HOW TO MAKE MONEY FROMS APPS – EPISODE 4

Aman Birdi on 23rd October 2017

What’s the best way to make money from apps? Often people ask me this question because they don’t know whether to charge users to download their app, for example 99p or 1.99, or have them download it for free. And if they were to download it for free, how do they make money from it? It’s a big decision when it comes to launching your app, whether to have it available for free or paid, and can have huge implications for the amount of revenue you have coming in.

But before we look into the answer, let me point out that there’s a common misconception out there that you make the most money with apps that you charge users to download. This isn’t true at all which you’ll see in just a moment. Another thing to point out – most people invest  a lot of their valuable time, effort and resources into building an app.

Naturally when it’s done, they want to charge immediately at launch to start recuperating their money. This can be detrimental to an app’s success. So when if you’re launching an app for the first time, keep an open mind and don’t dismiss the idea straight away of launching your app for free because in the long term, it could actually make you a lot more.

So let’s look at the answer: should I make my app paid or free? To answer this, we have to look at the each of the main revenue models when it comes to apps. These are, as mentioned before, 1. Having users download your app for free, 2, Charging users download your app in exchange for a fee like 99p, but there’s another, 3. Having users download your app for free but with optional paid content within the app i.e. in-app purchases. So which is this best model? Let’s take a look at each one.

1. The Free Model

First the free model. The free model is launching your app for free with all of the features as intended. This is great because there’s no barrier for users to download. They don’t have to give anything in return, leading to high-traffic numbers compared to paid apps.

But how do people make money from the free model? Normally this is through advertising. You know, as the number of customers with smartphones increases, more advertisers are switching to mobile advertising to reach their target audiences. I think saw a video of Gary Vee recently talking about how businesses are wasting huge amount of resources on tv ads because what does everyone do when an advert comes on?

They pick up their phone! So advertising on mobile is definitely valuable to companies and therefore, the developers that allows ads from these companies on their app.

So how do ads in apps work? Well let’s say you’ve built your app and want to get adverts on it. Do you go to each company in the world and ask them if they want to advertise on your app? Of course not because that would take a whole bunch of time right? You use what’s called a mobile ad network.

Mobile ad networks are like the middlemen of adverts in apps. You have companies that want to advertise their product or services on your app. And then you have your app which has space for adverts. The middlemen, i.e. these mobile ad networks will be in the middle to arrange the sales and placement of ads between these companies that want to advertise on your app and presenting them on your ad space within your app.

These ads can be from more than one different companies. The way it works is that companies, depending on how much they pay the mobile ad network, get allocated ad space. This is why you sometimes see one company being on your app at a certain time, and then a different company on your app at another time.

They just got a different amount of ad space OR different type of ad space based on the target audience using your app at the time. For example, a 60 year old using your app may have a different advert compared to a 20 year old using your app, even though they’re both using it at the same time.

The key thing to understand with adverts is that everyone wins. The advertisers benefit from the sales that result from their ads, and you the developer, earns revenue from the ads. Plus users often get targeted ads to of things that might actually be interested in.

There are different types of mobile ad networks but some of the popular ones are AdMob from Google, AdColony and UnityAds. They each have their own advantages but something key to note is the revenue share. Ad networks for mobile will usually take between 30-40% of the revenue generated from advertising, where the remaining 60-70% goes to you.

With adverts now being displayed on the app, how do you get that 60-70% of revenue in your pocket? Two ways: Impressions and Clicks! First let’s look at impressions. Whenever your app displays an ad to users, you have provided one ad impression.

These impressions are usually low revenue generators for developers because it’s unclear if the user saw the ad or even paid attention to it at all. I mean, if you’re using an app, your attention is on that app function. You wouldn’t be paying attention the ad would you? But some companies are willing to pay for a lot of impressions in the hope that some of them will catch the user’s attention.

On the other hand, Clicks (or taps I guess in the case of apps) are when a user taps the ad. These are more desirable advertisers because it means consumers are showing a genuine interest in the ad. Consequently, they become more desirable to you as well as advertisers are willing to pay a premium for receiving them. And that in a nutshell, is how the free model works.

