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Mobile apps continue to grow in popularity, which is hardly surprising given the ubiquitous nature of the smartphone. This scenario leads many companies to consider creating their own app, likely targeting both Apple iOS and Android platforms. Sometimes their goal for the app is to generate publicity for their business or even drive engagement from their customer base.
However, in many cases, companies simply create a mobile app as a source of income. In this situation, it becomes critical to fully understand the potential revenue models available for each app. This understanding then informs the process of evaluating which model makes the most sense for the business.
So let’s take a general look at the different revenue models available to mobile app building entrepreneurs and how to evaluate these models to help you decide which one offers the best opportunity. Remember, this analysis should be done before designing interface wireframes or writing a single line of code. Ultimately, a successful app launch probably depends on this initial effort.
Related: How can app makers improve revenue and keep users engaged?
Embedded ads in a mobile app provide an obvious way to monetize. However, this revenue stream really only applies to free apps, as displaying ads in a paid app is likely to hinder the growth of the app’s user base. In fact, it is common in mobile games or other apps to use an in-app purchase to remove ads.
In particular, the in-app advertising market continues to generate significant growth globally. According to Absolute market insightsthe in-app advertising market reached $66.78 billion in 2018 and is expected to reach $472.64 billion by 2027. This growth shows a compound annual growth rate of 24.4% over that 10-year period. Again, every app needs a large user base to generate significant ad revenue, so consider making your app free to attract users.
The “freemium” app approach
Somewhat related to in-app advertising, a freemium app also serves to attract a large user base for an engaging app experience. Additional content or features are then unlocked after making an in-app purchase. We just highlighted that users take advantage of this approach to disable in-app ads.
This revenue stream strategy is common in gaming apps, as well as music production and instrument apps, with the latter niche more common on the iOS platform. A user can own a free beat making app and access new synthesizers or drum machines after purchasing an IAP. Some music app developers also use this revenue model to deliver new sounds and synth patches to their user community.
Related: How to create an app for your business with no coding experience
Offer subscriptions to generate revenue
In addition, other developers use subscriptions to provide a repeatable source of revenue for their mobile apps that are typically offered on a freemium basis. Not surprisingly, magazines and comic books sometimes use this revenue stream strategy. Keep in mind, however, that Apple and Google Play take a share of all revenue generated from subscriptions; this also applies to any in-app purchase.
The subscription model can also be very valuable for B2B apps. Creating a mobile app that integrates with a SaaS solution is a great way to expand the platform to a larger audience and deliver more value – justifying the monthly subscription fee.
Monetize your mobile app data
This is one of the best examples of why you should determine your revenue model before developing your product. GasBuddy is an example of an app that generated a strong user base with a very sticky company and no plans to monetize their mobile app. They ended up secretly (i.e. illegally) selling user data and ran into trouble when users started noticing that GasBuddy is consuming extra resources and battery by collecting location data.
While data monetization is not the most popular monetization strategy, it can work if done legally and you are completely transparent about it from the start.
Related: How to Build an App? Follow these 4 steps to see things through
The traditional revenue model for paid apps
Of course, actually charging an app provides an easy way to monetize it. Paid apps should provide users with a top-notch experience and attractive functionality. As such, these apps are usually mobile games, music creation apps (including synthesizers), and productivity apps, such as video editing or graphic design software. Using the freemium model with certain features unlocked through an IAP also works, but paid apps also offer IAPs. Again, this approach depends on the overall quality of the app and the functionality it offers.
Make sure you fully understand the Apple Store and Play Store rules and how they affect your revenue model. Last month, Apple released their App Store Rules to get 30% of sales from “boosts” for social media posts. This is the first time Apple has directly taxed ads in iOS apps, and it’s just one example of a recent change that could significantly impact your earnings.
Which revenue model suits your mobile app?
As noted earlier, before writing a single line of code, you need to determine which monetization model will work best for your company’s mobile app. This analysis involves figuring out the potential size of the user community and the amount of revenue you need to break even. Those factors directly impact the potential of using in-app ads and monetizing data as revenue streams.
If your app needs millions of users to become profitable, you need to set realistic goals to reach those milestones. Personally, we’ve found more success with subscription-based app revenue models that require a lower number of users to become profitable. But charging high subscription fees doesn’t work for every app.
Ultimately, entrepreneurs need to take this analytical approach to ensure their mobile app is making real impact. Anything less will simply not yield enough interest or income.