App Monetization: The Ultimate Guide for Product Managers
Learn why is it important to incorporate monetization strategies into your app design and tactical ways to do so.
The "Snake" game that was built into the Nokia 6110 in 1997 is widely considered to have been the first mobile app. Mobile apps like Snake couldn't be monetized until 2008, when the Apple App Store was launched. Today, mobile apps are big business.
But choosing the right monetization strategy for your app is a balancing act between improving the user experience and maximizing revenues. Leaning too much on either side can jeopardize your business.
Use this guide to evaluate various app monetization models, systematically test them, and implement the right app monetization strategy for your business.
What Is App Monetization and Why Is it Important?
App monetization is the process of earning revenue from your app and its users. Effective app monetization strategies focus on delivering user value and exchanging that value for money.
The right app monetization strategy will help your business engage users, expand revenues, and establish brand credibility. But the wrong approach to app monetization can send your business on a downward spiral of decreasing profits and trust.
According to the App Data Report 2023, consumers spent $127 billion on apps in 2022. But less than 6% of iOS apps and just over 3% of Android apps were paid apps, so the overall trend strongly favors free apps over paid ones.
But choosing to offer a free app needn't deprive your business of revenue. Some of the highest revenue-earning apps are offered free of cost initially to maximize app downloads — finding other ways that monetize the attention and trust of their massive user base.
6 Popular App Monetization Models To Consider
Choose one or more of the following app monetization models based on your user demographic and what works for your market.
According to Data.ai, two-thirds of all app revenue is from ads. This makes ads the #1 app monetization model. Ads decouple revenue from user payments and, as a result, encourage more app installs. Popular apps like Spotify, Facebook, and Subway Surfers depend on ad revenue as their primary business model.
Common in-app ad formats like full-screen ads, interstitial ads, banner ads, native ads, video ads, and offerwall ads work well for generic apps that have broad use cases and a high volume of users. Ads work particularly well for popular gaming, communication, entertainment, and social media apps.
Instead of working with individual advertisers, using the services of an ad network or exchange like AdMaven, AdMob, AdX, OpenX, MoPub, Facebook App Ads, and RevX can help you earn more from your ad placements.
However, you also need to consider that ad interruptions lead to poor user experiences. "Your users dislike the ads you put in front of them, " writes Alex Genadinik in his book Mobile App Marketing and Monetization. "And if your users hate your ads, the reviews they give you will be worse."
2. In-App Purchases (IAP)
After ads, in-app purchases make up the bulk of the remaining app revenue. This model provides opportunities to sell a wide range of designs, features, products, collectibles, upgrades, and plugins to prospective consumers. In-app purchases can also be offered along with free apps as a freemium model.
In-app purchases work well for educational, gaming, and ecommerce apps that have multiple user levels or categories built into their design. For instance, BarMax, the most popular law exam prep app, is free to install but also offers additional course materials as in-app purchases. Similarly, Bunch, a popular multi-player game app that uses in-app chat so its users can virtually plan meet-up times and talk strategy, is free to install but has in-app purchases that enhance the gameplay.
However, both the Apple App Store and Google Play Store charge a 30% commission on all digital in-app purchases. A 15% discount on this commission is possible — provided you are an app developer who earned less than $1 million in the last fiscal year and you qualify for the criteria laid out by Apple and Google.
Subscriptions, the new kid on the monetization block, offer predictable recurring revenue and a higher average customer lifetime value (CLTV). Non-gaming apps earn 82% of their revenue from subscriptions, while gaming apps earn 36% of their revenue through a subscription model.
Subscriptions work best for apps with longer customer lifetimes and higher engagement rates. So apps that solve recurring user needs, such as fitness, diet, photography, and gaming, often fare better. For example, the fitness app Peloton charges its users a recurring subscription fee of $12.99 per month. Similarly, the gaming platform NVIDIA GeForce NOW charges a recurring subscription fee of $9.99 per month.
Both Apple and Google charge 15% store commissions on recurring subscription renewals.
4. Paid Downloads
Making your app a paid download is the oldest, most direct, and most immediate way of capturing value. It allows you to track costs, conversions, and profits easily. And it enables an ad-free app experience.
But most app users expect either a free or low-cost app (under $5). "The lowest price range is $0.99 to $1.99 with $2.99 already considered mid-range for app pricing," writes Genadinik. "These prices are problematic because it is difficult to get people to open up their wallets, and when they do, you're able to only extract a few dollars." So avoid this low-end price range because it hinders installs and leads to poor user ratings without offering you an adequate upside. Either go the freemium route or charge over $500.
