How Free Apps Make Money [A Complete Guide]

With around 5 million apps on the Apple App Store and Google Play Store combined, isn’t it amazing that most mobile apps are offered for free?
(Buildfire)

So how do free apps make money in 2020? This article will break down free vs. paid apps, monetization strategies for free apps, and tips for choosing a monetization strategy.

The app industry is a multi-billion dollar industry, but with 5 million apps available for download, that doesn’t mean that all free apps are generating revenue. In fact, most apps are duds and don’t make any money at all. So make sure you follow a guide on how to create a successful app in 2020.

Here is some food for thought on the amount of money apps may be generating. The top 200 apps on the app store manage to earn around $82,500 daily. The top 800 apps make about $3,500 daily. The revenue generated significantly depends on the type of app. The top gaming apps make around $22k each day, while entertainment apps average around $3k. (Source: Tekrevol)

Gaming apps received 68% of total app revenue in 2019 and is projected to continue dominating the app space well into 2024 (projected 49% of total app revenue). (Source: Statista)

Free Apps vs. Paid Apps

So you are in the process of developing your soon-to-be successful mobile app, and you’re trying to decide how to monetize it. There are two options to start with: offer it for free or have users pay to download the app.

If you are unsure what is best for your app, it’s a good idea to check out what your competitors are doing. If they are offering an app for free and you are charging to download, your competitor will be getting most of the downloads.

Although the number of people willing to pay for an app has been steadily increasing since 2011, it is still by far the least favorable option. Here’s an actual look at the number of free vs. paid app downloads.

Source: Spaceotechnologies

This graph shouldn’t be that surprising, though. Do you have any apps that you have paid to download? Most of you don’t. The only app I can even think of that costs money off the top of my head is Elmo Calls. If you aren’t familiar with it, consider yourself lucky.

So why would an app provider charge people to download the app?

There are a few benefits, such as a loyal customer base. With a paid app, there will be fewer downloads; however, the people that do download it will be a dedicated, engaged group. The companies that will be most successful at offering a pay to download app are those that are well established and already have a loyal customer base.

Check out these 5 reasons businesses must-have a mobile app.

In reality, you don’t need to charge users for downloading an app. There are many ways app providers can earn money, even with providing a free mobile application. In fact, 98% of app revenue worldwide comes from free apps ( Buildfire).

Now that you’re feeling pretty good about offering your mobile app for free while generating revenue, let’s get into the strategies for monetizing your free mobile app in 2020.

9 monetizing options we’ll be covering:

1. Subscription Model
2. Freemium Model
3. Advertising Model
4. Affiliate Model
5. In-App Purchases Model
6. Sponsorship Model
7. Crowdfunding Model
8. App Merchandise and E-commerce Model
9. Collecting and Selling Data Model

According to Statista, there are three main monetization strategies for free mobile apps: subscription model, freemium model, and advertising model. The other models that I’ll briefly mention account for only 3% of what is currently used for mobile app monetization strategies.

The subscription model is the leading mobile app monetization strategy, accounting for 36% of mobile app revenue. It is easy to see why, with some of the biggest brands using a subscription-based model such as Spotify, Netflix, and Calm.

There are two different ways businesses use the subscription model. The app is offered for free, and users can upgrade to a monthly or yearly subscription within the app to avoid advertisements, for example. This is also known as the freemium model, which we’ll go into more detail in the next section.

The second way is the app offers a free trial and then charges a subscription fee after the free trial ends (like Netflix and Calm).

An important distinction within the subscription model is where the information is coming from. This affects if the app stores take a cut of the revenue. See the images below.

Source: Apple

Pros of the subscription model

• It’s a fantastic model for cloud-based services like Spotify and Netflix.
• Apple and Google both reward the app with the longevity of subscribers by lowering the revenue split.
• It provides a more dependable revenue.
• It lends itself to a more engaged and serious audience.

Cons of the subscription model

• Typically requires a free trial.
• App developers must continuously update the app with new features and bug fixes (there’s less room for error).
• Changing of fees is noticeable and may cause backlash.
• Smaller businesses may not be able to provide enough value to users for this model.

Freemium Model

The freemium model is when an app is offered for free and can be used for free but will often have either advertisements or partial functionality. Users can upgrade to a paid subscription to receive premium features (aka full functionality) and/or no advertisements. These subscriptions are bought through the app, therefore, also classified under in-app purchases.

This model is great for gaining many free users and converting the more serious ones to paid users. The trick is providing enough value to the free users to keep them around, while still offering enticing premium features to get some users to pay.

Examples of freemium apps include Pandora, MyFitnessPal, and Duolingo.

It’s important to note that all good things come at a price. Both the Apple App Store and Google Play Store take a cut. For the first year of subscription, the revenue split is 70/30 (with 30% going to the app stores). After the first year, the revenue split goes down to an 85/15 split.

Pros of the freemium model Cons of the freemium model

Advertising Model

The advertising model is one of the easiest and most well-known mobile app monetization strategies.Ads are literally everywhere, and mobile applications are no exception. There are three ways to go about mobile app advertisements. A company can pay an app to display advertisements within it, the mobile app can provide ad space within programmatic ad exchange, or app owners can opt for an affiliate approach (which we’ll talk about in the next section).

