How Do Free Apps Make Money?

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It may seem counterintuitive, but many of the top grossing apps actually cost nothing to download. Clash of Clans, HBO NOW, and Spotify Music are just some of the free top grossing iOS apps in the App Store according to App Annie. And they're all free. In a market where the majority of users expect their apps to be free, how do app creators recoup their expenses and profit after the average 4-6 months of time it takes to ship an app?

In-app purchases and advertising allow app creators to make money off their free apps. But in order to make money from a free app, you have to do more than just stick paid premium options or ads in your app. Smart app monetization strategies come from understanding what revenue-generating options are available, familiarizing yourself with your market and competition, and leveraging your knowledge of your audience and business to cater the right paid user experience. Here's what you need to know to make money off your free app.

TL;DR

  • Research your market competitors to identify missed monetization opportunities.
  • “Freemium” apps are free to download and offer paid access to additional features.
  • In-app purchases are a way to offer optional, paid features within an app.
  • Subscriptions provide paid content or features over a set amount of time.
  • In-app advertising generates revenue from user click-throughs and impressions.
  • Grow a large, active user base to improve your chances of generating significant revenue.
  • Successful monetization strategies look and feel like a normal part of the app experience.

Understand App Monetization Options

There are several monetization options available for free apps. In-app purchases and in-app advertising allow apps to bring in revenue while forgoing the initial price tag that can discourage users from downloading the app. Choosing which to use is a matter of the type of app you plan on launching and the nuances of your users.

IN-APP PURCHASES

An app that utilizes in-app purchases offers a free version of the app that includes additional, optional, paid features. These are commonly seen in gaming apps where users are encouraged to purchase new levels, gear, and items. These types of purchases encourage repeat purchases because they are consumable, such as buying extra lives in Candy Crush Saga.

In-app purchases are also found outside the mobile gaming world in apps like Calcbot, 1Password, or even Apple Music. This second category of in-app purchases lets you continue to use what you purchase unlike consumable items that don't remain once they're used, such as extra lives in Candy Crush Saga.

Free apps that have a paid component to provide access to an additional feature or set of features are referred to as “freemium." There are various ways to approach a freemium app. You can offer a free version of your app with reduced features such as with Calcbot (e.g., a user can purchase the “convert” feature) or even let users try a certain feature initially and then lock it down behind an in-app purchase like with Apple Music. The latter approach requires much more development work but is a workaround for there being no true trials in the app stores.

iOS and Android apps also offer auto-renewable subscription options for in-app purchases. These subscriptions allow an app to provide content or features over a set amount of time. A good example is our customer FamilySignal, which uses an auto-renewable subscription on iOS for its apps that helps families better stay in touch with one another. Recurring subscriptions are especially useful for apps that have ongoing costs associated with them, such as maintaining servers or creating new content.

IN-APP ADVERTISING

In-app advertising comes in a variety of sizes, positions and placements in mobile apps. The amount of revenue you generate from in-app advertising is based off of traditional advertising models. Advertising can pay differently for click-throughs, impressions, which countries the users are from, and the format of the ads, with videos tending to be worth more than static ads.

There are advertising networks catered for mobile that offer a variety of models and formats within the in-app advertising strategy as well as metrics to keep track of how the ads are performing. Hongkiat runs through some of the big networks here, including Google's AdMob and Millennial Media.

Focus on User Growth

It doesn't matter if your free app relies on in-app purchases or in-app advertising, only a small fraction of your users will ever help you generate revenue from your app. That’s why your free app needs to grow a large, active user base so that this small percentage actually amounts to significant revenue.

It's important to think about metrics like free-to-paid conversion rates, lifetime value of a customer, churn rate (for recurring subscriptions), and comparable items. Andreesen-Horowitz recently published a guide to important revenue-focused metrics to help businesses, especially startups, identify the metrics most significant to tracking the health of a company. And John Egan, growth engineer at Pinterest, showed what those metrics look like in a post earlier this year. Without a keen eye on these metrics, you'll be ill-equipped to grow your app to the point where that minority of users is actually generating revenue.

Know Your App Market and Users

Do your research. Examine apps in the app stores, including competitors, to identify best practices for monetizing similar apps. While it's difficult to surmise exactly how much money your competitors are pulling in, you can identify the types of monetization strategies they use and how they frame their app content for ad impressions or optional transactions. Familiarize yourself with your competitors' techniques and then ask yourself whether they're missing a major opportunity. You should note elements of competitor apps you can improve on to enhance your monetization strategy or flat out make a better app.

Cultivating a deep understanding of your users is just as important as competitor research in building your app, if not more so. This is especially true for crafting a mobile monetization strategy. Because only a few users of your entire audience will ever pay for something extra in your app or tap on an ad, it's crucial to know what attracts and motivates your users. Research the demographics and tendencies of your audience and present relevant advertising for what they want. For in-app purchases, you need to balance what your free app offers with the desirability of extra, paid features. Skew too far one way and users will see no value in using your app. Skew too far another way and users won't purchase additional features.

Be Subtle and Actionable

Remember the purpose of your app. Mobile users are sophisticated. Few will tolerate an app that's only focus is making money off advertisements or in-app purchases. Successful free apps weave their monetization efforts into the app so that they feel like a normal part of the user experience.

Just how obtrusive your in-app advertising should be depends on the type of app and your audience. A 2014 study by Medialets (illustrated above) showed that the top performing banner ad sizes/positions by conversion rate were about 320x50 or 300x250 pixels and took up either a slice of the bottom of the screen, the lower half of the app, or a slice across the center of the screen. Interstitial ads, commonly found in gaming apps, are full-screen video or static image advertisements that can be very obtrusive if not timed correctly. These are often used during natural breaks in the app, like between chapters in a story or levels in a game, to maximize impressions while minimally breaking the flow of the app. Native ads, on the other hand, are ads that are designed to look like they're part of the app. These are usually seen as sponsored content and promotional videos found in content apps like Facebook and Twitter.

It's just as important to implement an easy to use and actionable purchase system for in-app purchases that makes sense within the app. The best in-app purchases are intuitive and just make sense within the context of the user experience.

Concluding Note

Make sure you focus and refine your monetization strategy to your business goals, your market, and your users. If your app is meant to boost your existing brand or business, you may not want to include in-app purchases or advertising. The mere existence of the app can make you money simply by expanding the ways your customers can find and interact with your business. Whatever strategy you implement, keep track of your own data and monitor it to ensure your assumptions are right, especially for free to paid upgrades. Once you have a good stream of data, innovate. Try new things based on this data, test them, and iterate based on your results to find the monetization strategy that works for your users and your business.

Whitney Rhodes is the lead editor for the Savvy Apps blog. She helps share Savvy Apps' extensive knowledge with all who seek to build better apps.

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