App Payback - what business model works best? close

Mark McDermott
17th March 2011
App Payback - what business model works best?

How do you make money from mobile apps? With all the hype that has surrounded Smart Phone Apps in the last few years it all seems so simple. Design and build a killer app, release it to the various market places and then sit back and watch the money roll in. For some lucky punters this has been the case but the psychology and tactics for successfully making money through apps is nuanced with a few key factors to consider.

Straight Purchase

I won't linger too long on this as it is a pretty simple concept to grasp. Build an app people want, then sell it to them. A word of warning though. Unless your app generates a lot of marketing hype, favourable blog or in-store reviews or charts on the best selling lists for your category then be prepared for fairly barren sales, especially if this app is not an extension to an already established brand. Mobile users do not speculatively part with their cash unless there is some sort of validation that this is the app they are after, normally from ratings from other users. So in order to make money you better be prepared to spend some on advertising and promotion.

Additionally as competition intensifies between app developers a price war has also begun and the Average Sales Price (ASP) of apps has been steadily decreasing over time. Nobody wins in a race to the bottom though so what other options are there?

Make it free?

It does seem counter intuitive to put all of that effort and budget into a mobile app to then just give it away for free, however there are still some benefits to doing this. Apps are frequently bolt ons to existing web services that make it easier for mobile users to access and consume. There is a school of thought that people will start to access the web purely through apps rather than directly through the browser as the quantity of content and noise proliferates users will want some form of filter to it all. There are more than 200 million (of the 600 million total) active users accessing facebook through mobile devices and those that use facebook on their mobile are twice as active as non-mobile users.

So a mobile app is a natural addition to your existing web presence if you want to keep your user base engaged and active. Unsurprisingly free apps also get downloaded a lot more than paid ones, especially on the Android platform so you could also consider this an exercise in brand building as well as facilitating user consumption.

Ad Supported

Including adverts in your app seems like a pretty simple revenue model. There are established Ad platforms such as AdMob (owned by Google), iAd (Apple's own advertising platform) and InMobi which dominates the Asia-Pacific market. However the revenue cuts are not great and in order to really sustain a decent income you need to have a lot of active users for your app. There is no real harm in supporting your free app with Ads aside from a bit of user distraction and the fact they may well click off your App completely if lured in by the marketing (although iAd has the benefit of being completely in app). You could also consider offering a premium service that removes the Ads which your most engaged users will want to take up.

In-app Billing

In-app billing has long been lauded as the answer to the free versus paid debate. Essentially the download of the app is free (which helps maximises the potential user base) and then the app either becomes chargeable for certain features or content. This way users get to try the app out without cost and if they like it can pay for more. It is essential to provide just enough functionality in the demo version to entice the user to try it and then advertise just how much more the user will get when they upgrade to the full version.

Sounds great! But take up of this option has been very slow so far. Bango reported that a mere 5% of the sales it facilitated in 2010 used this method however they also forecast that by the end of 2011 In-app billing will account for 30% of mobile payments as technical limitations that have encumbered developers are gradually resolved.

In-app purchase falls broadly into two camps:

  1. Unlocking content and features in the classic upgrade model from a light version.
  2. Building in micro transactions to buy things like digital goods in a game. For example a new bird charcater in Angry Birds or a facebook badge.

Subscription (The Holy Grail)

Marketers often cite subscribed users as the most attractive as income is predictable and regular (although naturally there is attrition). Each user that comes on board adds to the bottom line created by the previous. The sales cycle is gradually upward rather than peaking and troughing.

Not all apps can warrant a subscription model but if your app provides an ongoing level of service or is a source of valuable fresh content then it should be on your radar. I have heard anecdotally that users are also more open to it rather than a high one off purchase as they feel they can leave at any time and might not spend as much even though they normally end up spending more.

In February Apple and Google raised the stakes by announcing two different “one-click subscription models”, with the key difference being the amount each party will get for each subscription sold. Apple will get 30% for each subscription sold. By contrast, Google's “One Pass” system is a flat 10% charge (i.e., the publisher keeps 90%).

Previously subscriptions were handled externally to the app through a web interface but the ability to do this easily in-app is potentially huge. However the heavy cut that Apple have demanded has prompted a lot of unrest as the 30% cut eclipses many profit margins and Apple have said that there cannot be any "Apple Tax" (where users subscribing through their platform get charged more than anywhere else). This effectively stifles the competition unless there is a complete withdrawal from the App Store. Additionally the subscribing user's data is not released back to the publisher in the same way it would had they signed up direct. That argument needs more time to full play out.

Despite the negative issues Apple now offers an operating system that controls over 100 million high-value consumer accounts all connected to credit cards. Google and Microsoft are also both investing enormous resources in this area as well and are showing more willingness to be flexible to both publishers and advertisers.

The only downside is that users are only happy to manage around 6 subscriptions at any one time so get in quick before the gold rush!

Either way now might be the time to start thinking of your future app business model.