Choosing the right mobile app monetization model

How to monetize a free app

Plenty of apps are successfully monetized without the end user ever paying a dime. Even more apps thrive by using a "free version with ads, paid version without ads" model. In fact, the good thing about any of the following techniques is that they can be used in conjunction with another revenue strategy.

Selling goods or services

In some cases, you're building an app with the goal of selling more of your products/services. Think of it this way: the "product" isn't the app itself, but the app makes it easier for users to find and purchase your products. An example might be a local farmer offering an app that people can use to manage their subscriptions for weekly deliveries of produce, eggs, meat, etc.

This works similarly with services instead of products. For example, BetterHelp is an app that charges a monthly fee for access to therapists via in-app messaging. The app needs to be good and easy-to-use, but users aren't paying for the app as much as they're paying for access to the network of therapists BetterHelp offers.

Advertisements

Incorporating advertising into your app might sound like the ideal way to monetize it, but it shouldn't be undertaken lightly. The pros of advertising are fairly obvious—passive income and the ability to bring in revenue from your app, without charging up front. It can be especially appealing to newer developers who don't have name recognition or other popular apps. If you fall into that category, it might be hard to convince people to pay for your app without those credentials or pieces of social proof, but with advertising, you can still make money.

There are other things to take into account, though:

Technical challenges: Depending on what your app and skill levels are, it might be challenging to incorporate advertising into your app in a way that isn't completely hostile to the user and doesn't ruin the existing user experience.

Low rates: Unless you're operating within a very specific, in-demand niche, you'll find that most advertising rates are very low and require thousands of users to bring in any significant revenue.

Irregularity of revenue: Advertising revenue can fluctuate quite a bit from week to week and month to month—as your number of active users changes, or any seasonal fluctuations in app usage take place, your revenue will change as well.

Affiliate links

Using affiliate links is essentially a different form of advertising, where you have more control over the products advertised and receive a higher commission when people purchase through the links. The way it works is that you find products that users of your app would be interested in, join their affiliate program, and get your unique affiliate links or codes.

For example, let's say you've created an app to help with meditation. You might join the affiliate program for a yoga mat company. For every sale that comes in through your affiliate link or code, you get a commission. Of course, this only works with apps that have associated products, and you'll need to be careful not to put the affiliate links in so many places that the customer feels like they're being spammed.

Selling user data

You might be familiar with the saying, "If you aren't paying for the product, you are the product," coined in 2010 in reference to the rise of sites like Facebook and Digg. These sites, as you may guess, make money through advertising and selling user data. With this model, you're collecting data on your users—where they live, their behavior on (and sometimes off) your app, their answers to any onboarding questions, their usage patterns, etc. Then, you can sell that data through online marketplaces.

It's worth noting that this practice has come under intense scrutiny, and Apple has recently introduced more advanced privacy settings to make data-tracking more transparent and easier to block. There are also potential complications with various regulations around the world that prohibit the tracking and/or selling of user data without express consent from the users.

Donations

Last but not least, you can add a donation button, so users have the option to pay if they want to. This can work well with games or when your app is in very early stages, but if you're creating a B2B app or selling to a professional/mature audience, it might come off as unprofessional.

Considerations when choosing a free app model

It's worth thinking about the resources it takes to implement the app monetization strategy you choose. For example, implementing advertisements in your app can be technically tricky and can often involve researching different advertising networks to apply to, etc. Selling user data will involve researching the differing regulations that would apply to you (depending on how you're distributing the app, what country/state you're based in, and so on). If you have minimal resources at the moment, it might make sense to look at easy-to-implement revenue strategies, with the plan to add more later.

Monetization strategies for paid apps

If monetizing a free app sounds too complicated, you might want to look at the revenue models available for paid apps. Assuming, of course, that there is a user base out there that's willing to pay for what you're selling.

Paid models are, for the most part, much simpler to implement, but they succeed or fail on the sheer value of your app. Because of the proliferation of free apps on the market, many users are accustomed to getting something for nothing. So you'll need to convince them that your app is worth spending money on. You can make that easier or harder sell depending on how you implement your paid app revenue model.

Freemium

Freemium apps are free to download, but the most advanced features or benefits are restricted behind a paywall. This helps you get many more downloads than your typical paid app, but only a small percentage of those users will be contributing to your bank account.

When it comes to paywalling features, there's an art to it. You don't want to paywall features that every single user will need—otherwise, users will likely feel the pricing model is deceptive. Instead, think about your users as a whole, and then think about how usage scales within different groups. Who are the people who will be using your app every day? What features do they use? What's the overlap between the features they use, and the features that your average user uses?

By mapping this out, you can see which features are likely to be used only by a dedicated subset of users. Then, you can paywall those features, letting the majority of users get their needs met, while also monetizing the users that want access to the exclusive features.

