The mobile app market was valued at $208.5 billion in 2022 and is projected to hit $777.4 billion by 2032. This is a 14% growth. 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?
In this article, I will dive into the captivating world of app monetization and explore the most common and effective revenue-generating strategies that power the success of free apps.
As a Product Manager at Uptech, I have had the opportunity to develop successful apps like Yaza, Cardless, and many others. Drawing from my experience in product development and a deep understanding of market dynamics, I have prepared this article to help you navigate the complexities of app monetization.
Throughout this article, you will discover:
- The various app monetization models and their differences;
- Key app monetization strategies employed by successful apps;
- Steps to identify and choose the right monetization model for your business.
Let's figure out the secrets of how free apps make money.
Free Apps vs. Paid Apps Market
To answer the question of how free apps generate revenue without ads, let's first examine what’s going on in both the free and paid app markets.
Free apps
Let’s make it clear, most ‘free’ apps on the App Store and Google Play are based on the freemium model. According to Statista, 97% of apps on Google Play and 94.5% on the Apple App Store are free. It is also worth noting that the Apple App Store is the more lucrative market of the two.
Paid Apps
Speaking about paid apps, they have a clear benefit: they earn money right away when people download them. Plus, paying users tend to use the app regularly because they've invested in it.
It creates some kind of loyalty, and having a loyal user base is a great way to make a good income.
But there's a challenge. Many users don't want to pay for an app without trying it first. In fact, 50% of mobile users have never paid for an app, according to a Google study. That's why there are more free apps than paid ones in app stores.
Now ask yourself: Would you really want to spend money on an app if there are so many free alternatives?
I bet you wouldn't.
And the stats prove it. Almost all the money made on Google Play, about 98%, comes from free apps. Many apps make money through in-app purchases. According to Business of Apps, about half of non-game apps and nearly 80% of game apps use this method.
In-app purchases make up nearly half (48.2%) of all earnings from mobile apps. Compare that to 14% from ads and 37.8% from people buying the app upfront.
Worldwide, users are spending a whopping $380 billion on in-app purchases.
So my main message here is that charging for app downloads is one way to make money with mobile apps.
There are other ways to earn money while offering your app for free, and I'll be sharing the most successful strategies in this article. So, keep reading.
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%.
Expert tip: The freemium monetization model is best suitable for early-stage startups still working on their product-market fit and products that are simple to use and satisfy basic user needs.
How Do Free Apps Make Money: 5 Main App Monetization Strategies
The beauty of monetizing an app is that there are many ways to do so. Depending on the type of app, some strategies are more effective than others.
For example, rewarded video advertising is proven to be the best bet. It was found that users who engage with rewarded video ads are 4X more likely to make an in-app purchase than those who don’t.
In the freemium model, in-app purchases are the second most successful way to make money. In-app purchases account for 48% of mobile app earnings as compared to 14% from ads-based revenue. Paid app downloads are less effective, contributing only 38% to the total.
Without further ado, let’s discuss the different ways free apps make money. And explore how much money they actually make.
Advertising
In-app ads are the most common way free apps make money. When you download a free app, you often come across different types of ads. It could be banner ads, full-screen pop-ups, and even video ads. Each ad interaction, whether it's a view, a click, or an installation of a product or service advertised, generates income.
This model allows you to offer the app for free while still earning revenue. It's a balance between user experience and profitability.
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 number of clicks 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.
The formats of in-app ads also differ.
- Interstitial Ads: These are full-screen pop-ups that appear when you're transitioning between app features. They often contain videos, images, or text that encourage interaction or take you to an external website.
- Banner Ads: You'll see these image-based ads at the edges of your device screen, trying to get you to go to another app or website. They also can include images, videos, text, or a mix of these.
- In-Stream Video Ads: These in-app ads show up while you're watching a video in an app. They can appear before, during, or after the video, strategically placed for engagement.
- Native Ads: These ads blend into an app's content seamlessly, matching its visual style. They look like regular content but are sponsored.
- Rewarded Video Ads: Often used by gaming apps, these ads let users engage with content in exchange for rewards like app currency, unlockable items, and more. They're less intrusive than pop-ups or banners.
