Lesson 4

The Kinds of Mobile App Monetization

At the most basic level there are only two types of apps: free download and paid download. But scratch that basic surface and a larger world of monetization options opens up.

Perhaps your app is free to download but requires a monthly subscription to access exclusive content. Maybe users pay a fee to download your app and can then purchase in-app upgrades. Or maybe your app is free to download and then allows users to purchase goods in-app and includes in-app advertising. Clearly, there are a range of monetization options that go far beyond the simplistic labels “free” and “paid.”

In this lesson, we’ll cover everything from subscription revenue models to the more indirect benefits of using an app to extend a brand or offer additional services to an existing user base.

Top Monetization Models: Freemium and Advertising

Currently, there are two monetization models — freemium (apps that are free to download but have have additional payment options built in) and advertising — that are expected to continue to dominate the landscape for the foreseeable future. Together, free apps with additional payment options built in, known as freemium apps and apps that rely on in-app advertising generate nearly 90% of all app revenue. The success of both of these models is driven by their ability to appeal to a broader user base by eliminating upfront costs, and to create ongoing revenue streams for their publishers.

We’ll go into how these models work and look at paid, paidmium and other revenue generating models. Remember, what works for one app may not make sense for you.

Freemium: Free + Additional Monetization Opportunities

This is one of the most popular kinds of monetization, and you probably use freemium apps more than you realize. As mentioned above, these apps are free to download, but once users engage with the app there are additional revenue possibilities.

Here are some different techniques publishers can use to generate revenue.

Usage: Limited Usage, Pay for More

The free app offers limited usage, bandwidth, hours or storage space, and users need to pay to raise or remove the limits. Dropbox users get up to 2 GB of space before they need to pay for a Plus or Business account with more storage; the New York Times offers access to 10 articles a month for free before readers have to pay to read additional articles.

Trial Period: Free for a Limited Time, Pay to Continue

A free app offers full functionality for a short period of time so users can try it out before signing up. This has become a very common way to entice users into the app’s ecosystem. Netflix, for example, offers users one free month of viewing before it charges them.

Functionality: Basic Services or Items, Pay for More

Want to watch exclusive content, get clothing for a digital avatar or record your business calls? It’s common for apps to charge for additional items, services or capabilities. This happens frequently in gaming apps where users can pay to unlock levels, characters or special equipment. Service apps like Skype often provide additional functionality like the ability to have hundreds of employees join a business call, and the messaging app LINE has been particularly successful generating revenue by selling stickers which are widely popular as an emoji replacement in messages.

User Experience: Supported by Ads, Pay to Remove

Free apps are often supported by in-app advertising, which we’ll cover in-depth later, but users can pay to remove ads (or to download a separate, ad-free version). This is a popular model for video and music streaming services like Hulu or Pandora. It also appears in gaming — for example, with Color Switch, users can pay to remove all ads.

Combo of Any of the Above

Freemium monetization models are often used together. For example, a Spotify user can pay to have advertising removed, access exclusive content and engage with song-playing functionality not available to free users. These added benefits help drive users into Spotify’s premium model, which is subscription-based — a type of monetization we’ll look at later.

Paid

A paid app requires an upfront fee to download in an app store, and it doesn’t include other monetization opportunities. For example, the all-in-one photo editor Enlight requires a one-time purchase of $3.99 with no follow up purchases. Paid apps now represent a small part of the overall market, likely because they create an initial barrier for entry for users at a time when there’s an increasing number of high-quality free and freemium options.

Paidmium: Paid + Additional Monetization Opportunities

These apps require purchase through an app store and then offer additional sources of monetization after download. Monetization could take the shape of in-app purchases or upgrades to enhance the user experience.

Generally, paid and paidmium apps do not feature in-app advertising. Users typically expect that paying a price at download will result in an ad-free environment. We’ll review advertising as a monetization model a little later.

