6 App Monetization Options

Donuts are great. But, when it comes to choosing what donuts to have, it can be pretty difficult to commit to just one. It helps to remember that they are all basically the same, fried dough filled or topped with different forms of sugar.

That’s how I see app monetization models; they’re all slightly different, but all have their place. However, unlike donuts, they are not universally loved and it’s important for you to know the best ones to choose. The good news is that you don’t have to commit to just one.

To help, we’ve created a list of the most commonly used monetization models and the pros/cons of each. What does this have to do with donuts? Not much, but there’s always an excuse for donuts…enjoy the post.

The Rundown

Premium

The “pay to play” model; users need to pay before downloading the app. To be successful, the app MUST have a unique value proposition. Otherwise, users won’t pay for the app when there are free options.

But, it doesn’t stop there. The most profitable premium apps do a stellar job of selling their app’s unique value proposition through effective positioning. An app that is doing both things right is Calendars 5.

This alternative to Apple’s default calendar costs $6.99 (at time of writing) in the Apple store. It’s a “smart calendar” that incorporates tasks, human language, and reminders in an attractive interface. The listing page has rich screenshots, feature-focused sales copy, and user reviews that speak to its superior functionality (see Social Proof). Execution…Perfect.

Pros:

• Immediate monetization for app publishers and app marketers
• User engagement is more likely when users pay
• Doesn’t require in-app advertising: Results in a cleaner app interface
• Developers are free to focus on refining and improving the app

Cons:

• App stores are extremely overcrowded: Positioning your app is difficult
• App stores take a cut of the revenue (Apple gets approximately 30%)
• It’s been estimated that 90% of paid apps are downloaded less than 500 times per day (cost limits user downloads)

Subscription/Paywalls

A compromise between premium and freemium, this model is widely used by news outlets. The user downloads the app and is provided a free, but limited account. Often, the user is given curated examples and previews of full content that can be bought individually or through subscription with auto-renewal. The Economist does this exceptionally well.

The majority of their content is behind a “paywall”. While free articles are provided, they are limited to what an editor selects. Through them, the user gets a glimpse of what the Economist offers. The articles are provided to encourage the user to opt for the freedom that a full subscription provides.

Pros:

• Users get a taste of the full experience before spending their hard-earned money
• Auto-renewals have the longest life: An old fact from print publishing days
• An excellent opportunity to analyze content for triggers that will get users to pay

Cons:

• Difficult to find the right pricing model
• Does not translate to all verticals
• If the content is multi-platform, it is difficult to follow the same pricing logic

Freemium

On the other end of the spectrum from the premium model, the app is free, but there are features or additional functionality that can be paid for. Sometimes, the user can “test” a feature or functionality at a point where it enhances their experience. Once finished, the user will be offered the feature for a fee.

Rovio’s Angry Birds is probably the most widely known example of a freemium mobile app. As user progresses through the game, they can test “power-ups” that help them with specific challenges. After experiencing this, the users are more than happy to pay for the “power-ups” that are now behind a paywall.

Pros:

• Quickly build a large user base
• Allowing users to “test” features encourages engagement (see Reciprocity Rule)
• The model is super-flexible and can be used in almost any vertical

Cons:

• Offer too few features and users won’t be engaged, thus unwilling to pay for the rest
• Offer too many features and it will be a challenge to convince them to upgrade
• If the free app experience is poor, users will be turned-off

In-App Purchase

An extension of the freemium model, an eCommerce feature is added to your app that can be everything from diamonds needed to reach a level sooner to physical items that are actually shipped to the user’s door. Physical or virtual, the important point is that the goods are natural to the app experience.

Candy Crush Saga has mastered the art of in-app purchases. Initially, every player has five lives. Once the player loses all five lives, a 30-minute “time-out” is imposed before they get a new life. Luckily for users, they can easily buy a set of new lives for 99 cents. Candy Crush’s daily revenue is around $680 million (at the moment of this post). Yes. DAILY.

Pros:

• Profit margins are high for virtual goods
• Works very well for games and eCommerce
• It is easy to upgrade users from buying small goods to more expensive ones

Cons:

• App stores are asking for a share of the revenue of sold virtual goods
• Apps are being asked for greater transparency and are facing legal restrictions to prevent children from making accidental purchases

Sponsorships/placements (incentivized advertising)

The least practised of the monetization models within the list, the product placement model requires product/app compatibility, tons of development time, and true partnership and trust between the advertiser and publisher.

If you’ve watched a James Bond movie recently, you’ve seen product placement at work. An advertiser wants to push a product, finds an app where it fits, makes a deal with the publisher, and the product is incorporated as a natural part of the user experience.

GymPact is a prime example. It rewards its users for goal completion, such as when a user completes a 30-minute run and is offered a relevant, sponsored reward.

Pros:

• The sky’s the limit for different ad solutions
• High engagement potential from your user
• Done well, it can contribute to good user experience and positive word-of-mouth

Cons:

• Developers are needed to customize the app for every campaign
• Often involves revenue sharing: 100% trust between the two parties essential

In-App Advertising

According to a recent report, 70% of users won’t even pay $1 a year to avoid ads in apps. This is why in-app advertising is so widely used. It is an easy way to earn initial ROI. The primary goal is to grow your userbase and gather user information that you could sell to an ad network or app publisher, who will monetize your users.

Pros:

• Data rich, enabling hyper-detailed targeting for advertisers
• Ad partners will provide advertisers, allowing you to focus on other things
• People love free apps, your audience will grow quickly

Cons:

• Ads can damage the user experience because of intrusiveness or irrelevance
• If the app is very niche or your partner ad network too small, demand can be hard to find

The Takeaway

Successful app publishers, and publishers in general, never rely on one monetization strategy. In fact, you’ve probably experienced apps that will use two or three of the models we described in tandem. The most important factor (one that we stress in almost every post) is to keep the user experience in mind when evaluating monetization strategies and choose accordingly. After all, how long do you continue using an app that makes you feel like it’s nickel-and-diming you at every turn?