Here's how the in-app monetization model works:
- Ads are integrated into your app through ad networks like Google AdMob.
- You sign in to the ad network, and it handles showing relevant ads in your free app.
Such social apps as Instagram and TikTok use advertising as their monetizing strategy. In 2022, Instagram Ad revenue grew by 25.7% and reached $33.25 billion. TikTok continues to take a bigger slice of that pie. In 2022, TikTok ad revenues topped $9.9 billion, an increase of 155% over the previous year.
Planning to build a social app?
Leverage Uptech's social media app development services to build products that users love.
These are BIG examples, but of course, not every app can become the next TikTok or Instagram. So here’s the real revenue of a small metronome app I faced on Reddit.
The app has garnered 50K downloads, 16K active users, and boasts a 4.7 star rating. Initially, the app was completely free, but approximately three months ago, app developers decided to introduce ads using MoPub mediation and also offered an in-app purchase option to remove ads for just $2. Since then, they've generated about €250 in revenue from in-app purchases and approximately €100 from ads.
Expert tip: Use advertising if you’re not charging any fees from the users. Note that excessive ads that interrupt the experience could turn users off.
In-app purchases
One more way your free app can make money is through in-app purchases. Put it simply, an in-app purchase means buying something extra while using an app. It could be things like getting an e-book, playing a game without watching ads, and more. Game apps use this monetization model very often.
There are 3 types of in-app purchases:
- Unlockables: These are purchases that let you permanently unlock specific stuff or features, like buying e-books or expanding a game.
- Expendables: These are often found in free games. You buy things like coins or power-ups to help you in the game, like passing levels or getting fun digital items.
- Subscriptions: These are ongoing purchases, usually billed monthly or yearly. They give you access to an app or let you use advanced features beyond the free version.
A good example of an app that uses in-app purchases is Among Us. Among Us is a free game. Since it launched in June 2018, it has made over $86 million on mobile alone. Among Us makes money by offering things like removing ads, providing skins (outfits) for your characters, and extra items to make your characters look cooler.
Freemium model
One more effective way to make money from free apps is by embracing the freemium model. 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.
It’s some kind of a combination of free and premium features. This approach to making money is also referred to as the in-app subscription model.
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.
Expert tip: 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 has a revenue model that makes money in two ways:
- From subscription;
- “Pay-as-you-go” model.
How does it work? Skype is free for Skype to Skype calls, but if a user wants to make calls, send texts, or voicemails to a landline or mobile number outside of Skype – that is where the costs come in. According to Skype’s financial information, the company’s annual revenue was $184.3 million.
VCSO, a tool for photo and video creators, offers a premium subscription along with its free app.
VSCO charges an annual subscription fee of $19.99 for access to a full-suite of mobile photo-editing tools, exclusive photo filters, tutorials, and more, and it brings them around $80 million in annual revenue.
Subscription model
The subscription model is one of the 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.
People often can say that Freemium and Subscription models are the same, but there's an important distinction. With the Freemium model, you can download an app for free and use its basic features indefinitely without any time constraints.
On the other hand, apps using a subscription model typically offer a free trial period. This allows users to test the app before deciding whether to continue using it by paying a fixed fee.
The key difference is that you cannot use a Subscription-based app once the trial period ends unless you pay.
So, why are such apps called free? Well, it's a matter of perspective. My aim is to clarify this and explain how apps available for free download on App Stores can still generate revenue.
The Subscription model is commonly used by entertainment, media, news, and services. This strategy isn’t so popular, as only 5% of successful apps have used subscriptions in their monetization approach.
Expert tip: 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.
Feel Better – the health app lets users browse the food, workouts, and tracks available in-app. However, to access the content users must subscribe. This strategy allows the user to see exactly what they will be getting before they sign up.
Amazon – is one more great example of a free app that uses a subscription-based model. Amazon allows users to save on products, shipping, its video streaming service Amazon Prime, and its music streaming service Amazon Music, as well as access thousands of free e-books only when a user subscribes.
Amazon’s annual revenue as of the end of September 2023 was $554B with 10.32% growth year-over-year.
Sponsorship 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 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.