For example, the popular game Minecraft Pocket Edition costs $6.99 in an app store; users can continue to add elements at an added cost. In fact, Minecraft recently launched its own marketplace complete with its own currency, Minecraft Coins.

In addition to these purchase options, Minecraft also recently unveiled a monthly subscription feature, which leads directly into our next section.

Subscription

A subscription model requires regular payments, often in monthly or yearly fees, for app access, services, content and continued upgrades. Signing up for a subscription happens after a user downloads the app, so it’s considered an in-app purchase.

Subscriptions account for roughly 15% of all revenue in the app stores. That’s an impressive number, and it has led to a few notable trends:

  • The popularity of the subscription model now impacts a broad range of categories and monetization techniques, including music and video streaming (Pandora, HBO NOW), dating (Tinder), media (The Wall Street Journal), productivity (Dropbox) and more.
  • The iOS App Store and Google Play make it simple for app publishers to incorporate subscription services, including setting them to automatically renew, and they recently increased the share of revenue that app publishers receive for subscriptions.

For iOS, publishers retain 70% of the subscription revenue, increasing to 85% if a user remains subscribed for more than twelve months. For Google Play, publishers retain 85% of subscription revenue immediately.

Subscriptions can also be used in all app categories, including games.

Commerce/Transactional

These apps are often free to download and serve as a bridge between the digital and physical world, making it easy for app users to purchase real world goods and services. There are a lot of examples in the commerce/transactional realm, and most mobile users will be very familiar with this monetization model.

Amazon, for example, delivers products to your door and Airbnb manages accommodation rentals — experiences that take place outside of the app. Starbucks and CVS Pharmacy are apps that allow you to order ahead and pick up in store, helping to build brand loyalty in the process.

Brand Awareness, Loyalty & Enhanced Customer Journey

Brands have always wanted to be everywhere their customers are, and now that millions keep their phones with them at all times, it’s finally possible, thanks to apps..

By opening a direct channel to a user through an app, a brand has a chance to stay on a user’s mind and instill brand loyalty, which in turn can lead to increased purchases. It’s a more indirect form of monetization than, say, an in-app purchase, but a potentially powerful influencer nonetheless.

For example, with the MY ASICS training app, part of the ASICS clothing and lifestyle brand, users can create highly customized running plans backed by expert guidance. By attracting running enthusiasts who may not have previously been customers and then winning their loyalty by providing a great free service, ASICS puts itself in a great position to be the brand of choice the next time those users decide to make a purchase.

Another way brands can use apps to connect with customers is by providing them with tools that make the customer journey smoother, more rewarding and more immersive. For example, with the IKEA Catalog app, users can rearrange Ikea furniture in a virtual room.

Anyone can use the apps without buying Ikea or ASICS products, but engaging with these branded apps will likely influence future buying decisions.

Extension of Service

This is an app that serves as an extension of existing business offerings (so there is no direct monetization link). This kind of app is common in, but certainly not exclusive to, entertainment apps.

For example, as mobile video streaming became more common, HBO customers began to expect that their cable television subscription would carry over to their phones. In response HBO rolled out the HBO GO app, a streaming service that carried the full range of HBO content; subscribers got it for free. By extending its service to mobile, HBO hoped to retain current subscribers and give potential subscribers another reason to sign up.

In-App Advertising

For the foreseeable future, in-app advertising will be the dominant mechanism for app monetization and the primary driver of app revenue. In fact, in-app advertising is expected to bring in 62% of all app revenue by 2020.

In-app advertising appears across a variety of categories and is often used with other monetization techniques, showing up with particular frequency in free and freemium models.

It has become such a successful revenue model for publishers that many prominent publishers — Snapchat, Facebook and YouTube, for example — draw the majority of their revenue through various forms of advertising.

In the next lesson we’ll look in more detail at ways to monetize in-app advertising.

Keep Learning

In the next lesson we’ll look in more detail at ways to monetize in-app advertising.

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