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The mobile app industry is projected to hit $407.31 billion by 2026. It is lucrative by any standards, and, naturally, you’ll want to tap into the market. However, 9 out of 10 apps are downloadable for free, which brings the question, how do free apps make money?
Freemium Apps vs. Paid Apps Market
Most ‘free’ apps downloadable on Appstore and Google Play are based on the freemium model. According to Statista, 96.1% of apps downloadable on Google Play and 91.9% on the Apple App Store are free. It is also worth noting that Apple AppStore is the more lucrative market of the two.
The numbers speak volumes of how users tend to go for free apps and are turned off by paying for an app. According to Google, only 1 in 2 people ever paid for an app. The figure explains why developers are ditching the paid apps model in favor of freemium apps.
Freemium Apps vs. Free Trial Apps Market
The free app market is also split into freemium and free trial apps. While freemium apps allow users access to basic features for free, a free trial app usually allows full access to the features but within a limited period.
Both types of apps do not generate revenue until users start paying to access premium features or continue using the service after the trial. Freemium app has a conversion rate between 1%-30%, although most linger on the lower boundary, while free trial apps enjoy a higher conversion rate of 30% - 50%.
How much do free apps earn
Do people spend money when using a free app? According to past statistics, the average user of an iPhone spent $79 for in-app purchases in 2018, a 36% increase compared to the previous year. Most of the money is spent on games compared to other types of mobile apps.
Apps on Apple’s App Store generated $46.6 billion in 2018, while those on Google Play Store brought home $24.4 billion. Considering that more than 90% of the apps on both marketplaces are free to download, it is fair to suggest that the bulk of revenue originates from free apps.
Fortnite, the popular first-person shooter game, generates $1.8 billion in revenue in 2019 from its in-app purchases. How does this compare to a non-game app?
Slack, a popular communication tool, brought home $400.6 million for its financial year-end on Jan 31, 2019.
App Monetization Strategies
The beauty with monetizing an app is that there are many ways to do so. Depending on the type of apps, some strategies are more effective than others. Rewarded video advertising is proven to be the best bet as it’s rated at 75%. It is a form of advertising popular in games where users will need to watch a video ad to receive gameplay items or energies.
At 63%, in-app purchases on the freemium model are the second most effective form of monetization, followed by various forms of advertisements. Paid subscriptions and downloads are far beneath the ranking at only 14% each.
Most answers for how do free apps make money will point to advertising, and it isn’t surprising. Ads have dominated various media in our life as they’re proven to be effective. In a mobile app, ads are displayed and monetized in multiple ways.
- CPM - where the app developers are paid for a number of impressions of the ads.
- CPC - revenue is generated based on the numbers of click delivered through the ads.
- CPV - earning is based on the number of views by app users.
- CPA - user actions like installing the advertised app or purchases through the link lead to the developer’s commission.
Use advertising if you’re not charging any fees from the users. Do note that excessive ads that interrupt the experience could turn users off.
Duolingo and Instagram use advertising as their monetizing strategy.
The freemium model is increasingly popular and has dominated both Google Play and Apple App Store. Instead of charging users for a fee from the start, freemium apps allow users access to basic features. However, to access premium features, users are required to pay a fee.
There are a few types of monetization strategies within the freemium model. Mobile games allow users to buy game items through in-app purchases. Productivity apps often offer a premium subscription, which removes feature limitations on the app.
Use the freemium model if you’re hoping to decrease user acquisition cost, yet confident that the users will stick with the app and make purchases now and then.
Skype offers a subscription for its Skype To Go service and sells credits that allow users to use certain features. VCSO, a tool for photo and video creators, offers a premium subscription along with its free app.
The subscription model is one of the few ways free apps make money. It works by charging users for a recurring amount on a monthly or an annual basis. With this model, developers are assured of a fixed amount of revenue as long as users are subscribing to the app.
Subscription is commonly used by entertainment, media, news, and services. This strategy isn’t popular, as only 5% of successful apps have used subscription in their monetization approach.
If you’re offering VPN, video, or audio streaming services, the subscription model is the best way to monetize. To encourage user signups, you can offer a money-back guarantee period for new users.
Netflix and Spotify operate on the subscription model.