If it helps, think of it in terms of the Pareto principle, also known as the 80/20 law. It's fairly common for 80% of sales to come from 20% of clients, and vice versa. In this case, what you're looking for is the top 20% of users—your paying users are most likely to come from that group. You can also think of it as having 80% of your app's functionality for free, and charging for the last 20%.

One-time payment

While subscription models are popular, a one-time payment might work better for your particular use case. If you're monetizing your app with the goal of recouping your time/energy investment into the app, but don't care about being profitable over the long term, this could be a good choice. It also makes sense for an app that will only be used a few times or very intermittently. For example, an app that manages your Christmas shopping lists is only useful for a few months out of the year, so users are unlikely to be willing to sign up for a subscription service oriented around that.

Pros:

• Easy to explain and understand
• Customers are often less hesitant to pay a one-time fee vs. signing up for a recurring fee

Cons:

• Depending on what your long-term goals and plans are, one-time payments might not be a sustainable way to get revenue from your app (since there's no recurring income)
• It can be hard to predict app revenue with this model, whereas knowing how many subscribers you have and your average churn level lets you forecast revenue

Recurring subscription

If you're going the recurring route, think about whether you want to offer different time increments for the subscriptions. Many companies offer a discount for paying yearly instead of monthly, which can help you reach profitability faster, as this post from ProfitWell outlines. On the other hand, some of HBR's research suggests that users who pay an annual price are less likely to take advantage of their membership, as the memory of paying the cost fades into the past. A monthly membership, they theorize, keeps the user committed.

As always, context matters: that research is from 2002 and is drawn from data about a health club's memberships, so it may not hold true—or hold true to the same degree—for apps. And for some types of apps, the person using it isn't the person buying it. For example, with B2B software that a manager has to sign off on (but won't be using), whether the payment is monthly or yearly is unlikely to impact the end-user behavior.

Pros:

• Create sustainable, regular income that's more predictable and easier to forecast
• Spread out the cost of the app over a long period of time instead of forcing the user to commit to the full amount up front

Cons:

• It can be harder to convince customers to pay a recurring price
• With a subscription model, you have to keep actively improving the app and user experience, to keep your users happy and encourage them to continue paying for it

In deciding what kind of paid app to offer, it's important to remember one thing: when users are paying for an app (especially a recurring monthly cost), they expect the app to be maintained on a regular basis. If you plan on charging for your app, especially on a subscription basis, you need to plan on maintaining the app for the foreseeable future. That means regular updates to keep it current with the latest OS, pushing bug fixes as needed, and taking steps to make sure the app scales with its users.

Should I offer a free trial?

If you've decided to go with one of the paid app models, we highly recommend a free trial period. Without a lot of social proof (including things like user reviews, name recognition of the app or developer, etc.), it can be hard to convince customers to pay for an app before trying it. If you do a free trial, make absolutely sure that your user experience and onboarding sequence are top-notch, to impress customers enough to keep them around.

Once you decide to do a free trial, your next question is likely how long the free trial should last. Here are a few things to keep in mind:

• Research what's normal in your industry, as the average trial length varies across industries. For example, media and entertainment companies tend to offer trials around 30 days, whereas education businesses are around 10 days.
• Regardless of industry, trial length doesn't seem to impact conversion rates, so this is a good area to run tests and see what works best for your app.
• A separate small-scale examination of SaaS data showed that regardless of trial length, many customers don't convert until after the trial is over. Keep that in mind while you're running tests, and think about what kinds of re-engagement techniques you can use to pull trial users back into your funnel.

In addition to industry, the specific type of app and user experience you're aiming to create will also affect your free trial length. This post at Customer.io is a worthwhile look at where free trials and user experience intersect, and how to make the most of them.

Deciding how much to charge

If you've decided to charge for your app, it's time for the million-dollar question: how much are you going to charge your users?

Your aim should be to set the highest price that customers will pay, and be happy with their purchase. Pricing too low can create perceptions of an inferior product (less likely with B2C apps, but a concern with B2B apps), and pricing too high can make would-be customers skeptical of you. It can also create user dissatisfaction, if they feel like they haven't gotten their money's worth.

To get an idea for prices that users will tolerate, you can create a list with the prices of your top 5-10 competitors, or other apps operating in a similar niche as you. The more specific you can be, the better—so your notes should also include things like whether the app has paywalled features, uses ads, is one-time or recurring, etc.

Pricing and monetizing can be overwhelming topics at the best of times, and during app development is no exception. However, by thinking about your goals (both short and long-term), your users, and the psychology of pricing, it becomes much more manageable.

Picking an app monetization model that works for you

Now that you've got the lay of the land, it's time to start making some decisions. But first, it's important to get clear on your long term goals. After all, your goals will have a huge influence on your revenue model.

Are you creating the app to build momentum for an existing product or service?

If so, then it makes sense to charge less (or not charge at all), so that your app can reach as many new users as possible. The app will drive revenue elsewhere, so stay focused on that goal. You can use advertising or affiliate links if you want to monetize usage even further, but we recommend caution. If implemented incorrectly, it could mean driving users away from your core products/services.

