Share on Facebook0Share on Google+0Share on Reddit0Share on LinkedIn1Tweet about this on Twitter

How Do Free Apps Make Money? 5 Popular Monetization Ways

Building an app ain’t cheap.

Promoting and growing it into a successful business requires even more investment. Yet, the overwhelming majority of apps on App Stores are free.

But that doesn’t mean that free apps don’t earn a penny for publishers.

Quite the opposite, in fact. Over 98% of Google Play revenues are generated by free apps! But how to make money with an app that costs nothing?

That’s exactly what we are going to talk about in this guide.

How Do Free Apps Make Money After All?

According to Statista, in 2015 these were the most popular app monetization models among the developers:

screenshot-www.statista.com-2017-01-16-17-36-59

In a nutshell, those could be grouped to the following app monetization strategies for free apps:

  • In-app advertising
  • Subscriptions
  • Freemium upsells
  • In-app purchases (digital or physical)
  • Sponsorships or Incentivized Advertising
  • Affiliate marketing and CPI Networks

Ok, so you can clearly see that there’s a lot of different ways to make money with an app. But what’s the best option here?

According to a survey conducted by Apptentive, free apps make a profit when using a combination of different strategies:

Screen-Shot-2016-09-19-at-2.04.12-PM

Alty team decided to conduct our own investigation and compared different approaches based on both our client’s and our own results as app publishers.

Digital In-App Purchases

Mobile users are already spending 24% more on in-app purchases than on buying apps according to Gartner. To be more precise that is $7.40 paid for apps every three months versus $9.20 on in-app transactions.

And here’s the kicker – only 5% of users actually spend money on in-app goodies (if we are not talking about dedicated e-commerce apps). AppsFlyer dug deeper into the matter and uncovered some interesting shopping patterns:

Screen-Shot-2016-07-11-at-2.34.39-PM

iOS fans are bigger spenders, that’s no news. Yet freemium Android apps still account for 98% of Google Play revenues on a global scale. So stay with me till the next section for the tips

Also, you may be surprised to know that Asian consumers spend 40% more in apps compared to the rest of the world. Here’s a detailed recap:

Screen-Shot-2016-07-11-at-2.37.36-PM

Yep, we are already thinking about localizing our products for the Asian markets. Taiwan, in fact, is among the top-10 countries generating the most app revenues. Check out our previous post for more insights on this.

Ok, so apps earn money by selling digital goodies. But what are those exactly and which niches do they work for?

AppAnnie has some good answers for that.

screenshot-blog.appbot.co-2017-01-16-18-24-32

And here’s some IAP (in-app purchases) data from these 200+ top grossing apps:

  • Lowest IAP price – $0.99
  • Highest IAP price – $299.99
  • Median IAP price – $8.99
  • Mean IAP price – $19.11
  • % apps with 10+ IAPs – 69%.

Games generate a healthy fraction of revenues through all sorts of IAPs ranging from virtual currencies to instant boosts or premium items.

Social networking and dating apps also generate a fair share of their revenues through various digital in-app purchases and subscriptions (we’ll get back to that).

In fact, some of the priciest IAPs ($59.99) were available in dating apps like eHarmony, Match, OkCupid, Ashley Madison and Grindr Xtra.

Additional reading: How To Make a Dating App Like Tinder

Custom stickers and emojis are often the most popular IAPs in social media and messaging apps. In fact, Lines is known to generate over $270 million annually through sticker sales. We’ve previously published a detailed post outlining how profitable building an emoji keyboard app can be. The data will likely surprise you.

Physical In-App Purchases (Mobile Commerce)

Mobile commerce market is booming. By 2020 some 284 billion of consumer dollars will be spent on portable devices.

So if you are wondering how to make money from app, mobile commerce may be the right answer.

Here are some more numbers to prove the point:

  • Custom mobile shopping apps generate 3.5 times more conversions than mobile & desktop websites.
  • Mobile transactions now constitute 35% of all retail e-commerce transactions in the US.
  • The average mobile app shopper’s check is $127.
  • While iPhone users still spend more money, the number of Android transactions in the US has seen a whopping 58% growth in 2016.

