How easy it is to make money with an app
Earning money with apps, how does it work?
There are different models and strategies for monetizing an app. Premium, freemium, subscription or advertising integration are the most common. Many app publishers think that they only have to generate enough installations (downloads) for their app project to refinance itself. Lots of downloads and regular users are certainly important success factors for an app, but to really earn money with apps, you need a suitable monetization strategy. There are many apps with many downloads and regular users, which generate a lot of maintenance costs, but unfortunately do not make a profit.
Around ten years ago, Apple created a real gold mine with the introduction and opening of the App Store for third-party apps. Originally it was only intended to increase the attractiveness of the iPhone, but ten years later it can be said that it clearly did more than that. In 2017, Apple made more sales with the App Store for the first time than McDonalds in 2016 with all branches around the world (source: Stern Online). In contrast to the thousands of McDonalds fast food restaurants, which also cause a lot of costs, Apple has only managed this with a single online store. In 2017, total sales from the Apple App Store amounted to around 37.9 billion dollars, of which 70% went to the developers and 30% to Apple. That works out to around $ 11 billion!
How does it work to earn money with apps?
Not every monetization strategy works with every app. It is therefore advisable to deal with the various possibilities of app monetization as early as the concept phase. Depending on the monetization model, more or less development effort is required for the implementation, which should also be included. There are basically two sources of revenue from an app:
- The end users
Alternative forms of profitable apps
In many successful apps, the return on investment (ROI) does not take place within the app at all, but rather indirectly. This means that the app promotes the image, addresses potential customers, reaches a new target group, or serves as a means to an end. There are also countless apps that are developed to optimize processes and thus save a lot of costs, but do not generate sales in the traditional sense.
Many apps are developed as a marketing instrument, service or tool in order to bring about monetization (or cost savings) outside the app economy. For example, we developed the all-in-one smart home app SARAH for HUBWARE AG, which can be downloaded for free from the App Store. End customers first have to procure the necessary smart hardware components and set up and pay for the networks in the house before this app is of any real use to the smart home owner. Of course, there are also non-profit projects in which the aim of the app is to provide a social, societal and / or ecological benefit and, for example, to sensitize humanity to our plastic problem or the protection of animals.
The classic monetization strategies for apps
The most important app business models and sources of income are:
Free to download. Sales with advertisements or logo presences paid for by advertisers or sponsors.
Free download with the option to extend new content, new functions or the term of a full version through in-app purchases or a subscription. User pay.
Paid apps that already cost when they are downloaded and thus the revenue comes from the user.
There are also apps that generate sales with the usage data in addition to or in addition to advertising income and sales. A prominent example would be Facebook.
It often makes sense to integrate several revenue sources at the same time in order to generate the greatest possible revenue with one app. There are no rules in the app stores that state that you cannot implement sponsorship partners, in-app purchases and a subscription model in an app.
Often times, free apps have integrated advertising banners, native advertising or sponsor logos. App publishers sell (auction) their advertising space via so-called ad networks, which automatically display the highest-bidding advertising in the appropriate format. Alternatively, publishers make a contract with sponsoring partners who pay a fixed amount for a presence in the app.
"An app only becomes interesting for advertising networks if it has around 20,000 regular app users."
A clever variant for publishers is to give the end user the opportunity to buy advertising freedom. The user pays an amount via in-app purchase so that they no longer have to see advertising. This model is often combined with other in-app purchase options such as new levels (in games), new content (in learning apps) or new functions (productivity apps). In addition, this model can also be combined with the subscription model, in which end users do not pay a one-off but a recurring amount for using the app. It is important to know that an app needs a lot of downloads and regular users (only from around 20,000 regular app users) in order to be interesting for advertising networks and to be able to earn money with it.
