How to make money with apps
How to make money with apps is a essential question that app developers should ask way before publishing. There are different models and strategies for monetizing an app. Premium, freemium, subscription or advertising integration are the most common. Many app publishers think they only need to generate enough installations (downloads) for their app project to refinance itself. Many downloads and regular users are certainly important success factors for an app, but to earn money with apps, a suitable monetization strategy is needed. There are many apps with many downloads and regular users, which generate a lot of maintenance costs, but unfortunately no profit.
App Store Sales
About ten years ago, Apple created a real gold mine with the launch and opening of the App Store for third-party apps. Originally, it was only intended to make the iPhone more attractive, but ten years later it was clearly more than that. Apple generated more revenue with the App Store in 2017 than McDonalds in 2016 with all its stores around the world. Unlike the thousands of McDonald’s fast food restaurants, which also cost a lot of money, Apple has only managed this with a single online store. In 2017, the total revenue from the Apple App Store was around 26. billion dollars, of which 70% got to developers and 30% to Apple. That’s about 11 billion dollars!
How do you make money with apps?
Not every monetization strategy fits every app. It is therefore advisable to start thinking about the various possibilities of monetizing apps in the concept phase. Depending on the monetization model, the implementation requires more or less development effort, which should also be included. Basically there are two sources for sales with one app:
- The End Users
Alternative forms of profitable apps
The Return on Investment (ROI) of many successful apps does not take place within the app but indirectly. This means that the app promotes the image, appeals to potential customers, reaches a new target group, or serves as a means to an end. There are also countless apps which are developed to optimize processes and thus save a lot of costs, but do not generate sales in the classic sense.
Many apps are therefore developed as marketing instruments, as services or tools in order to bring about monetization (or cost savings) outside the app economy. For example, the all-in-one Smarthome App SARAH for HUBWARE AG, which can be downloaded free of charge from the App Store. The end customers must first procure the necessary smart hardware components and have the networks set up and paid for in house before this app has any real benefit for the Smarthome owners. Of course, there are also non-profit projects where the aim of the app is to provide a social or ecological benefit and, for example, to sensitize humanity to our plastic problem or the protection of animals.
The classic monetisation strategies for apps
The main app business models and revenue streams are:
Free to download. Turnover with advertisements or logo presences paid by advertisers or sponsors.
Free download with the possibility to extend the lifetime of a full version by in-app purchases or a subscription, new content or functions. Pay users.
Paid apps, which cost already during the download and the turnover comes through the user.
There are also apps that generate sales with the usage data in addition to or in addition to advertising revenues and sales. A prominent example would probably be Facebook.
It often makes sense to integrate several revenue sources at the same time in order to generate the greatest possible revenue with one app. There are no rules in the app stores that say that you cannot implement sponsoring partners, in-app purchases and a subscription model for an app.
Freemium business model
Frequently, free apps have integrated advertising banners, native advertising or sponsor logos. App publishers sell (auction) their ad spaces via so-called ad networks, which automatically play out the highest bidding ad in the appropriate format. Alternatively, publishers make a contract with sponsor partners who pay a fixed amount for a presence in the app.
“AN APP ONLY BECOMES INTERESTING FOR ADVERTISING NETWORKS FROM AROUND 20,000 REGULAR APP USERS.”
A clever option for publishers is to give the end user the opportunity to buy advertising freedom. The user therefore pays an amount via in-app purchase so that he no longer has to see any advertising. This model is often combined with other in-app purchase options such as new levels (in games), new content (in learning apps) or new functions (productivity apps). In addition, this model can also be combined with the subscription model, in which end users pay a recurring rather than a one-off amount for the use of the app. It is important to know that an app needs a lot of downloads and regular users (only from about 20’000 regular app users) to become interesting for advertising networks and to earn money with it.
The In-App purchase model can be used to sell a wide variety of digital goods. From the publisher’s point of view, it is important that the basic version (Free) already offers enough added value so that an end user is motivated to pay for a better experience, new functions or additional content. The offer should be made to the user at the right time and in the right context and should of course be attractive. Examples of in-app purchases are:
- Advertising freedom (see above)
- Additional “experiences” like levels or e.g. magic weapons in games
- Additional content and functions (e.g. learning apps)
- A longer useful life
- Additional user accounts or connections
- Personalized functions and services (e.g. recommendations based on app data)
- Access to exclusive offers
Subscription based Apps
End users are very reluctant and cautious to accept contracts with recurring costs. However, if this model is implemented once, the value of the app and of course the regular revenue with each new subscriber increases. This model is used successfully in the entertainment and news industry. Examples would be Spotify/Deezer as music services, Netflix for video streaming, Die Zeit or the Sonntagszeitung in the News section. Also some learning apps like Mondly have a subscription model.
Important rules for using the in-app purchase funtion
There are clear rules of the App Stores regarding the use of the in-app purchase function, which of course also apply to subscription models purchased via in-app. The most important rule is that you can only offer services via in-app purchase that are purely digital in nature. This means that the product is 100% digital. In order for an app to be available for download in the App Store through Apple/Google through the App Review at all, all sales of digital goods must be handled by In-App purchase. This rule is very important and means that you can’t simply bypass the 30% revenue share of the app stores. Services and products, on the other hand, which are sold within the apps but are not provided digitally but physically and outside the apps, must not be sold with In-App purchase. These would be e.g. taxi apps like the go! App or mCommerce apps like Amazon, etc.