Further Reading: How To Make an Online Shopping App

The Freemium Upsell

Freemium apps make money through IAPs too. Yet, in this case, users are asked to pay for unlocking additional functionality, remove ads or enable more customization.

That’s the model Evernote is using both for their mobile and desktop products.

evernote-price-increase-2

Does a freemium upsell model suit your business?

Yes, in the following cases:

  • You have designed and built a genuinely great product that solves an immediate need/pain point.
  • Your free version is already action-packed with value and most people feel compelled to upgrade to receive even greater benefits.
  • Your user acquisition costs are low. Remember only to 2%-5% of your users will eventually convert into paying customers.
  • You are heavily promoting your product. Look at the paying user numbers again and calculate how much app users you will need to generate a decent amount of revenues.
  • The perks of upgrading are crystal clear. For instance, I can clearly understand why I should pay extra for radio functionality or extra storage in a music app. Yet, the perks of going premium with LinkedIn seem rather murky to me.

Subscriptions

In a nutshell, the subscription model functions similarly to the freemium upsell:

  • It costs nothing to download the app.
  • The app features a certain amount of free content.
  • Users need to pay a recurring subscription fee to unlock more/all the content within the app.

In general, this model works best for apps with regularly updated content. Think mobile news apps or magazines, apps featuring video/audio materials etc.

For instance, if you want to build a newspaper app and monetize it successfully, you may want to consider offering a limited number of stories for free and gate the rest behind a paywall.

Or you can take the standard SaaS route and offer a one-month free trial of your app and request the payment afterward.

For startups, opting for a recurring revenue model may ensure early profitability and success in the long run. After all, mobile apps with a subscription model tend to generate 2-3 times more revenues per user compared to apps relying on advertising or paid downloads. These apps also tend to generate 50% more revenues compared to apps offering IAPs.

According to Tim McCloud from PlayKids, to succeed with the subscription model you need to pay close attention to the following:

  • Targeting the right user segment(s).
  • Test different onboarding experiences.
  • Constantly test and improve the impact of your subscription plans.
  • Leverage dynamic user segmentation.
  • Inspect your unique app value proposition frequently.
  • Watch the churn.

Sponsorships or Incentivized Advertising

This may be a fairly new app monetization strategy, but it’s gaining more momentum in 2017.

Tinder is one great example of how sponsorships could be done in a creative, non-sleazy manner.

For instance, Fox Entertainment has partnered with Tinder to promote the new episodes of the Mindy Project. The main characters got their own Tinder profiles with funny descriptions and when users swiped right on them, they received some witty messages along with a soft pitch to stay tuned for the new episode.

the-mindy-project-tinder-ad-campaign

Amnesty International used Tinder to raise awareness about forced marriages still practiced around the world. Domino’s have created a funny pizza promo for Valentine day on Tinder.

For the Ex Machina movie campaign, the company created a robot profile of the main character, Ava, who asked provocative questions to the users.

download

Incentivized advertising has also become popular in mobile games. Users are often served rewarded video or text ads promoting a certain brand in return for some special boost or extra game credit.

rewarded-mobile-ads-02

Of course, landing major sponsorship deals requires a huge and very engaged user base and may not be suitable for companies at early stages.

These were just five ways of how to make money from apps. The most successful product owners typically opt for a mix of different models, rather than settling on one option only. And the optimal mobile app monetization strategy should always come in line with your target market spending power and app usage habits.

Audience discovery and research is the essential part of the mobile app development services at Alty. And we’d be delighted to help you with a new project or optimize your current design for higher conversion rates!

Rate the article
[Average: 0]
Want to Get our Digest to Your Inbox?
Great, You are Now Subscribed!
Hands-on Guides Startup Goodies
Mobile App Testing: Why You Should Always Test Your Apps?

Learn how to bulletproof your apps for excellency with the right testing approaches.

Leonid Gorev
Hands-on Guides Startup Goodies
Responsive Website vs. Native App: What To Choose & When

Mobile is the primary channel for content consumption. But what do you need – an app or a responsive website?

Slava Bushtruk
Hands-on Guides Startup Goodies
How to Write a Perfect App Specification? (+Free Template)

What to include in your app specifications document to get an accurate price quote and get the ball rolling.

Leonid Gorev