App Planning

How to monetize an app

The whole point of building an app is to generate revenue for a business. Whether you’re developing a new app for an existing business or launching a new company based on an app, revenue is one of the primary goals. Thanks to the evolution of the app economy since its launch over a decade ago, there are now far more options for app revenue.

Which app monetization is best?

Premium downloads, advertisements, subscriptions, transactional fees, and acquisition goals are all valid methods for creating revenue from an app. It isn’t a matter of determining which one is superior, as much as it is a matter of matching the business value with the most logical way of charging for that value. Applying the wrong monetization strategy can have an even bigger impact on revenue than releasing a mediocre app. Here’s a look at some of the most common monetization strategies and what kind of apps are good fits for each.

Premium applications

The original monetization in the app world is a one-time payment for downloading an application. This now includes both premium apps (one-time payment upon download) and freemium apps (free to download with an unlock or add-on payment). One-time payment for an application can be a good fit for an app that delivers a static package of information or functionality. Games are great examples of premium apps.

While this model is still around, it is typically the most difficult one with which to turn a profit. This boils down to the revenue potential per user. If a user will only ever pay for your application one time, the only way you can continue to generate income of any kind is to acquire more users each month or continue to release new apps for your target market. This requires consistently high advertising budgets, and at only $1 or even $5 of revenue per user, the cost of user acquisition can quickly surpass what the users are paying.

Advertisement revenue

Another long-standing method of monetizing apps is through advertisements. Ads typically are done very well or very poorly, and it generally spells life or death for the app. Poorly implemented advertisements are random, annoying, and irrelevant to the content of the application. Generally this happens when an app owner accepts a random feed of advertisements from a third party service as a cheap and easy way of trying to offer the app for free. Apps utilizing poor advertisements will rarely see a satisfying income because users tend to delete apps that annoy them.

Great advertisements are more closely related to sponsorships or promotional content. A company with a shared interest in the app’s audience may pay to display their brand or offer a special deal that will be of interest to users. Sponsorships should change periodically to stay fresh and related to current app content. These ads add value to the user’s experience and don’t even feel like ads. It’s challenging for an app-business to be profitable on ads alone unless the user base is in the millions, but good ads can be a nice bonus on top of other revenue.

Subscription services

When an application offers changing information or an ongoing service, a subscription fee to access the app can make far more sense than a one-time payment. Subscription fees generally renew monthly, but some businesses may follow a yearly model. Apps that deliver premium content that is frequently refreshed or apps that offer an ongoing service of syncing or backing data up are often a good fit for subscription models.

The benefit of a subscription model is sustainable revenue. Because your customers pay to continue to access your service, you can focus on acquiring only the right customers and then keeping them happy. The per-user revenue potential also exponentially increases with a subscription. Growth can happen either through expanding the target market or by upselling the existing user base on new features.

Transactional fees

Thanks to the creation of the on-demand economy, many physical services are now coordinated and paid for through apps. Apps that facilitate the payment for services or goods between two parties have the benefit of being able to charge a transactional fee, potentially leaving the rest of the app free. Transactional fees charge either a flat amount or a percentage of a transaction as payment for using the app.

A transactional fee limits the risk a user feels in trying the app because until they actually pay for a physical good or service, they don’t pay the app owner. The app needs to provide enough value at a low enough transactional fee, though, that parties don’t feel incentivized to circumvent the app. In some circumstances, app owners find a good combination of both a low transactional fee and a low subscription fee.

Acquisition goals

A nontraditional and slightly riskier monetization approach is to instead aim for an acquisition of the app in the near future. Instead of generating revenue from users or advertisers, the app owner operates without revenue in hopes that the company’s valuation for an acquisition will be enough in a few years to more than cover the lost income. Free apps have much higher adoption rates than those that require payment, which makes it slightly easier to gain market traction.

This is trickier to pull off because the app has to still build value. The most valuable assets an app can offer to potential buyers are generally proprietary technology and the user base. A proven unique algorithm or automated process could be of immense value to a competitor in the same market. A user base of individuals with high spending potential is valuable to companies hoping to convert those same individuals.

If you’re ready to talk about monetizing your app, let us know. We can help you find the right strategy for your business.

By Emily Hart