When it comes to developing a successful app startup, figuring out an app monetization strategy is critical – but often overlooked. The quicker you can begin turning a revenue with your app, the more likely it is that you will be able to financially sustain the growth of your startup. Even with a great app, the lack of an app business model can limit your access to investor capital and your mobile app pitch deck will never be effective without a cohesive revenue-driven strategy in place.

The app startup industry is full of competition. The market has become so oversaturated that most apps fail to turn over any consistent revenue, if they generate any revenue at all. Without a clear and effective monetization strategy, app entrepreneurs quickly find their budgets dwindling as they promote the app to gain new users, but fail to turn them into customers. Many founding teams make the critical mistake of focusing all their attention on developing the app, and comparatively little attention on perfecting the business model behind it.

The Basics of Monetization Business Models

image of monetization funnel

Establishing a mobile app revenue model is essential, and if implemented properly, can allow your startup to hit the ground running. Fortunately, there is no need to reinvent the wheel – there are a number of tried and tested models that app startups have used over and over to generate long-term revenue. It doesn’t have to be sophisticated and complex either. Most successful apps have super simple app business models that are familiar and easy to understand.

Before we break down specific app monetization strategies, it’s important to look at the fundamentals of app monetization. One of the most important factors to understand when launching an app startup is that a large base of users alone won’t sustain your business in the long term; a strong app monetization strategy is vital to success. Building an app startup is expensive and you will never realize a return on investment if you can’t convert users into customers. Your business model should allow you to begin earning a profit, even without a large user base.

Build a financial model through Microsoft Excel to test different monetization strategies before you go live. Displaying how your chosen monetization strategy will convert into profit is key to establishing a business plan that stands up to scrutiny. By testing and planning thoroughly, you can optimize your model to ideal performance and ensure that it is ready to meet the demands of the open market.

When you first launch your app, we recommend launching in a “testing state”. Until real users are interacting with your app, you don’t know how your app and services will be received or how much people will be willing to pay for it. From the outset, you should launch as a lean startup – delivering a minimal viable product (MVP) with specific testable objectives in mind. As you build your user base, analyze user behavior and tweak your app monetization strategy accordingly. Live testing of your monetization strategy forces you to put the theoretical ideas from your business plan into a real-life scenario.

Ideally, you want to implement a business model that is profitable without thousands of users; one that is scalable as your business expands; and one that provides the opportunity to monetize a significant portion of active users.

1. Freemium

One of most effective and scalable business models comes in the form of freemium apps. With a freemium app, you provide a limited version of your app to the user for free and encourage them to become customers by offering a full-featured version of the app for a price. This model works because the quality of your core app demonstrates your product’s value, and entices users to invest money to attain additional features. Never underestimate the power of “free”. Free apps are much more accessible and customers are more willing to download them without having to think it over.

When implementing a freemium model, focus on acquiring new users by keeping the barrier to entry extremely low. Users who find the application beneficial will be anxious to increase this value by purchasing upgraded access.

One of the best examples of a freemium model was designed by Dropbox. The Dropbox app offers users 2GB of storage space for free and allows them to buy more storage space if required. Dropbox has since established a reputation as one of the leading virtual storage solution providers in the world. Other apps like Temple Run and Fruit Ninja have used the freemium model to encourage users to upgrade their apps to avoid advertisements.

A major benefit of freemium apps is that they don’t require thousands of installs in order to generate revenue. There are two main ways to monetize with this method; one-off payments and subscription fees.

With subscription fees, you can charge a small pool of users consistently until they cancel; giving your startup the opportunity to generate a residual income on each paying customer. In contrast, one-off payments can only be taken once, and therefore more users must be converted in order to generate the same amount of revenue.

The freemium model lends itself well to the lean startup process. If you want to identify how enthusiastic users are about your product (and whether they’ll pay for it), you can easily test the waters by altering what features you offer in the free app and which you offer in the upgrade. This model makes it simple to find out what features are important to your audience, and which they are willing to pay for.

There are a number of ways the Freemium model can be used. Here are a few successful methods that you may want to consider:

  • Feature-led Freemium – Provide a free version of your app, but limit it’s functions. Allow users to access additional functions at a price. Minecraft is currently operating under a model where users can only save the worlds that they’ve created on the “pro” version.
  • Capacity Limited Freemium – The user can access your application for free until they reach their allotted capacity. This may be a certain number of free uses or a specific amount of storage that users cannot exceed without upgrading at a cost. Companies like Dropbox and Evernote are currently operating under this model.
  • Limited Time Offer Freemium – Offer a free version of your app for a limited amount of time, under a free trial. Audible and Spotify both use this model to build value for the user before encouraging them to upgrade to a paid subscription.

2. Virtual Goods with In-App Purchases (The Addictive Model)

Building an addictive app with in-app purchases has become a popular app monetization model, especially for mobile games. The widespread success of games like FarmVille and The Sims has given app entrepreneurs an insight into the lucrative potential of producing virtual goods and allowing them to be accessed through in-app purchases. One of the biggest advantages of this model is its simplicity, versatility, and scalability.

To succeed with this model, all you need is an addictive app that allows users to advance their value with some type of in-app virtual goods. Although his model lends itself well to games and gamification, it can also be applied to other apps as well. For example, a dating app where users can buy in-app credits to purchase additional features would also fall under this monetization strategy.

The core premise of this model is that the virtual goods you’re selling need to offer something of high value to the user. Whether it’s extra levels or playable characters on a game, or the ability to buy credits to see when another user has viewed your profile on a dating app; your offer needs to allow the user to accomplish something that they highly desire. The clearer that your value proposition is, the more you can incentivize the user to spend money within the app.