One of the less common strategies, the sponsorship model involves finding a sponsor related to your niche and striking up a compensation structure. In return for the monetary compensation, the app could include the sponsor’s brand, advertise its products, or send users to its website.
For example, if you’ve created an app for diet planning, you can seek out nutrition brands for a sponsorship deal.
It isn’t easy to work out a sponsorship deal, which explains why most apps prefer other more straightforward monetization strategies.
8 Steps to Define the Best App Monetization Model
Despite advertising being a dominant strategy, it may not be a good strategy for your app. Sometimes, a less-popular approach works better, and in some circumstances, you can use more than one monetization model.
The fact is, every app is different, and you’ll need a systematic process to determine the right monetization model for yours.
Here’s a step-by-step guide.
1. Consider the apps’ business goal
Prior to developing an mobile app, you’ll want to be clear of what you’re trying to achieve in terms of business goals. Is it an attempt to increase brand awareness by getting as many downloads as possible? If so, the paid subscription model may not be the best approach.
If you’re complementing an existing business with an app, and you have a customer base to market to, then the freemium or subscription model is worth considering. For businesses that are only concerned about generating quick income, the advertising model is the easiest approach.
2. Define the value
Chances are, there are already competing apps that are solving the same problem. You’ll need to determine what values do your app offers, and does it do so differently? It’s pointless to introduce just another app to the marketplace. It will be hard to monetize, even if it’s free.
3. Define your target audience and user needs
Depending on your target audience, some monetization strategies may work better than others. For example, gamers would patiently click on 30 seconds of rewarded video ads to get freebies in the game. Try doing that with a productivity tool for professionals, and it will be disastrous.
Therefore, it’s important to identify your target audience. Doing so also helps you pinpoint the users’ needs and pain points, which is essential to ensure high signups, engagement, and retention.
4. Check your competitors and evaluate the risks
As lucrative as it is, you’ll want to weigh your options before plunging into the app industry. This is particularly true if you’re planning to launch an app in the already-crowded gaming marketplace. Check out who you’re competing against and explore their strengths and weaknesses to explore possible opportunities.
Are the competing apps offering good user experience while running ads on it? Or is using a paid subscription model a wise move? Sometimes, it’s easier to be profitable with a less popular monetization strategy in a narrower niche market.
5. Monetization and metrics for your model
Once you’re comfortable with the information gathered, you’ll need to decide the app's monetization strategy. Sometimes, it’s possible to combine two or more ways of how free apps make money.
Then, you’ll need to define the metrics to gauge the success of the monetization strategy. For example, Spotify has a conversion rate of 26.6%, but most apps convert at 1% for the freemium model. Decide your app’s target and monitor when it hits the market.
6. Calculate the economy
Ultimately, you’ll want to be profitable regardless of which model you’ve chosen. You’ll need to define the number of users, conversion rate, average spending, and a predictive timeline to breakeven.
You’ll then want to be realistic and compare it with the current market sentiment and how other competitors are faring. These figures help you to navigate the choppy water, mainly when the app is newly-released.
7. Prototyping and user testing
To have an easy-to-monetize app, you’ll need one that is well-accepted by the users. The only way to ensure that is to build and prototype and test it with the uses. It could be in the form of an app with only the visual layout, or a sketch presented to a group of users for feedback.
What’s important here is for the users to understand what the app offers and how it works to solve their problems.
8. Build MVP
You’ll want to balance cost, profitability, and time-to-market. Building an MVP, which contains the basic features in a skeleton frame, helps to achieve that. Launch with an MVP and gather the user feedback on what’s working and what’s not.
Make the necessary revisions based on the feedback and gradually include other ‘nice-to-have’ features. Take note of the engagement factor and if it leads to higher conversion.
1. How do free apps make money?
Free apps are monetized through various means, including advertising, in-app purchases, sponsorship, and affiliate marketing.
2. What is the freemium model?
The freemium model offers users access to basic features for free. Users are required to make payment for premium features, whether by in-app purchases or subscription.
We’ve thoroughly addressed the question of how do free apps make money. What’s more important is choosing the right monetization model that suits your app. At Uptech, we’ve helped various clients monetize their app and build the MVP.
If you like to know more about what works best for your app, drop me a message here.