2. The Paid Model

The next model is the Paid mode: charging users download your app in exchange for a fee like 99p. The concept is simple enough – you make money when a user purchases your app. And that’s all there is to the paid model. The more downloads you get, the more money you get from sales. As mentioned before, often this is what most people who build an app for the first time want to do – they want their investment back straight away so they charge users to download their app.

Consumers must buy before they try. But this idea can often be a turnoff for users. With us living in this digital age, people want to see value first before they pull their card out to make a purchase. And that leads perfectly on to the next model.

3. The Freemium Model

The final model is called the freemium model. The freemium model is having users download your app for free but with optional paid premium content i.e. in-app purchases.

It allows the user to try your app before they buy. The app provides value free of charge to the consumer. Once they see they’re getting this value, such as an app making a normal day task quicker and easier, they are more likely to pull their card out and spend money with you on the app i.e. make an in-app purchase in exchange for even more value.

You know, one of the things that I’ve learnt very quickly in the app business, and any business for that matter, is to always sell on value – not price. The freemium model fits that perfectly and it’s why some of the most successful apps in the world, such as Candy Crush and Clash, Pokemon Go and Clash of Clans consistently feature in the app store’s top charts.

So what kind of in-app purchases can you get? As a general way of looking at things, there are three types of in-app purchases: consumable, non-consumable and subscription in-app purchases. Consumable in-app purchases are those that you need to buy every time you want them. You can’t re-download them again for free. Examples include currency, hints, extra health, extra experience points etc. One that I saw recently in Candy Crush, by the way I’m in that 1% of population that doesn’t play candy crush,  was a lollipop hammer for £1.99.

Non-consumable purchases on the other hand are those items that you buy one time. Examples include upgrading the app to a pro edition, unlocking a full game when you only have a trial version, unlimited hints in a game or even, removing ads.

Removing ads is a great in-app purchase to mention here. See you can build your app, and have users download it for free with adverts like the free model described above. You then have the luxury of earning money generated from the ads. But let’s face it, nobody likes adverts. So what you can do is give users the options to remove adverts as an in-app purchase, which then means altogether, from one app, you can have the benefits of the paid model along with the benefits of the free model with adverts. Advantages all around!

And finally subscription in-app purchases are those, as the name suggests, buying services or content within an app for a specific subscription period. Examples include buying a sports season pass, or getting a subscription from Netflix, or Spotify. These can be non-renewing subscriptions where after the specified subscription period, the user would have to buy it again.

Or it can be auto-renewing, which again as the name suggests the app would automatically renew that subscription.

Conclusion

So now, with all three of the models cleared up and understood, which is the best model for your app to make money? For us, there is a clear winner and you might have guessed it by now – the freemium model. Why? Because it combines the advantages of the free and paid model. The free model is great because the user has nothing to lose when downloading your app.

They can download it, try it, if they like it great. If they don’t they can delete it. As a result, the amount of traffic generated compared to the paid model where you have to give something in return to “try” the app, is miles apart. The paid model on the other hand has the massive advantage that being only available for a fee gives off the impression that this app is valuable and of course, gets you income right away regardless if the user likes your app or not. You get both of these advantages with the freemium model.

And if you don’t believe this is the best model for your app to make money, here’s a really simple and quick exercise you can do now so you can see it for yourself. If you’re on iOS, go to Apple’s App Store. Under Top Charts, you’ll see three headings: Paid, Free and Top Grossing.

The Top Grossing category lists the apps with the highest total revenue, whether that is from app sales in the paid model or free apps with in-app purchases. Essentially it’s the free and paid apps that are making the most money at this moment in time.

Have a look at the list and see how many of them are available to download for free, and how many of them are paid. At this time right now for me, the top 36 apps in the top grossing category are freemium apps with Minecraft being the first paid app in that list ranking at number 37. That basically says it all!

So there we have it! Should I make my app paid or free? At Digiruu, we believe you should make your app available for free with in-app purchases by following the freemium model. Although the idea of removing ads as an in-app purchase is an attractive one, we recommend having in-app purchases solely for provide more value to users such as more features as opposed to simply removing ads. Remember, sell on value and not on price!

If you have any questions, drop me an email on aman@digiruu.com. Speak soon!