One major downside to using in-app purchases as a standalone monetization strategy is that it requires a considerable number of users in order to generate significant returns. Doing so may take extensive customer acquisition efforts through platforms like Facebook, which can be costly to a new startup. This type of marketing situation may be far from ideal when you’re newly launched and haven’t yet quantified the value of a single user.

The key to making this app business model work is to avoid over-complication. Start with one in-app purchase option that rewards the user for making a purchase and see how users respond. You will find much more value in having one strong in-app purchase option that provides significant value to the user than 10 options that users don’t find beneficial. Be creative with this strategy; sometimes it’s more valuable to offer these additional features in exchange for social shares or referrals.

3. Advertising And Sponsorship

For more ambitious app entrepreneurs or those with over 125,000 monthly active users (MAUs), monetizing apps through advertising and sponsorships can be extremely profitable. App entrepreneurs with a smaller audience, however, will typically find that this model alone doesn’t provide enough revenue to sustain the growth of their business. In order to generate substantial and consistent revenue, this model requires an extremely large base of users who interact with the app frequently.

As an example, if your app received $1 for every 1000 impressions, it would take 1000 users viewing ads on a single occasion, or 500 users viewing ads twice (and so on) before you’d make even a single dollar. In other words, your ability to scale your income with this model will be directly tied to how large you can grow your audience and how well you engage them with your app’s offering. However, using advertising along with other monetization methods may allow even a smaller app to maximize the monetization of each of its users.

It’s worth mentioning that advertisements do run the risk of alienating or overwhelming your users. Advertisements can have a dramatic effect on the user experience, especially if they are shown more than occasionally. Modern mobile users are particularly hostile to ads and often feel as if they are intrusive and that they ruin the user experience. Companies that incorporate advertising on their apps need to be strategic and find the optimal way to introduce ads to their users without damaging the experience or creating an off-putting moment for users on the app.  

4. Paid Apps

Offering download for payment is perhaps the simplest app business model available for app startups in terms of implementation. With a paid app, startups earn revenue every time a user purchases (and subsequently downloads) their app. After making a one-time payment, users are given access to the app forever (in theory). As a monetization strategy,  paid apps are highly transparent and customer spending is easy to track.

With a paid app model, your revenue is directly tied to the number of individuals you can convince to pay for and download the application. The caveat is that you need a high number of users in order to make a substantial profit, and will need to continue bringing in new users to sustain the business in the future. As a standalone model, there is little opportunity to increase customer lifetime value or to create any type of residual spending situation with current users.

It’s also very difficult to get potential users to pull the trigger and purchase an app. The App Store is highly competitive, and there is no shortage of free apps out there. Without strong brand awareness, paid apps only have a slim chance of competing. Studies show that paid apps are installed 90% less than free apps, and this is likely due to the high barrier of entry on the customer side.

Successful paid apps generally rely on having a strong brand presence throughout other marketing channels (print, digital, social media, e-mail etc.); or by already having a strong brand awareness as a non-app business (such as a popular brick-and-mortar store introducing an app). Established brands can successfully earn profit from paid apps because they have already proven their value to consumers.

Smaller apps have yet to prove themselves and therefore, customers are less likely to trust that their money will be well spent by downloading the app – even if it’s only a dollar or two. As a new app startup, relying on customers to purchase your app without proving value first will likely end in app monetization failure.

5. Alternative & Additional Monetization Strategies

Successful app entrepreneurs aren’t just able to implement a single monetization strategy, but in many cases, also include alternative and additional strategies to even further their revenue generation potential. Two especially popular app business model strategies include affiliate marketing/sales and lead generation.

In-App Affiliate Marketing

Affiliate marketing allows you to advertise and sell third-party products to your audience. Since you already have a specific user base, this method allows you to earn commissions by promoting products on behalf of another company. When users from your app purchase these items, you earn a commission on the sale.

Affiliate marketing can be an ideal situation for all parties involved – app entrepreneurs are able to further monetize their audience, the third-party company gets access to new customers, and users get to hear about new products that they wouldn’t have been familiar with otherwise. There are many apps that operate under this model, some of the most popular including Podcast Addict and Clash of Clans.  

Lead Generation

As you scale your app to reach a larger audience, you will have access to a ton of user data – from names and e-mails to demographic features. Depending on your app, your demographic, and the size of your audience, providing this data to third-party entities can be fairly lucrative. Demographic and usage data can be key to helping other businesses understand user behavior, and can help them improve the buying process for their own products and services.

Apps like Mint have used this process successfully. Offering tools that enable users to track their monthly expenditure and create financial budgets; Mint has access to a host of data about how people from certain demographics spend their money. Furthermore, Mint has implemented affiliate sales as an additional generation method – allowing users to sign up for third-party credit cards that are specifically suited for their financial situation.

If you’re considering selling leads on to a third party, it is important to make sure that you are following federal data regulations and that you are operating within the limits of the law. Depending on your locality, data regulations can be considerably strict – have an attorney review your data-monetization strategy before executing it.

What App Business Model Should I Choose?

Ultimately, the app monetization model you choose should be the one that allows your app to attract the most users and convert them into purchasers most effectively and efficiently. No two businesses are the same, but by experimenting with a lean strategy, over time you can optimize your monetization plan for ideal revenue generation.

Seek to discover an effective strategy that delivers large returns with minimal effort. Rather than cramming your app to the gills with complex pro features and in-app purchases, its much more effective to start small and build your apps features (and monetization opportunities) up over time.If you’d like help to bring your app idea to reality we have a variety of resources and and a team of expert app consultants to assist you with each stage of the process.

Contact us today for a free consultation and let us help you discover the best app business model and monetization strategy for your app!