4 App Monetization Facts To Know Before You Build

December 30, 2015

For every 10 mobile apps released, five will fail to make their developers more than $500 per month. Among those five, two will fail to generate any revenue whatsoever. That’s just the cold reality of app monetization entering 2016.

Revenue isn’t the only way to measure success, of course. Those bottom-five apps probably contain plenty of utility and creativity. But it’s also safe to assume you’d like your app development process to yield something more significant than a participation trophy.

If that’s the case, then you can’t afford to leave app monetization as an afterthought. On the contrary, it demands attention in your earliest development discussions. And when it’s time to talk, you’d be wise to keep these four trends in mind.

1) Paid Apps Are Dying

The oldest and simplest app monetization method, unfortunately, seems to be on its way out. The developer community is rarely able to reach a consensus, so the fact that free apps continue to outnumber paid apps by a margin of roughly 10:1 should tell you something.

There are a number of factors contributing to this ongoing abandonment of paid app strategies. For starters, three out of four consumers now expect apps to be free, regardless of category. When users do pay for downloads, they’re more resistant to subsequent app charges and advertising — significantly restricting complementary monetization opportunities. Lastly, developers who want their apps listed in major marketplaces can expect to cede approximately 30% of their download revenue to their gracious hosts.

The writing may be on the wall for paid apps, but it hasn’t been etched on the gravestone just yet. For a small minority of developers, charging for downloads may still be a sustainable app monetization strategy. However, its success hinges entirely on the ability to communicate immediate and undeniable value.

Developers pinning their hopes to this approach must be exhaustive in their competitive research, identifying exactly which differentiating features users would pay a premium for without so much as a test drive. And on the backend of the development process, special attention must be directed toward crafting attractive and informative app store descriptions, complete with screenshots and demos that convince browsers to become buyers.

2) Ads Are Expected, But Tricky

Despite the recent rise of ad-blocking technologies, advertising remains a primary player in digital economics. Modern consumers understand that access to free online content usually comes with a catch, and they’re increasingly okay with this arrangement. More than 70% now expect free mobile content to contain some form of advertising, while just 3% pay for ad-free app experiences.

From a developer perspective, advertising remains the dominant app monetization model. However, this popularity does not necessarily translate to stronger payouts. While 46% of mobile app developers do employ advertising in their monetization strategy, only 17% of them generate more than $10,000 a month from this revenue stream. As a result, in-app advertising is probably best regarded as a supplemental income strategy that needs to be used in concert with more sophisticated monetization models for those hoping to hit it big.

Design will also dictate how profitable your in-app advertising can be. Simply splashing banners across the top of your app screens isn’t going to generate the kind of returns you’re looking for — no matter how good the targeting. Ads need to feel like a native part of the app experience to win consistent user engagement.

This is easier said than done, but planning for ad integration from your very first wireframes will surely place you at an aesthetic advantage. You can also look to gaming apps for inspiration on creative ways of embedding ads into the app’s functionality. For example, users who watch a full video ad can be rewarded with “currencies” (points, lives, unlocked skills, etc.) that directly enhance their app experience. It’s all a matter of determining which currencies your specific audience will respond to and transforming advertising into a mutually rewarding activity.

3) IAPs Are Taking Over

So if paid downloads are a long shot, and most advertising strategies only provide a modest income, which app monetization model will get you the biggest bang for your buck? All signs point to in-app purchases (IAPs).

Apple was the first to capitalize on this trend, rolling out a single, simple IAP protocol that clearly resonated with iOS users. Between 2012 and 2013, IAPs were responsible for nearly 80% of iOS developer revenues. The transaction authorization process was so user-friendly, in fact, that it would later land Apple in hot water with the FTC.

Android and Windows Phone developers have not enjoyed the same financial success as iOS developers to date, but Google and Microsoft are certainly working to close the gap on Apple in this valuable corner of the mobile marketplace. As a result, market forecasters are expecting global IAP revenues to rise from roughly $14 billion in 2015 to nearly $37 billion in 2017.

4) IAPs Come In More Flavors Than You Think

As with most emerging tech terminology, a consistent definition of IAPs has been hard to come by. Most associate the practice with mobile gamers purchasing upgraded gear before heading onto the virtual battlefield or buying additional hints to solve a challenging word puzzle. But in reality, this app monetization method can be extended to almost any vertical.

Business and productivity app developers can incorporate IAPs into a freemium business model, where users download a basic version of an app for free before paying to unlock advanced features as they see fit. Media app developers can incorporate IAPs into a subscription-based business model, where users can read, watch and listen to unlimited or exclusive content by paying a fixed or recurring premium. And any app developer incorporating advertising into their monetization model can also consider offering an ad-free experience as an IAP.

The other — and often most lucrative — end of the IAP spectrum involves the sale of physical goods. The most common play involves retailers using their mobile apps, in part or entirely, as an eCommerce storefront. But you don’t necessarily need to manufacture your own goods to cash in on the rise of mCommerce. App developers of all stripes can explore affiliate programs in which products that complement their brand experience are advertised as IAPs. A transit app developer, for example, could promote tourism guides published by a network of local partners. Alternatively, a sports fan community app could embed offers from a live event ticketing partner.

Regardless of whether your IAP takes the form of a digital perk or tangible product, it needs to communicate clear value. Even the best traditional ad placements may still be viewed as a distraction, whereas IAPs that retain direct relevance to the user’s intentions and deliver immediate enhancements to their app experience have a significantly stronger chance of cultivating bankable business relationships.

So before you dig into any further into development, consider this question first: Which premium features, privileges or products could elevate your users’ initial app experience?