Snapchat has a great example of a Sponsorship model. In 2016, the popular fast-food chain Taco Bell sponsored a Snapchat filter. The filter worked that way that it turned users’ head into a giant taco to celebrate Cinco de Mayo.
The filter broke Snapchat records with a total of 224 million interactions and 12.5 years’ worth of unique user engagements in just one day.
Expert tip: Before looking for sponsors, I suggest that you do your homework: search their demographics data, app usage metrics, and buying behavior. It will give brands a stronger reason to explore your app as a way to build their audience reach.
8 Steps to Define the Best App Monetization Model For Free Apps
So if you've decided: “I want to develop a free app” – it's important to choose the right monetization model from the options I've previously listed.
While advertising is a dominant strategy, it may not be a good fit for your app. Sometimes, a less-popular approach works better, and in certain cases, you can use more than one monetization model.
Each app is unique, and selecting the appropriate monetization strategy requires a systematic approach.
Here's a step-by-step guide to help you choose the most suitable monetization model for your free app.
1. Consider the apps’ business goal
Prior to developing an app, you’ll want to be clear about 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 your app offers, and whether does it 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.
Expert tip: You can use data.ai – a platform that lets you analyze competitors, improve ASO and paid UA, understand an audience base, identify potential partnerships, assess expansion into new markets, and build new innovative app features.
5. Decide on the monetization 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.
6. Set and track the key metrics
Ultimately, you’ll want to be profitable regardless of which model you’ve chosen. Here are the key product metrics for evaluating your app monetization strategy performance:
- Downloads: Counts how many times an app is downloaded, indicating initial interest.
- Monthly Active Users (MAU): Tracks unique users in a month, showing ongoing popularity.
- Average Revenue Per User (ARPU): The average revenue from each user, calculated by dividing total revenue by MAU.
- Lifetime Value (LTV): The total expected revenue from a user over their lifetime, found by multiplying ARPU by the user's average lifespan.
- Customer Acquisition Cost (CAC): The cost to acquire a new user, calculated by dividing marketing costs by new users gained.
- Retention Rate: The percentage of users who keep using the app over time, indicating user satisfaction and loyalty.
- Engagement Rate: Measures active use and interaction with the app.
- Conversion Rate: The percentage of users completing a desired action, showing the app's effectiveness in meeting its goals.
Decide your app’s target and monitor when it hits the market. 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. Create a prototype and test it
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 a 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.
To make in-app ads work well and not disrupt the user experience, I advise you to consider these strategies:
- Place full-page ads after users complete an action or level;
- Analyze how users interact with your app to personalize ad content.
- Ensure the ad is high-quality and has no technical issues.
Remember, a bad ad experience can lead to bad reviews. So, focus on delivering a smooth user experience.
How Much Do Free Apps Earn?
Do people spend money when using a free app? As we found out, they do.
As of the Q3 of 2023, the average consumer spend on mobile apps per smartphone was approximately $5.05, up from the $4.86 spent during the Q3 of 2022. Most of the money is spent on games compared to other types of mobile apps.
In 2022, revenue from apps on Apple’s App Store went up by 10.6% and reached $36.3 billion.
On the other hand, the amount of money people spent on apps from Google Play went up a lot in 2021, by 58.2%. But in 2022, it didn't grow as much, only 8.4%, making a total of $11.5 billion for the year.
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.
Summary
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 would like to know more about what works best for your app, drop us a message.
FAQs
How do free apps make money without ads?
The beauty of monetizing a free app is that there are many ways to do so. Depending on the type of app, you can choose the option that suits your app best, including in-app purchases, sponsorship, freemium, and affiliate marketing.
How to earn money from apps?
Here are some most effective ways how free apps make money.
- In-app purchases;
- Interstitial ads;
- Banner ads;
- In-Stream video ads;
- Native ads;
- Rewarded video ads;
- Freemium model;
- Subscription;
- Sponsorship model.
How much money can a free app make?
As of the Q3 of 2023, the average consumer spend on mobile apps per smartphone was approximately $5.05, up from the $4.86 spent during the Q3 of 2022. 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.
In 2022, the apps on Apple’s App Store genrated $36.3 billion. While apps on Google Play made a total of $11.5 billion in 2022.