By Olga Orda
Most organizations are not just building apps for fun. Building apps is a business and there are a number of options to monetize your mobile app, but deciding which option is best for your brand and your business is not easy.
This post guides you through some of the key aspects to consider before launching your app.
From the start, it is vital to be clear about your app’s business model and have proof that your customers will be willing to pay to solve the problem that you have singled out. Validating the idea behind your solution is critical to ensure that your time and investment is well spent and the app you have in mind is worthwhile to develop.
Validation can take place in the form of unbiased conversations with real customers, a landing page that requires pre-payment from potential customers, a very large fan base on social media and a number of other methods.
I previously wrote a post on how to identify which one of the four most popular app business models is best for your business – and the potential upsides and downsides of each monetization model – in “Three Great App Models – Which Type of App is Right For Your Brand?”
There are four main models to consider, including:
1. Transaction-Based Model
2. Advertising Model
3. Freemium Model
4. One Time Paid Model
Here is what you need to know about each app business model:
1. Transaction Based Model
This type of app business model is best suited if your app is based on a booking or ordering service for everyday utility products or services in ‘essential’ sectors such as food, medical, finance, transportation and other ‘everyday necessities’ industries.
Here is an example of why: your customer is out on the town and remembers that she will run out of contact lenses next week. She doesn’t want to go through the hassle of getting in touch with the receptionist at the optometrist’s office (e.g. phone tag). She decides to Google contact lenses in her city and comes across your site – which also happens to have an app – she downloads the app, enters her prescription and mailing address and fulfills her order. Her contacts will now arrive in the mail in a few days. Her information will be saved, making subsequent reorders as easy as a click of a button.
Other examples of companies that would benefit from transaction-based models include restaurants (e.g. takeout orders) and taxis (e.g. Uber).
Apps that allow your customers to buy things that are everyday necessities and that need to be purchased on a regular basis will find your app highly useful and will keep coming back to it. In return and if your app is developed right, you will benefit from repeat purchases and long customer life cycles.
The key here is necessity and products or services that customer are used to ordering or booking on a regular basis in real life (e.g. over the phone, via email). The fact that your mobile app will make the process even easier will be an added bonus and encourage customers to come back to your app – resulting in more transactions for your business.
2. Advertising Model
This type of app is best suited for ‘public’ essential services or utilities. Unlike transaction-based models, public services and utility apps are often broader and less commercial in their purpose. Examples of essential services or utilities include newspapers, weather, household energy consumption monitors and even notes (e.g. Evernote).
Advertising on mobile apps need not be looked down upon. In fact, 80% percent of consumers claim that they do not mind ads within their apps as long as they can receive free content and access to essential information. In return, you company can benefit from advertising revenue.
Many apps use this model of monetization. For example, Sleep Easily Meditations by Shazzie costs no money to download and runs non-intrusive advertisements for as long as the app is in use. This app receives over 300 downloads every day and it runs for over 20 minutes every time it is used.
You can profit from an advertising based model if your app is used on a frequent basis and there is (or will be) a large number of users who download from you. If your app does not meet both of these criteria, consider carefully whether it is worth giving your app away for free and relying solely on advertising revenue.
3. Freemium Model
This is the ‘mothership’ of all app models and for a good reason: according to Distimo’s report, in-app revenue from free apps brought in the most revenue at 71 percent with paid revenues following at 24 percent and in-app revenues from paid apps at 5 percent. If that is not convincing enough, freemium apps generate 69 percent of the worldwide iOS app revenue and 75 percent of global Android app revenues, according to a study by App Annie.
However, truly nailing the freemium model and making revenue from it is another story. I like to call the freemium model the ‘addictive’ mobile app model. The idea is to offer a free basic version of your app to consumers to get a quick buy-in with the least resistance and let users buy additional features for a fixed price or a monthly subscription once they are hooked and find value in your app.
A freemium app or game is offered free-of-charge to the user with limited features, content or virtual goods. Examples include Audi’s A4 Driving Challenge, which has least 3.5 million users and allows car enthusiasts to enjoy steering virtual cars (by tilting the phone like a steering wheel) and race against their own best times. Pandora Radio is another great example and it offers additional content, updated every month for a subscription fee.
Your business can offer premium or additional content or offer basic features for free that require the user to pay to use the complete functionality of the application. If you are a leader in your sector and offer a service that gets users ‘hooked’ (read: potential for viral adoption) through the need for more data, time or even entertainment, you are lucky: the freemium model may be right for you.
However, the freemium model comes with its own risks. In a Wall Street Journal article, Vineet Kumar, a professor at Harvard Business School, shares that:
The problem is, it’s not always obvious what features should be free and which should be paid…[And] offering too many features in the free version risks “cannibalizing your paid customers,” while not offering enough might generate little interest all around.
4. One-Time Paid Model
I mention this model last because, until recently, many brands typically only thought of selling their app for a one-time fee. Today, one-time paid apps account for a mere 5 percent of all app revenue according to Distimo’s report. In this model, users pay just once to download the app. Updates and feature additions are expected to be free.
If you want to launch a one-time paid app, it should be compelling enough for users to pay to download even without first sampling it. Also, as there is no repeat revenue from your existing customers, you market for a one-time paid app has to be very large and interested in your product. This model typically also requires a very smart marketing strategy.
So how do you determine whether your app should be a paid one? Most paid apps offer the core value in the first download, followed by minor additions or design and usability enhancements. Great examples of a paid app ($2.99) includes the AnyPaintColor by MyPerfectColor, which is similar to BEHR’s Colour Smart app. It is a very useful utility because it contains color matches of over 130,000 paint colors from over 100 paint brands including Benjamin Moore, Sherwin-Williams, Behr, Martha Stewart, Ralph Lauren and others. It allows users to search and browse colors, match colors from photos and buy paint online.
Ready to find out in more depth what app model is right for your business? Get in touch with us.
Infinium Systems is an award-winning web and mobile app development company based in Vancouver, BC. We create high performance web and mobile apps for organizations that are making life better.