You can charge well if your app solves a pressing user problem in a niche segment that has little or no competition. vueCAD Pro, a mobile CAD viewer, and CyberTuner, a piano tuner, are good examples of niche apps that fall in this category. Both these apps cost $999.99 on the App Store.
This model makes money by selling the offerings of other businesses to your users. Ideally, this would result in a win-win-win scenario for you, your users, and the referred business.
Cross-selling works best with complementary offerings. For example, an antivirus app that already has a security-inclined user base can do well cross-selling an exclusive VPN service deal. Similarly, a fintech app can cross-sell relevant financial or investment products based on each user's individual profile.
Groupon's model is based on cross-selling discounted offers and collecting a commission. Businesses like Swiftic, Express VPN, and Coinbase offer apps a generous commission for cross-selling their offerings.
But offering products or services that are not relevant can quickly erode user trust. So avoid spamming users and stick to personalized offerings that target relevant prospective users.
Use a free or low-cost app as an entry point to win the trust of long-term users and offer them exclusive premium services. Upselling works well for apps that help users get exclusive features, generate revenue, save time, or upskill themselves.
Popular business and communication tools like Zoom and Google Workspace offer free mobile apps and upsell paid plans after users reach a particular usage limit. Pro Camera, a free app that adds DSLR-like features to your mobile cam, also offers a $6.99 premium version. Similarly, Vidyard, a sales video software app, offers a free plan along with its pro and business plans.
Upselling also works well if you offer a larger value proposition that goes beyond the app. For example, Compass Connect, a low-cost mobile app that helps teachers connect with students, parents, and fellow staff, generates high-quality leads for its comprehensive school management software.
Most app users prefer free or low-cost offerings, so only a small percentage of them are likely to adopt premium services. But a good user experience improves the odds of upselling. That's why Compass adopted an in-app chat and Vidyard invested in an activity feed to deliver top-notch user experiences.
How To Choose the Right App Monetization Strategy
Use the following steps to make evidence-based decisions about your app monetization strategy.
Evaluate Your Unique Advantages
Consider what your users' needs are, their paying capabilities, and existing competitor offerings. For example, a dating app may choose an ad-supported free version along with premium in-app purchases, while an ecommerce apparel app may rely exclusively on in-app purchases without needing to rely on ads.
Next, identify a unique advantage. For instance, if your team is highly skilled in advertising or building complex technology, then focus on those strengths to create a superior user acquisition strategy or feature set that leads to higher revenues.
Track Key Business Metrics
It's important to understand how a chosen app monetization strategy impacts key metrics along the user acquisition, conversion, engagement, and retention phases.
For instance, if your new paid download model reduces app installs by 50% but increases revenue by 300%, that's a win. However, if your new ad model increases the user churn rate from 10% to 50%, that's a red flag.
iTunes Connect and Google Play Console both provide basic tracking options. Additionally, you may want to consider an advanced and customizable analytics tool such as Google Analytics, Mixpanel, or data.ai.
When it comes to metrics, less is more. It's better to focus on a few metrics that indicate the health of your business rather than track several dozen different metrics.
Here are a few metrics to consider tracking:
- Conversion rate = app downloads / impressions (map conversion against your industry benchmark)
- Active users over a given daily, weekly, or monthly time period (DAU, WAU, or MAU)
- Churn rate = # of users lost / # of total users x 100
- The average time taken for new users to make their first purchase
- How much revenue does an average user yield (ARPU)
- Customer lifetime value (CLTV) = ARPU x average customer lifetime
- Internal metrics such as crashes, app launch time, data usage, and API responsiveness
Identify What Works Best for Your Business
There isn't a single monetization model that'll work best for all of your users and use cases — you're likely to use a combination of several different ad monetization strategies. Split test various monetization models and identify the combination that has the most positive impact on your key business metrics.
Engaged Users Help You Earn More Revenue
The State of Customer Engagement Report 2023 says businesses that invested in improving their "digital customer engagement" have increased their revenues by an average of 90%. This statistic validates a maxim that marketers and product managers always intuitively know: engaged users do more business.
There are several ways to improve user engagement. Good UI design, quicker app loading times, and superior app security all improve user engagement to an extent. But the most direct way of increasing engagement is by allowing users to interact with your brand and other users in real time.
For instance, Betabrand, an online women's apparel store, is redefining user engagement by enabling its users to participate in the design process of new clothing concepts via its in-app chat. Similarly, Paired, an app for couples, integrated an in-app chat to encourage higher user engagement. And Pluang, an investment app in Southeast Asia, used a fully customizable in-app chat to boost the user engagement rate.
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