Are you learning the ropes, with the hope of making more apps in the future?

If so, then you may also want to go the free route—that way, you can build up a loyal user base over time. Those happy users will be much more likely to download a different paid app down the road, so just because they're not paying now, doesn't mean they'll never become a source of revenue. In that case, compared to the previous example, it makes more sense to use advertising or affiliate links. As long as you're building your user base, you might as well get some benefits along the way.

Are you setting out specifically to make as much money as possible from your genius idea?

If so, then you'll likely want to combine monetization strategies. You can use a freemium model, where users can access and use the app for free (while being shown ads and/or affiliate links, having donation prompts, etc.), and then lock certain features behind a paywall. Users might pay to remove ads, pay to access premium features, or do both, if you want to have different tiers of payment.

Align your app monetization strategy with your life goals

As an indie developer, app making isn't just an abstract idea. It's a means to an end. What are your long-term plans for your life, career, and/or business? If you want to be location independent in two years, then you might focus on maximizing and increasing revenue. If you want to grow your business and find the widest audience possible for your products and/or services, then maybe you're willing to grow in a way that's slower but more sustainable. Not every app idea will support every revenue model or every life goal, but it's still important to make sure that you're not losing sight of where you want to end up.

The point is to think of your app—and the revenue model it allows—as a vehicle that can take you to the life you want to live. Whether that's as the CEO of a powerful software empire or a financially independent SCUBA instructor in the Maldives, if you know where you want to be in 5 or 10 years, you'll be better equipped to make the right decision throughout your development process.

3 research-backed pricing strategies to increase mobile app revenue

The price and payment structure for your app is one of the most important decisions you'll make as a new app maker. After all, the revenue model for your business will impact almost every other decision you make, from how you do your marketing to what features you develop. However, before making such a key business decision, it's always good to check what the research has to say.

One barrier you may run into in your research is that the majority of studies related to the psychology of pricing are oriented around one-time purchases, usually for physical products. This can make it hard to apply that advice to digital and/or subscription-based products.

That said, let's take a look at a few of those studies and see what there is to be learned:

Avoid choice overwhelm

As most salespeople know, overwhelmed buyers often don't buy. There are studies to back this up, including a famous study conducted in 2000 using jam. The scientists set up a tasting booth, where some prospects were presented with six options to choose from, but others were presented with 24. Only 3% of the prospects presented with 24 options purchased jam. On the other hand, out of the group of prospects presented with six options, 30% of them became customers.

Hopefully you don't have 24 different versions of your app to choose from—but if you did, we'd tell you to whittle it down a little. Starting with one price is great; if you have more than one option or pricing plan, we'd caution you not to start with any more than three. That will keep you and your customers from being overwhelmed.

Charm pricing

People tend to gravitate towards odd numbers, specifically 9. "Charm pricing" is a psychological pricing strategy that aims to take advantage of that. For example, a 2003 series of studies showed that pricing an item with a number ending in 9 ($39, in this instance) increased customer demand, especially for newer items.

You see this a lot with prices ending in .95 or .99—one study showed that items with prices ending in .99 were consistently perceived as less expensive than ones with rounded prices.

On the surface, this is an easy technique to apply to app pricing. It is worth noting, though, that while customers in the US are used to seeing prices ending in .99, that's not necessarily true for customers in other places around the globe. It's also worth noting that you only have so much control over how the price appears in app stores. Apple has specific pricing tiers for developers to use, and the Google Play store allows for more customization, but prices will still be converted to the currency of the viewer's home store.

Price anchoring

The idea behind price anchoring is that buyers perceive the value of a product in relation to a baseline number that they believe is the fair market value. They come up with that price (either consciously or unconsciously) based on the aggregate data they have at the moment of purchase. This can include past purchases, competitor research, or even how you present your own price. That means that you can change how potential users perceive your app by changing the aggregate data they're working with.

For example, one study asked university students and real estate professionals to estimate the value of a home. The researchers gave the test subjects pamphlets about the surrounding homes, some that had normal prices and some with prices that had been artificially inflated. The researchers found that both groups overestimated the value of the home when shown the artificially inflated prices—even the real estate professionals!

There are a couple ways you can use price anchoring in the world of software. First, consider offering an obvious discount of your product right on the pricing page. For example, let's say you want to charge $7.99 per month for your app. To impact the price anchor in the mind of your prospect, you might consider displaying the price like this: "$10.99 $7.99" That way, $10.99 acts as the price anchor, making the real price, $7.99, seem like a steal.

Another way you can use price anchoring is by offering different pricing tiers. Let's say the Standard Edition of your app costs $20/month. You might consider offering an Ultimate Edition (with no limits and all the best features) for $70/month. Most people probably don't need all the bells and whistles, so they'll choose the Standard Edition, but with the Ultimate Edition visible next to it, the price of the Standard Edition will feel more reasonable.