Premium app business model
The premium business model means that an app costs money right from the start and that the user is already asked to pay for the download of the app. From the publisher’s point of view, there is no need for the not-so-trivial integration of in-app purchase functions and no need to install paywalls. You can simply define how expensive the app should be in the individual app stores. Which prices (price points) can be given can be found in the respective price lists of the Apple and Google App Stores.
“FOR APPS WITH A VERY LIMITED POTENTIAL TARGET GROUP, BUT A GREAT ADDED VALUE FOR THE END USER, A PREMIUM APP WITH A HIGH PRICE CAN LEAD TO THE BIGGEST PROFIT.”
The big disadvantage of this model is that many users are not willing to spend a lot of money on a digital product if they have not yet tried it out and are convinced of its usefulness. For this reason, this model works best when the user can already imagine the benefits the app will bring. This is often the case for apps with a high degree of recognition and reputation, such as the Atlas of Human Anatomy. Most people recognize the functions and added values of such an app, because they can be found, for example, in advertising.
Most people quickly recognize the functions and added value of such an app because they have heard about it in advertisements, for example, and are therefore willing to pay for the download without first testing the app intensively.
Another disadvantage of this model is that it is very difficult from the beginning, but also over time, to find the ideal price (highest revenue) for an app. Either you demand a lot but get only a few downloads or you demand very little and have to generate a lot of downloads to generate a decent turnover. In the case of apps with a very limited potential target group, but a large added value for the end user, a premium app with a high price can lead to the biggest profit.
We are convinced that an intelligent combination of the various monetization options can generate the highest revenues.
Calculate potential sales of an app
We are often asked how much money you can earn with apps, or how many downloads you will get. We can’t answer both questions just like that. Very often, however, we observe that the potential of the app is overestimated because wrong assumptions are made. In order to avoid this, we recommend using the intersection method to get a reasonably realistic picture of the effective potential.
How can the monetarization potential be determined?
First, the maximum possible target group must be determined. This can often be determined via statistics portals such as Statista, the Federal Statistical Office or other data sources from the relevant subject area.
Everything that has to be excluded due to a criterion or a certain circumstance is now “cut off” from this maximum potential.
Thus the second step is to define the criteria and circumstances which lead to an exclusion of this customer group or a reduction of the effective potential. Criteria that are typical for an app:
How many of the potential users can be reached with the existing advertising budget? In most of the projects that we supervise, this criterion already accounts for around 90% – 95%.
How many of these people have a smartphone and an App Store account? These are probably the vast majority nowadays, i.e. around 90%.
How many of those potential users who learn about the app and have a smartphone will actually download it? If this is 10%, it would be a very good value already.
How many downloaders will still use the app after three months (App Retention)? If this is 20%, it’s already a good value.
How many of the app users would be willing to pay to upgrade the app (in the case of a Freemium model)? If these are 10% of all Freemium users, that’s already a good number.
Depending on the app and the business model you have to define different “exclusion criteria”. The possible criteria are very diverse. The situation becomes critical if several criteria have to be fulfilled in order to reach a user.
At the end of the day, there is often only a few percent left of the great potential, which often dazzles you at first glance.
Tips for monetizing apps
If advertising integration is an option, it is essential to ensure that it does not impair usability or the user experience. Therefore, you should only allow advertising that fits the context of use and not at the expense of user flow or user navigation.
Several monetization options can be combined: For example, one can give the user the possibility to choose whether he/she prefers to watch an advertisement or whether he/she prefers advertising freedom via subscription or in-app purchase.
In addition to different amounts for in-app purchase options, you should also be able to offer the whole package at a reduced price (added value for end users).
The ideal price has to be tested – it can hardly be determined in advance. By means of A/B testing and analysis of downloads/turnovers over time, one should, however, be able to approach the best price for the app or also for in-app purchases.
Downloads and sales can be boosted by a good referral program. Dropbox, Airbnb, Uber or Booking.com show how “user-advertising-new-users” can be implemented correctly and profitably for all participants. Such a referral program should also be part of a monetization strategy.
Don’t forget the taxes, levies and revenue sharing of the App Stores! Often a publisher only realises at the first accounting that a considerable part of the turnover has to be transferred to the App Stores and a further part to the VAT. Attention: The VAT rates are not the same everywhere in the world!
It is of course very important that an international app is translated into the local languages (localization). It is also important to adjust the price of your app to the purchasing power of the country to get the most out of it.
A realistic potential (user, turnover) can be identified by the interface method.
What experiences did you have with your app?
The topic of monetization strategy for apps is very broad and complex. We also learn new things every day and are of course very excited about your experiences with the monetization of apps. Please let us know your findings – via social media or via e-mail to firstname.lastname@example.org. If you would like to develop your monetization strategy together with us, we naturally offer our entire know-how and look forward to your request.