App Business Models

A mobile app makes a profit for its owner only if it is successfully monetized. Accordingly, to recoup the investment in the creation of the app, the developer needs to think of an effective business model for it.

It is equally important to attract the attention of users and get stable monetization. But achieving the first goal does not automatically mean success in reaching the second one.

For example, if you use the freemium business model, i.e. a free basic version of an app with the option to subscribe, you will not get significant monetization. But it is a good idea for startups since the developer increases the popularity of the brand in this way.

After that, the value of other products for your customers will increase, as they already have a positive user experience.

Basic Business Models of App Monetization

One of the most important stages of creating a mobile app is analyzing the target audience and choosing the best monetization strategy. These are also the tasks of the developer. First of all, you need to analyze:

  • What task or user problem the app solves;
  • What is the uniqueness of your app for users;
  • Whether creating a free version will pay off;
  • What the users of the application will be willing to pay for;
  • What business models your competitors use.

Preferably, a monetization strategy should be ready before the app is launched in the app store. If necessary, the monetization business model can be changed later.

The main objectives that a properly chosen app monetization business model solves are:

  • Converting users into loyal customers;
  • Creating a financial model for the app;
  • Creating a user database.

Even at the testing stage, the developer should deliver a product with specific goals for users. A startup owner can take a ready-made business model template and modify it according to his/her goals.

Freemium

The freemium business model is perfect for startups because you can attract a lot of users and then gradually gain their trust. The essence of the business model is that users can install the application for free and use most of its functions. But if they want additional features, they need to buy a paid version.

The second option of the freemium business model is a fully paid application with a free trial period, e.g. 30 days. During this period, the user has an opportunity to get acquainted with all the functions and features and then make a decision about buying the product.

The developer of a freemium-type application can introduce the following types of limitations for the free version:

  • The usage period of the free version (for paid products with a certain introductory period). For example, the free version with access to all functions is valid for 30 days, after which the user needs to buy the paid version to continue using the application;
  • The list of available features. The developer provides unlimited access to the basic version of the application, i.e. a limited list of functions. In order to unlock all the features of the application, one needs to buy a paid version;
  • The amount of available free storage space. You can install the app for free, but the amount of storage space available is limited. For example, for cloud storages like OneDrive, Google Drive, or Dropbox, the basic version has a limited capacity. For example, for Dropbox, it is 2 GB. The second option is a limited number of free logins to the application;
  • Number of licenses. The license to use the software can also be either open, free, or paid. The user can first purchase the application with a free license and then, if desired, a paid version;
  • The presence of built-in advertising. A popular way to monetize mobile applications is to use the product completely free of charge, but users are shown ads. To disable it, it is necessary to purchase a paid version. The user chooses whether they will pay for the version without advertising or stick to the conventionally free version.

Such applications are most popular with users for several reasons:

  • Users are eager to install such applications because they do not require a lot of time and resources;
  • Users can fully familiarize themselves with most of the features and functions, for example, for unlimited time of using the basic version;
  • Users’ trust in the brand is boosted because they get a valuable service for free.

The freemium business model is perfect for launching a startup. A developer can bring a test version of an app to market in this way. After that, analysis of user behavior as well as their feedback will provide valuable information on what should be modified and enhanced.

A crucial point in using this business model is that you cannot make too few or too many free features. In the first case, people will not be able to appreciate the value of the app and will abandon it. In the second case, this monetization strategy will be loss-making because there is no point in switching to a paid version.

Applications with Virtual Items

An engaging virtual space with an attractive design and a compelling storyline is the key to success when releasing a new mobile game. The monetization strategy in this case consists of selling virtual goods to users, which increase the value of the program.

For example, in quests, these can be additional attempts to pass levels, various artifacts, or additional characters. A second use case is various dating apps, in which additional features can be paid for.

The advantages of this business model are:

  • Perfect for e-commerce apps or mobile games;
  • The in-app purchase strategy is a way to make stable profits with minimal risk;
  • Promotes maximum user engagement and then converting them into loyal customers;
  • High-profit margin compared to online stores due to the fact that there are no extra costs for mobile communication, rental of warehouse staff, and hiring salespeople or consultants.

Such a business model can be extremely effective in conjunction with affiliate programs. For example, users can be offered additional bonuses for attracting referrals or the opportunity to invite friends.

In order not to lose the trust of potential customers, it is essential to specify in the description of the application that the use of this product involves in-app purchases.

Disadvantages of this business model:

  • You need a large user base for stable monetization, i.e., it is not the best option for startups;
  • The developer should be able to analyze the market well in order to choose 1-2 most profitable options for in-app purchases.

If the app is just at the testing stage, it is not advisable to jump straight into complex monetization options. It is better to start with just a few, while carefully analyzing user behavior, including how actively they use the in-app purchase feature.

Advertising or Sponsorship

Another effective method of monetizing apps is through in-app advertising, most often targeted advertising. Partnerships with advertisers work well for owners of large apps with a large number of users. For example, users are offered a gift or reward for performing certain actions.

It is necessary to know that this is a long-term monetization model, and its success depends on the number of active users. Advantages of embedded advertising:

  • Regular and interesting promotions for the target audience increase user engagement and motivate them to actively interact with the app;
  • App developers can adapt such a monetization business model even for small apps if other methods of monetization are applied along with it;
  • Such an app is a platform through which the developer and the advertiser benefit at the same time. The former gets stable monetization, and the sponsor gets a platform for advertising.

But despite the popularity of this monetization model, it has significant disadvantages:

  • It is not suitable for startups, since the level of profitability directly depends on the number of views;
  • Intrusive advertising can scare away potential customers, so you need to find a way to retain existing users and attract new ones, while not getting negative feedback from users in the app store;
  • The sponsorship business model is not as thoroughly tested by developers as other monetization methods. The app creator will need considerable experience and a strong entrepreneurial intuition to successfully use this model.

This monetization business model can only be successful if the ads are of interest to the target audience.

This business model assumes that the app can only be downloaded after it is purchased. Revenue will be generated immediately from each new user.

Advantages of paid apps:

  • This is the most transparent monetization model possible, as you can track and analyze the money coming in from users;
  • Users who bought the application are likely to interact with a lot and purchase additional features if necessary;
  • The absence of internal advertising in the app is an additional way to attract users who want a “clean service” without having to see intrusive advertising.

Possible disadvantages of paid apps:

  • It is quite difficult to sell an app, as stores are overflowing with apps that use the freemium monetization model. To successfully compete with free apps, it is essential to find and offer users a unique product that has great value for the target audience;
  • The online app store receives a part of the income from the sale of the app, which should be taken into account when developing a monetization strategy;
  • Revenue from a paid app directly depends on the number of users who have the desire to buy the product.

This is an ineffective option for little-known brands that do not have a large number of active users. In order for such a monetization strategy to be successful, the company developer should first spend a large amount of money on marketing promotion on social networks or with the help of other advertising channels.

In other words, the level of monetization of a paid app directly depends on the level of brand recognition.

How to Choose a Business Model for Monetizing an App

There is no one-size-fits-all business model for monetizing various apps. This is because the choice of the optimal method directly depends on the target audience and the features of the app.

For example, effective monetization methods for a startup and a large brand that already has a large base of loyal customers or active users will be quite different.

Conclusion

Successful monetization of a mobile app directly depends on whether the investment in the development will pay off. If the monetization strategy is chosen correctly, it helps solve several important tasks at once. This includes increasing brand awareness, generating stable income, and increasing user loyalty.

Market analysis and further development of a monetization strategy are among the stages of app development. In other words, even at the startup stage, the monetization method should be integrated into the app before it is placed in the app store.