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App Monetization: Choosing Between Free and Paid Apps

December 22, 2015 Written by Maria Shestakova, Digital Marketer
In 2008, over 50% of applications were paid ones. With the introduction of new smartphones and Android programs, the market has seen dramatic changes, and now 90% of all mobile applications are downloaded for free. While most developers adopt various app monetization strategies and models to generate revenue from free mobile software, some vendors stick to paid applications. Which solution is best for your business?

Defining your mobile app strategy

If you want to release a commercial mobile application, A/B testing is a great variant to see which version of your soft (free or paid) does better. MVP is also a good way to start. But these are ideal scenarios. Let's take a look at the real life.

Important things to consider choosing monetization model include:

  • Competition. In 2015, mobile applications were downloaded 179 billion times worldwide, with free apps generating 93% of the total amount. Companies that distribute software for free benefit from in-app mobile advertising, purchases and upgrades. The rivalry between these programs is tough: a newly launched application from an unknown publisher brings less than $ 500 per month. In order to dominate free app charts, you have to gain at least 75 thousand downloads per day. Vendors who come up with a unique and truly helpful solution like Evernote or an alarm clock that monitors sleep patterns (Sleep Cycle alarm clock) are destined for success;
  • Leads’ quality. The parameter shows whether a customer who downloaded an application will take advantage of your paid services (including upgrades and subscription). For non-paid applications, the quality of leads is usually low, since mobile software may miss your target audience (people just give it a try and abandon later). For example, only 3% of Freemium SaaS-app users actually convert;
  • Focus platform. According to Flurry Analytics, Android users are less likely to pay for content and extra services than iOS adepts. In fact, the price for an average Android application is only $ 0.06, while the corresponding figure for iOS software is $ 0.19. In 2013, the number of downloads on Google Play reached 50 billion (98% of those applications were free), while the store’s total revenue amounted for $ 1.3 billion (compared to $ 10 billion generated by iOS apps, 85% of which are free). It basically means that most Android-lovers just skip advertising & and remain free users forever.
App monetization stats

App monetization models

Paid mobile apps

With paid applications, vendors make profit from every download. However, 90% of newly launched commercial apps struggle to sell more than 500 downloads a day. Taking into account that 60% of paid applications fall into the $ 0.99 category, your revenue won’t be stunning. By the way, stores get approximately 30% from each payment you receive. What can be done to improve the situation?

There are several factors that influence an app’s commercial performance:

  • Real value of your product. Despite the general shift towards free applications, some programs (healthcare, business, weather, lifestyle and productivity) still fare well in the paid category. In fact, there are applications that cost up to $ 299.99 and bring stable profit. The Agro app, for example, allows farmers to create reports, draw up invoices and contact suppliers while working in the field. The new version of the app was met with favorable reviews and got over 5 thousand downloads;
  • Publisher’s name. Users aren’t willing to purchase even a $ 0.99 program from an unknown vendor. This issue can be solved through business partnership with an influential company. Back in 2011, the Turbolina team secured support from the Racer X Illustrated motocross magazine and re-launched its Mad Skills Motocross game for iPhone. As a result, the game became the 31st best-selling application on the App Store;
  • Chart presence. In order to crack the App store’s Top 10 download/Top 50 grossing apps chart, you must sell at least 950 downloads a day or generate $ 12 thousand in daily revenues, respectively. The task is hard, yet accomplishable. You can follow the example of Brian Stormont who launched the Tunemark Radio soft in 2010. Initially free, the application managed to gain positive reviews and 500 downloads per day. It was featured in the Radio Apps category on iTunes, and the amount of daily downloads more than doubled. The feat allowed Stormont to transfer Tunemark Radio into the paid category. Despite considerable decline in downloads (about 100 per day), the application started to bring profit and received chart promotion;
  • Overall marketing strategy. You can either contact a company with great expertise in custom mobile application development to conduct a proper marketing survey or try several techniques successfully employed by your rivals. Some vendors, for instance, offer applications for free and sell useful in-app purchases (the Paper program and its stylus). Others provide VIP status to all subscribers, decrease prices and offer fresh content on a regular basis. Remember: having a smoothly running and really useful application is the key success factor.

Making free mobile (or freemium) apps work

Looking for a mobile app commercial strategy? You’ve got three to choose from:

  • Freemium. Users get access to the app’s basic functionality and pay for special features. The freemium model was successfully implemented by the Rovio team (the developing force behind Angry Birds). You can download the game and play it for free. However, vendors charge you for moving to the next level or “juicing up” your bird. Although the popularity of the Angry Birds franchise declined, Rovio Entertainment still managed to generate $ 170.6 million in revenues in 2014. Using the model, you can easily showcase your application and build a solid fan base. Still, you should give customers a strong reason to utilize paid services (extra storage space, new content, enhanced functionality, ect.);
  • In-app advertising. The strategy is fairly simple: you release a free application, collect user data and present it to publishers who utilize your program as a platform for their target links. In 2014, in-app adds performed 11.4 times better than standard banner advertising; as a result, global free application revenue grew by over 70%. You should take the native approach towards advertising, providing rewards for user engagement (in-app currency and prizes) or integrating adds into user environment. In 2011, Microsoft partnered with Ngmoco to place Windows Cloud banner into the GodFinger All-Stars game. During the advertising campaign the Cloud generated over 6.1 million visits (10% of GodFinger players). However, it’s gamers who tolerate in-app adds the most, so you have to carefully analyze your target audience;
  • In-app purchases. The strategy involves selling virtual and physical goods to users. Such mobile software is usually distributed for free; still, some paid programs (for example, Battle Map 2) adopt the hybrid model, charging customers for extra content. In-app purchases should complement the natural environment of your software. The model is perfect for e-commerce brands and allows further expansion (including affiliate programs). If you consider adopting the strategy, it is worth mentioning that both Google Play and App Store charge 30% of all in-app purchases. Also, the stores are likely to restrict in-app payments: in 2014 Apple had to refund $ 32.5 million to consumers whose children made accidental in-app purchases.
According to Gartner, by 2018 less than 0.01% of mobile applications will be financially successful. Some experts, on the other hand, forecast the great comeback of paid programs. When it comes to app marketing and monetization, there are no tried-and-true methods. After all, 20% of app developers drive 80% of Google Play and App Store revenues, and the strategies than work for them might never work for a small company. We do not want to discourage you; on the contrary, bright application ideas must come to life! What we mean is that mobile software development is not an easy task and usually requires assistance from an experienced vendor.

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