. Users should perceive the pricing as fair in relation to the benefits they receive.
Consider launching your app with a trial monetization strategy or a limited-time promotion. This approach allows you to gather user feedback about the selected business model and make necessary iterations.
Monitor app analytics, user engagement, and revenue metrics closely. The data you collect will help you understand which monetization strategies are effective and which may need adjustment. You'll find more about how to do that in the paragraph below.
Efficiently measuring the success of your app's monetization strategy is crucial for profitability and improvement. But how do you know that your app is profitable? How do you know what is there to improve? You need to keep an eye on key indicators that will help you measure progress.
Metrics like Average Revenue Per User (ARPU) are crucial in assessing the effectiveness of your monetization methods. Additionally, tracking Conversion Rate, Churn Rate, and ad Click-Through Rate (CTR) provides insight into user activity and engagement with monetization features. Return on Investment (ROI) helps assess the viability of a strategy, while user engagement metrics such as Daily Active Users (DAU) indicate the level of user interaction, influencing monetization. Finally, it is important to collect user feedback and reviews that will tell you more about user satisfaction and areas for improvement.
However, for a more complete understanding of these metrics and their impact on your app's financial viability, check out my other article on key performance indicators. There, I discuss each of the metrics in detail and explain their influence on the success of your app.
In this comprehensive article, I've explored a variety of methods for generating revenue from your app, considering different monetization strategies (ranging from in-app purchases to different types of in-app advertisements and subscription models, all the way to hybrid approaches).
Throughout, my emphasis has consistently been on the importance of picking the right revenue-generation approach based on what your app does and who uses it. I've also strived to provide you with key indicators to monitor the effectiveness of your chosen strategy and explain why they matter.
However, if you have any questions or doubts, or a desire for further discussion on monetization models, feel free to contact me via LinkedIn or send me an email at katarzyna.sobczak@teacode.io. Keep in mind, that the app market is constantly changing, so it's good to stay updated and be ready to adapt to new opportunities. Good luck!
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