After developing and releasing our first mobile application Monster Chase, there has been discussion around the office about what the best way to monetize an application was. Included was talk about ad-supported apps, apps with in-app purchases, and simple paid apps. I decided to do a little research.
As we are not the only app developer out there (there’s about 160,000 of them for iOS alone), I thought others might be interested in my findings. The following are a few of the pros and cons to the different monetization options available, as I tried to determine what the ‘best’ method of app monetization was.
Ad-Supported Free Apps
Revenues from large user base: Smartphone users prefer free apps to paid apps (who doesn’t like free), and made up for an estimated 96 percent of all smartphone apps downloaded for free in 2011. There is obviously a massive consumer base available to developers that appreciates the value of a free app and will generate revenue through ad-clicks within it.
Ongoing revenues: Not only do you have a large consumer base for a free app, if these consumers consistently use it it should continue to generate ongoing revenue, rather than that from a single purchase instance.
Greater reach: people are more willing to download a free app than a paid app. This provides your app/company with greater exposure and better ability to provide consumers with the solutions they need.
Annoyance: of course, the downside to ad-supported apps is the annoyance factor. It is an inconvenience as a user to have ads taking up valuable real estate on a small screen that could otherwise be used for the app’s primary purpose.
Lack of interest: People aren’t interested in seeing mobile advertising. In fact, in a recent study 20 percent of people said they would stop using a product or service if they were subjected to ads on a mobile device.
Task interruption: When using a phone you often are completing tasks that have a sort of immediacy to them, and therefore want to complete them quickly. Ads do not fit well with that equation.
Ongoing revenues: Similar to ad-supported apps, in-app purchases often allow for ongoing revenues through the purchase of items or features more than once during its the lifetime of its use.
Enhanced user experience: In-app purchases allow users to customize their gameplay in some shape or form through characters, gameplay elements, level packs, etc. They gain a sense of ownership over their experience as it is unique to them.
Growing market: In-app purchases are expected to make up for 64 percent of the mobile app market in 2015. This increase of 39 percent in 2011 represents a great opportunity for developers. Today’s top app developers have already caught on, with 68 percent of the top-grossing applications in 2011 featuring some form of additional content or functionality available via an in-app purchase.
Annoyance: As with ad-supported free apps, there is an annoyance factor that comes with in-app purchases as well. Many consumers want to simply download the app and be able to use it (free or paid), rather than to endure continuous sales pitches and be required to make purchases throughout its use.
Income potential: Initial income potential is higher with paid apps. At a cost of at least $.99 to even use the app paid apps are attractive to developers looking to recoup development costs.
More abilities for developers: When you have a paid (vs. free) app often you receive better reports on performance and more room for personalization from the app stores.
Preference: Often the app stores will favor paid over free apps as they receive a percentage of the cost to consumers. There is therefore some preference by the stores for apps that are paid vs. free.
Small consumer base: As stated earlier, it is estimated that about 96 percent of smartphone apps downloaded in 2011 were free. This leaves 4 percent of the market for paid apps – not exactly the greatest opportunity.
Limited revenue flow: Contrary to ad-supported apps or apps with in-app purchases, single-payment apps have a limited revenue flow. Developers receive payment only when the app is purchased and therefore do not have a continuous revenue flow from the app.
One can see that there are many positives and negatives to each type of app monetization strategy. Industry trends seem to indicate a movement towards the freemium model, with talk of it being inevitable in the market in as soon as five years. Trends also demonstrate the substantial increase in in-app purchases, which will likely accompany freemium models in the future. In fact, ads are becoming less prevalent already as in-app purchases become the manner of monetization in these free models.
Regardless of these trends, there still remains no ‘best’ way to monetize applications. Instead, in order to survive and thrive one must examine their product, their company and the industry, and tailor monetization strategies accordingly.
Have you developed an app for the market? What types of pros/cons did you encounter?