Source: Light It

There are 5 different variations of ads to promote in a mobile app:

Banner
Banner ads are one of the most common variations of ads. Typically they are located at either the top or bottom (as shown above) of a mobile screen. Banner ads are the least intrusive as it doesn’t interfere with app usage. This is a great way to display ads while keeping the inconvenience for users low. However, banner ads typically have lower engagement rates and are dependent on brand recognition.

Pop-up
Pop-up ads are a mid-sized ad and appear based on predefined logic. They may occur after completing a specific action such as scrolling or tapping a button, or they may appear when the session surpasses a specified amount of time, such as 2 minutes. Pop-up ads are unique because they occur when a user is already engaged; thus, they have a better engagement rate.

Native
Native ads are integrated into an app, so they don’t appear to be as spammy as other ads; therefore, having minimal user annoyance. This makes native ads popular among app providers. However, the integration adds additional development costs, which may take away from the revenue.

Video
Video ads are 5+ seconds and played automatically within the app. Video ads can either be skipped after a few seconds, or users can be rewarded for watching the entire video. Video ads are completely disruptive as the user can no longer use the application while the video is playing.

Example: Most YouTube videos have a video advertisement before the user’s video will play. This video can usually be skipped after a few seconds, but some videos cannot be skipped. It is common in gaming apps to offer a reward, such as extra points or coins for watching the entire 30–60 second video ad.

Interstitial
Interstitial ads are full-screen pop-ups, usually popping up when the app first opens or after completing a task such as editing a photo or completing a level in a game. These are used more conservatively to avoid bombarding the user.

With programmatic ad exchange, you offer open space within the app, and other companies can bid to use that space through a general platform such as Google.

There are 5 main ways to generate revenue through the programmatic ad exchange:

Cost per mile (CPM): In this model, you get paid for every 1,000 (so-called ‘a mile’) people that view the ad. This model is suitable for mobile apps that have steady traffic. This model is also helpful for estimating monthly revenue.

Cost per click (CPC): In this model, you get paid for every click an ad receives while on your application. This model is useful for advertisers because they are only paying for the people interested in clicking the ad, which is why it typically has a higher payout than CPM.

Cost per view (CPV): This model is for video ads. You get paid each time a user watches the video advertisement. As a video advertisement continues to boom, this model becomes more and more popular.

Cost per action (CPA): In this model, you get paid based on completing a specified action. This could be an in-app sale, subscription, form submission, sign up, and more.

Cost per install (CPI): With this model, you get paid based on the number of times an advertised application is installed.

Pros of the advertising model

• It is one of the easiest ways for a free app to make money.
• Requires low maintenance for developers.
• It can help with measuring user engagement within the app.
• Low start-up fee.

Cons of the advertising model

Affiliate Model

As mentioned above, the affiliate model is closely related to the in-app advertisement model. With the affiliate model, you have partnerships with companies and get paid based on the agreed-upon deal, whether it’s bringing the company traffic, form fills, sales, etc. Many affiliate network companies such as Pepperjam can help you find appropriate companies to kickstart your affiliate model.

Pros of the affiliate model

• You work with a few limited companies rather than advertise for a bunch of companies.
• You can choose to work with companies you love.

Cons of the affiliate model

In-App Purchase Model

The in-app purchase model allows users to make purchases within the free app. These purchases are typically to get premium features, eliminate ads, and/or get virtual money.

Subscription and freemium models also fall under this category because you can sign up for the subscription within the app, therefore making it an in-app purchase.

Besides the ever-popular subscription and freemium models, in-app purchases are most commonly used in free mobile games to buy digital money. This enhances the user experience by purchasing extra lives, additional levels, and purchasing features you wouldn’t otherwise be able to utilize.

It’s a bonus that this monetization method is not very intruding or annoying to the user.

There are 3 main types of in-app purchases:

Consumable: are items that are used one time, mostly in games. Example: digital currencies or points.

Non-consumable: are features that are used permanently. Example: adblocking.

Subscriptions: allow users to access premium content or features as long as they pay for the monthly or yearly subscription. (This was described in detail earlier in the article.)

The app must be secure with in-app purchases because people are putting their credit card information into it. If there are security breaches, the app will lose a large portion of its user base.

Pros of in-app purchase model: Cons of in-app purchase model:

• Can lead to high development costs due to premium features, etc.
• User expectations are higher when spending money.

The main monetization methods for apps include the subscription model, freemium model, advertising model, affiliate model, and in-app purchases. The next few monetization methods are less common, but still an option.

Sponsorship Model

Once a free mobile app is established with a steady user base, the sponsorship model could be considered a monetization method. The sponsorship model works best with niche-specific apps and an established user base, so sponsors will know that the app’s users will also match their target audience. This also makes it easier to identify potential sponsors.