A wide variety of digital goods can be sold via the in-app purchase model. From the publisher's point of view, it is important that the basic version (Free) already offers enough added value so that an end user is motivated to pay for a better experience, new functions or additional content. The offer should be made to the user at the right time and in the right context and, of course, be attractive. Examples of in-app purchases are:
- Freedom of advertising (see above)
- additional “experiences” such as levels or e.g. magic weapons in games
- additional content and functions (e.g. learning apps)
- a longer useful life
- additional user accounts or connections
- personalized functions and services (e.g. recommendations based on app data)
- Access to exclusive offers
End users are very reluctant and cautious to accept contracts with recurring costs. However, once this model has been implemented, the value of the app and of course the regular sales increase with each new subscriber. This model is used particularly successfully in the entertainment and news industries. Examples would be e.g. Spotify / Deezer as music services, Netflix for video streaming, Die Zeit or the Sunday newspaper in the news section. A number of learning apps such as Mondly also have a subscription model.
Important rules for using the inApp purchase function
There are clear rules in the app stores regarding the use of the in-app purchase function, which of course also apply to subscription models that are purchased via in-app. The most important rule is that you can only offer services via in-app purchase that are purely digital in nature. That means the product is 100% digital. In order for an app to even get through the app review by Apple / Google and then be available for download in the app store, all sales of digital goods must be dealt with via in-app purchases. This rule is very important and means that you cannot simply bypass the 30% revenue share of the app stores. Services and products, on the other hand, which are sold within the apps, but are not provided digitally but physically and outside the apps, may not be dealt with as in-app purchases. These would be e.g. taxi apps like the go! App or mCommerce apps like Amazon, etc.
Premium app business model
The premium business model means that an app costs right from the start and that the user is asked to pay for the download of the app. From the publisher's point of view, you save yourself the not entirely trivial integration of in-app purchase functions and you don't have to install any paywalls, etc. You can easily define how expensive the app should be in the individual app stores. Which prices (price points) can be specified at all can be found in the respective price tiers of the Apple and Google app stores.
"For apps with a very limited potential target group, but with great added value for the end user, a premium app with a high price can lead to the greatest profit."
The big disadvantage of this model is that many users are not ready to spend a lot of money on a digital product if they have not yet tried it out and convinced themselves of the benefits. For this reason, this model works especially when the user can already imagine as well as possible the benefits the app will bring. This is often the case with apps with a high level of awareness and reputation, such as the Atlas of Human Anatomy. Most people recognize the functions and added value of such an app because they have heard about it in advertising, for example, and are therefore ready to pay for the download without first testing the app intensively.
Another disadvantage of this model is that it is very difficult to find the ideal price (highest revenue) for an app from the start, but also over time. Either you ask a lot, but then only get a few downloads, or you ask very little and have to generate a lot of downloads in order to generate a reasonably decent turnover. For apps with a very limited potential target group, but with great added value for the end user, a premium app with a high price can lead to the greatest profit.
We believe that an intelligent combination of the various monetization options can generate the highest sales.
Calculate potential sales of an app
We are often asked how much money you can make with apps, or how many downloads you will get. We cannot answer both questions just like that. Very often, however, we observe that the potential of the app is overestimated because wrong assumptions are made. In order to prevent this, we recommend using the intersection method to work out a reasonably realistic picture of the effective potential.
How can the monetization potential be determined?
First, the maximum possible target group must be determined. This can often be found out from the relevant subject area via statistics portals such as Statista, the Federal Statistical Office or other data sources.
Everything that has to be excluded due to a criterion or a certain circumstance is now “cut away” from this maximum potential.
The second step is to define the criteria and circumstances that lead to the exclusion of this customer group or a reduction in the effective potential. Criteria that are typical for an app:
How many of the potential users can the existing advertising budget even reach? In most of the projects that we oversee, this criterion is already around 90% - 95% absent.
How many of these reached people have a smartphone and an App Store account? Nowadays these are probably the vast majority, i.e. around 90%
How many of those potential users who learn about the app and who have a smartphone will actually download it? If that is 10%, that would be a very good number.
How many of the downloaders will still use the app after three months (app retention)? If that's 20%, that's already a good number.
How many of the app users would be willing to pay to upgrade the app (in the case of a freemium model)? If that's 10% of all freemium users, that's a good number.
Of course, depending on the app and business model, you have to define other “exclusion criteria”. The possible criteria here are very diverse. It becomes critical when several criteria have to be met in order to get to a user.
In the end, only a few percent of the great potential, by which one can often be blinded at first glance, is often left.
