how-do-apps-make-money

How Do Apps Make Money?

Apps in the Apple Store follow five primary business model patterns:

Free Model

Users get those apps for free. This makes the whole experience of getting the app frictionless as it removes the barriers to enter and download the app.

How do free apps make money?

Developers either don’t make money, or they do make money by displaying ads within the apps. In the case in which developers decide to make money by showing ads, they need to optimize for a large user base and to have a strong engagement.

Indeed, this is the most sustainable way to make enough money from a free app.

Why developers use the free model?

The free model has a few advantages. Some of them are:

  • branding: a successful free app can be recognized across a large base of users
  • large user base: free is a powerful way to have users try your app, quickly
  • lead generation: if you have other apps, a free app might be used as a lead magnet to attract users to download or purchase other paid apps

While those elements might seem appealing, in reality, given the competition on the Apple Store, many free apps might never turn a dime.

 

Freemium Model

In a freemium app model, the user stills downloads the app for free, which removes the initial friction.

If the user wants to have additional features, or content not available in the free version, she/he will be prompted to buy the premium version of the app.

How do freemium apps make money?

Those apps make money by converting free users into paid ones. This implies the content in the app needs to be optimized for conversion.

Therefore, a basic version needs to be significant enough to convince free users to keep using it, and add features, or limit the usage, so that free users might want more and switch to paid.

Why developers use the freemium apps model?

The freemium model has become quite popular in the Apple Store. However, making money from a freemium, it’s not as easy as it might seem.

Convincing users to switch to paid requires a deep understanding of the users base willing to pay for the app. At the same time, a paid app requires a high cost of maintenance for the content it carries.

While you might develop a completely free app, and leave it there. You can’t with an app built on top of a freemium strategy. Continuous support will be needed.

However, similar to a free model with the freemium you can easily reach larger users base, being recognized as a brand and convert free users in paid ones.

However, you need to make sure to keep offering a great experience for both free and paid users. This is a crucial element.

In fact, by allowing everyone to try the app for free, also those users willing to pay beforehand might opt for the free version before deciding whether to leap to the paid one.

As pointed out on the Apple Developer Blog:

In most cases, providing a great experience to all users regardless of whether they choose to spend is an integral aspect of the freemium model. The path to monetization is through engagement, and when users are given time to enjoy an app, they may be more inclined to invest in paid features.

As JP Chookaszian, Director of Revenue at VSCO points out in the same article “From their first session with the app, we’re trying to develop trust with users. And we do that by demonstrating value without asking anything from them first.

Subscription Model

The subscription model works by a paid memberships that keep renewing automatically until the user decides to cancel the service.

This implies a focus and emphasis on continuous improvement and additional features of the app. Or a reason for the user to keep paying to avoid to lose something valuable.

How do subscriptions apps make money?

As reported by the Apple Developer blog:

Within a subscriber’s first year of subscription, you receive 70% of the subscription price at each billing cycle, minus applicable taxes. After a subscriber accumulates one year of paid service, your revenue increases to 85% of the subscription price, minus applicable taxes.

Thus, if the user is retained after the first year, the developer makes more money. In short, Apple tries to incentivize developers to build a model to keep users engaged or to gain them back.

Indeed, if a user unsubscribes from an app service but gets back within the 60 days grace period days of paid service continue to be accounted by Apple so that at the renewal of the first year the developer will earn more.

Why developers use a subscription model?

A subscription model might be the most sustainable in the long run. While the user base initially using the service might be way more limited than the free and freemium model, developers also can leverage on a few strategies to gain subscribers quickly.

As mentioned in the Apple Developer blog, “Apps with auto-renewable subscriptions can offer a discounted price or a free trial for a limited time at the beginning of a subscription.”

In short, the developers can use one of the following strategies:

  • Pay as you go: this works by lowering the price of the service for a limited period, which works well with price-sensitive users
  • Pay up front: one-time introductory for a specified duration at a lower price. This allows users still uncertain to enjoy of the first period with minimum investment and then decide whether to renew at full price
  • Free trial: the user enjoys a limited period for free. The subscription starts right away, but the user won’t pay until the end of the trial. The user can cancel before the trial ends

To make this model work, developers have to:

  • create a frictionless and seamless sign-up process with a clear value proposition, call to action, pricing and terms make
  • the onboarding process smooth
  • offer territory-specific prices set according to country and currency
  • re-engage churned users by sending tailored messages with compelling offers
  • offer bundle apps: if you have multiple apps on the Apple Store think of a bundle offer that makes the perceived value of the overall offering way higher

In a paid model, rather then accessing the app via a periodic fee, the users can get access to it via a one-time payment formula. This is extremely appealing for many.

However, by limiting the option of the users, like in subscription or freemium model, a user will evaluate the app more carefully before proceeding with the purchase.

This implies that the app needs to be well positioned in terms of the value proposition.

How do paid model apps make money?

Those apps make money via a one-time payment. To make sure users can evaluate the app fully before the one-time purchase, developers have to optimize the app for things like title, icon, description, preview, and screenshots.

Marketing becomes extremely important for acquiring users.

Another lever developers have bundle offering. Those primarily consist of:

  • Pricing: offer a discount compared to the separate purchase price of the individual apps in the bundle
  • Subscriptions: a user subscribes in one app, they must be able to access all other apps in the bundle at no additional cost

Why developers use a paid model?

In respect to a subscription-based app, a paid model has a pricing structure that although might create some friction initially might be in general more appealing.

Many people like one-time purchases. Also, this might also imply a lower cost of having to engage users in the long run, with support costs. On the other hand, a paid model also suggests lower predictability on the forecasted revenues.

Paymium Model

The paymium model is a mix of paid and freemium. Where users pay to download the app, but also need to pay to use additional features or get access to additional content. As the initial cost might make users evaluate their purchase more carefully the same principles of paid models apply.

How do Paymium apps make money?

They make money by both an initial payment and an additional payment at download level and afterward if users are converted again to paid.

Developers using this model can leverage from tools from both freemium and paid models.

Why do developers choose the Paymium model?

A paymium model is attractive as it mixes the levers from a freemium and paid model.

What apps have had most grab on our attention in 2018?

According to apptopia.com the top apps are:

apptopia-top-downloaded-apps-2018

Apps like WhatsApp, TikTok, Facebook, and Twitter are among the most used social apps. To appreciate how much attention those apps grab, apptopia also computed the time we spent on those popular apps by session time:

top-apps-by-session-time

The resources you need to get started with your business model: 

Popular case studies from the blog:

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach about a million business students, professionals, and entrepreneurs in 2019 alone | Gennaro is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

Leave a Reply