There are two main types of sponsorship deals:

• Equally divide revenue from the app
• Set a monthly sponsorship fee

An example of the sponsorship model is Home Depot sponsoring an animated background for the Weather Channel app. With inclement weather, it is essential to have your house protected from the elements. Also, many people who work outside or work manual jobs often check the weather and frequent Home Depot for their working supplies.

Pros of the sponsorship model:

Cons of the sponsorship model:

• Have to be an established app with a consistent user base.
• Will have stipulations that the sponsor is requiring.
• May increase development costs.
• Can be challenging to find a sponsor even as an established mobile app.

Crowdfunding Model

This method is a relatively new way to monetize an app for free, and it’s not for every app. There are platforms developers can use to raise funds for app development and marketing.

There are four main types of crowdfunding:

Reward-based crowdfunding: In return for their money, backers will get some sort of reward. For example, maybe the backer will get free premium subscription for life. Platforms: Kickstarter, Patreon, and Indiegogo.

Donation-based crowdfunding: Just like the name suggests, these are donations for the good of the app. Donators do it for the cause rather than a return. Platforms: GoFundMe.

Equity-based crowdfunding: The backers for this type of crowdfunding will receive equity in the company. Platforms: Republic, Seedinvest, Crowdcue, and Wefunder.

Lending-based crowdfunding: This crowdfunding is where people get loans from the public instead of banks in return for interest. Platform: LendingClub.

Pros of crowdfunding: Cons of crowdfunding:

• Most often, you’ll have to give backers something in return.
• Can be challenging to find crowdfunding depending on the app.

App Merchandise and E-Commerce

The e-commerce industry is booming, and there’s an opportunity to capitalize on that with app merchandise. To monetize with this method, the app and brand must be established for enough users to buy physical products.

A great example is the Angry Birds app. First, it developed its user base and then once established, it capitalized on its popularity by selling Angry Birds merchandise both in stores and online.

Pros of app merchandise and e-commerce: Cons of app merchandise and e-commerce:

Email Marketing Model

With more users comes more money. Email marketing can help generate more users for the app, which in turn generates more revenue. This model is easy for any industry to participate in, and it’s well known. It’s a simple concept: collect user data (typically emails) and send creative marketing emails to peak users’ interest in the product or service. It’s great for announcing new features, rewards, app news, etc.

The best way to collect email addresses is by offering something for free, and the user has to put in their email address to get the offer. The offer could be information related to the app (for a banking app, the free offer could be a pdf for simplifying budgeting) or offering a free week of premium.

We don’t suggest buying email addresses. It is spammy, and often it is not your target audience. Regardless of your strategy for receiving email addresses, make sure to use appropriate standards of asking permission and stating the purpose of using personal user data. And if you have any users in Europe, make sure you are compliant with the General Data Protection Policy (GDPR).

Pros of email marketing model: Cons of email marketing model:

Collecting and Selling Data

A less glamorous sounding way of making money, but it is an option for monetizing a free app. Most apps collect user data in terms of app usage and user behavior, helping guide researchers in different industries.

The data is collected and then sold to researchers for a handsome profit. The data also typically contains users’ email addresses, social media accounts, and personal preferences. So for users’ this isn’t the most attractive monetization method; however, most users agree to let the app use the data as they please when they sign up for the app.

Pros of collecting and selling data:

• It is a “behind the scenes” monetization method, so the user isn’t bothered while using the mobile app.
• Most apps collect data, so it isn’t out of the blue for apps to capitalize on selling data.

Cons of collecting and selling data:

• It can be seen as unattractive to sell the app users’ information.
• There needs to be an established user base to collect enough data to sell.

3 Tips for Choosing the Best App Monetization Model(s)

Analyze your competitors

Sometimes the best thing you can do for your app is to sit back, observe, and learn. Download your competitor’s apps and find out what they are doing well and where they are lacking. If an ad keeps popping up and annoying you, there’s a good chance it’s also annoying their users. What different monetization strategies can you identify? Can you improve upon them? Do you see loopholes where there’s a monetization opportunity they are missing that you can capitalize on?

Know your target audience

Any good business model starts with having a solid understanding of who your target audience is. That’s who you are building your app for, and they are also going to determine which monetization model(s) you decide to go with. Who are they, and what do they need? How much are they willing to pay?

Stay true to your app

Just because you think the subscription model is the easiest to implement doesn’t mean that it’s right for your app. When is the last time you heard of someone paying a subscription for a gaming app? If you want to try something new, try and look for case studies showing it did work or examples of failure that you could maybe learn from. But when in doubt, don’t overthink it and keep your app function top of mind.

Here’s a great article with 6 case studies of some of the most successful apps ever, including WhatsApp, Google Maps, Candy Crush Saga, Slack, Pandora, and Pinterest.

Summary

There are many app monetization strategies to consider, with the most popular being the subscription model, freemium model, and advertising model. Some models work better for specific industries, but overall they all have their benefits and drawbacks. It is so important to remember to keep it simple and not to overwhelm your app. No user enjoys using an app that is littered with ads. Consider which options could work for your app and then logistically think through the user experience. Ultimately it must work for both parties.

Originally published at https://www.vivus.tech.