Tips for monetizing apps
If advertising integration is an option, it should be ensured that this does not impair usability and the user experience as far as possible. So you should only allow advertising that fits the context of use and not at the expense of user flow or user navigation.
Several monetization options can be combined: E.g. you can give the user the option to choose whether he / she would prefer to watch an advertisement or prefer to be free of advertising via subscription or in-app purchase.
In addition to various amounts for in-app purchase options, you should also be given the opportunity to offer the entire package at a reduced price (added value for end users).
You have to try out the ideal price - it can hardly be precisely determined in advance. Using A / B testing and analyzing the downloads / sales over time, however, you should be able to get close to the best price for the app or for in-app purchases.
A good referral program can boost downloads and sales. Dropbox, Airbnb, Uber or Booking.com show how "user-recruit-new-users" can be implemented correctly and profitably for all involved. Such a referral program should also be part of a monetization strategy.
Don't forget taxes, levies and revenue sharing from the app stores! Often times, a publisher does not realize until the first settlement that a considerable part of the turnover has to be given to the app stores and a further part to the value added tax. Attention: The VAT rates are not the same everywhere in the world!
It is of course very important that an international app is translated into the local languages (localization). It is just as important to adjust the price of your own app to the purchasing power in the respective country in order to get the most out of it.
A realistic potential (user, turnover) can be found using the interface method.
How is the willingness of Swiss app consumers to pay?
We were allowed to accompany a bachelor thesis, which investigated exactly this question. Although the willingness to pay for apps is a very topical issue, according to the authors Dominique Aebi and Mathias Rufer, it has hardly been scientifically researched so far. The most important finding from the practice-oriented research is that 80.4% of the test subjects are willing to pay. For 56.8% of the participants, the willingness to pay depends on the use, while for the remaining people it is on average CHF 9.13 (!). 71 percent prefer paying at the time of downloading. (Aebi Dominique and Rufer Mathias. "Willingness to pay for apps." Bern University of Applied Sciences, n.d.)
Case study: Swiss Marketing Expert App
The Swiss Marketing Expert App is our own product, which enables us not only to try out technical innovations, but also to test out various monetization strategies. It is important to note that this app still has a very limited potential target audience and that the value proposition is aimed primarily at marketing professionals in training. The app includes digital exam learning cards. That is why we first decided on a combination of premium (paid app) with sponsoring (presence of partners with logo on the partner screen). Thanks to this combination, we were able to just cover our development expenses in the first year, but not yet make any real profit. In addition, we set the price of the app very high (CHF 27.-) at the beginning, which in retrospect was correct. In the first few weeks, it was possible to generate several thousand francs in sales using the app alone. However, after the first momentum and the attention from the app launch was over, there were hardly any additional purchases for the time being. We then decided to lower the app to CHF 19.- and then to CHF 9.-. The number of downloads then increased again, but of course the turnover was no longer that high due to the lower price. The price of CHF 19.- was not good because there were hardly more downloads than CHF 27.- and we now earned around ⅓ less per download. At a price of CHF 9.- we achieved roughly the same turnover as at CHF 27.-, but we generated three times as many downloads, which in turn increases the value for sponsoring partners.
In a next step, we could also provide this learning app for free download from the App Store and offer individual contents of the app via in-app purchase. We don't yet know how much revenue this model would generate for this app. The aim would be to address a larger user base by giving the target group the opportunity to test the app first before they have to pay anything for specific functions and content. At the same time, it would offer the partners a greater reach and more visibility. The technical challenge for this model change is to automatically activate all in-app purchases for all previous users who have already paid for the premium app, also in the new app, which is implemented with in-app purchases, so that they do not have to do them again have to pay. Alternatively, you could of course also put a premium version and a freemium version in the app stores to give the end user the choice. In the long term, however, it is quite time-consuming to maintain four codebases (2x Android, 2x iOS).
What is your experience with your apps?
The topic of monetization strategy for apps is very broad and complex. We also learn new things every day and are of course very excited about your experience with the monetization of apps. Please share your findings with us - via social media or via email to [email protected] If you would like to work out your monetization strategy together with us, we of course offer all of our know-how and look forward to your inquiry.
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