These days, people are obsessed with the products and services they get free of cost, and mobile apps are no exception. It seems that most apps on the market are free to download and use. According to reports, global free mobile app downloads reached 253.91 billion in 2017. But how do companies that offer free software make money off their products?

How Do Free Apps Make Money

How do you make money from a free app?

Offering an app for free is a smart business decision that can help an app stand out in the crowded mobile app marketplace. But if an app is provided to users for free, how can app creators derive a profit from their investment? In this article, we're going to answer the question "How do free apps make money?" These are some of the best monetization strategies that creators recoup their investments and achieve a reasonable return on investment, or ROI.

In-App Purchases

In-app purchases are typically used within money-making apps. These purchases offer access to additional features or exclusive in-app content. Freemium apps are the most popular method of app monetization in use today with companies and publishers.

The most common types of in-app purchases include consumable and non-consumable products. Users purchase and use consumable products for one-time bonuses, like game currency or timer reductions. Non-consumable products include things like additional functions or the permanent remove of ads from an app. In-app purchases are primarily implemented in gaming apps. For example, in Pokémon Go, users can visit the Touch Shop to buy PokeCoins. In-app purchases allow freemium apps to earn revenue at a faster rate by providing users enhanced gaming experiences.

In-App Advertising

A major revenue driver for free and freemium apps in-app ads allows app publishers to advertise affiliate’s products and pays differently for different ad formats click-throughs, impressions, and which countries the users are from. There are different ad networks such as Google's AdMob and Millennial Media that offer a variety of ad models and ad format for monetizing free apps. These ad formats come in different size variety of sizes, positions, and placements in mobile apps. The best ad formats commonly used to monetize free apps are:

  • Interstitial Ads

    These are the ads that displayed in full pop-ups at specific time frames. They can be closed by opening the promoted page or by a close button in the ad corner. Interstitial ads are commonly implemented for messaging and content apps, news, and for games before or after an expected content or functionality to achieve maximum impression.

  • Banner Ads

    Mostly displayed on the top or bottom part of the app screen without obstructing users from interacting with the app content. These ads can be programmed for target users based on demographics and past behaviors.

  • Video Ads

    Video ads also known as Rewarded Video ads tend to be more worth than static ads. Video ads are displayed when the app is running or after some intervals. With this ad format, the publisher can provide in-app rewards allowing users to receive app currency, coins, and extra lives in exchange for watching the video ad.

  • Native Ads

    With its less irritating and intrusive nature, Native ads are considered to be the most popular revenue stream for app publishers. These kinds of ads are made to fit within the app as its natural element. Native ads are mostly in the form of content or video, aimed to promote a product.

How Do You Make Money From a Free App

Subscription or Paywalls

Subscription is another free app monetization strategy that allows app publishers to sell their app content for a recurring pay instead of one-time cost. This model makes sense for free apps that have regular content updates such as news, cloud services, and audio/video streaming. Many of the subscription-based apps offer a limited number of posts each month and then require payment for further accessing the content. For instance, Netflix, the online video streaming app provides free access for content for the first month and its users have to pay a monthly fee for getting access to additional content through paid subscriptions. The subscriptions are either non-renewing or automatically renewing allowing users to get access some exclusive app content without restriction for a certain period of time.

Freemium

The Freemium app monetization strategy provides the app for free initially, but charges the users for optional features, such as boosts and power-ups, restricted levels, virtual money, and extra characters. It is another popular strategy to make money through apps. This model works to gather and engage app users until they are willing to pay for additional in-app premium features. The freemium model works best for your app if you want mixed revenue from ads and app users, or you have a large user base and long app sessions. There are several ways through which you can implement this strategy including:

  • Limited Capacity

    With this strategy, you can offer users a free version of your app or service up to a specific capacity, such as usage level or the number of concurrent users. In the Dropbox mobile app, for example, users are required to pay if they want to use the app's functions or services beyond their free storage limit.

  • Locked Features

    Here, a free version of your product or service is offered to users with limited functionality. Users have to pay if they want to unlock the full range of features available within the application. For example, with the popular game Angry Birds, Rovio released a free version of the app, keeping certain hidden features and levels, and required payment to upgrade to the full version of the game.

  • Time Trial

    This method offers a free version of the feature or service for a limited time like the standard free trial offers provided with apps like Shopify. Free trials aren't a new pricing innovation by any means, but they are still a sound way for users to experience what your app has to offer without compromise. It can be an effective technique to boost concurrent users while also demonstrating the full range of capabilities of your app.

Sponsorship

Sponsorship is a powerful app monetization strategy that helps top money making apps to generate revenue and expand their potential audience base. In this model, the developers create apps tailored for a specific user group and launch it on behalf of another company, who may be a sponsor or advertiser. They can place brand advertisements or sponsorships within the provider’s application, targeting similar or the same audiences for both parties. The developer finds a sponsor company and offers to update the design of their app to match the sponsor’s brand.

Lucrative for developers, this strategy allows developers to generate revenue through a few numbers of agreements, such as an agreed revenue split that is generated by the app or monthly sponsorship fee, which is paid by the funder for app maintenance or use. The best example of this strategy is Home Depot sponsorship on the Weather Channel app, where an animated app background behind the temperature measurement is an ad placed by Home Depot targeting homeowners interested in weatherproofing their homes. With the right business relationships and sponsorships in place, these kinds of apps are excellent ways of providing sustainable income through mobile applications.

Incentivized Advertising

Incentivized advertising is a fairly a new app monetization strategy which has become popular in mobile games, sports and fitness apps. Here, users are often served with video or text ads promoting a certain brand, service or business. If the user accomplishes a particular objective, they will be rewarded with a special boost or extra in-game credit or discount and gifts previously agreed with other companies that pay the application for appearing in it.

An example of this model is the RunKeeper26 app, where it motivates its users to track their running activity in-app by offering rewards and prizes upon completion. These exclusive rewards and promotions come from advertisers and marketing firms. The app earns money from the sponsored advertisements, and the advertisers or marketing firms get impressions, click-throughs and conversions.

Mobile Commerce App Advertising

Physical Purchase or Mobile Commerce

This model allows businesses to sell physical goods through their app, where the app is free to download and acts as a portal for users to discover and purchase products. Many ecommerce businesses release free apps for selling physical goods or branded merchandise: toys, T-shirts, cell phone cases, etc. For example, Rovio, the company who created the popular mobile game Angry Birds, sells branded T-shirts, backpacks, stickers and plush toys through their app. Another example is Amazon, which enables app developers to earn revenue from their merchandise through its Merch service program.

Affiliate Marketing

Affiliate marketing is an app monetization strategy where businesses can earn a commission through apps by promoting other companies products. Affiliate marketing is somewhat extended far beyond physical products to information, products, software as well as services. All it requires is to find a product you prefer, promote it to your app users through advertising and earn a share of profit for each sale that you make through the app. Amazon is one of the best examples of this model, as their business model heavily relies upon the affiliate marketing. You can promote your affiliate’s product with in-app ads and get paid if your app's users interact with those ads, allowing the client company to gain additional sales from customers that might not have usually been able to reach. This strategy often uses different campaigns that include:

  • Cost Per Click

    In this model you will get paid for each click on the ads displayed on your app.

  • Cost Per View

    This is commonly used in video ads. The more the time your users spend watching the video ads, the more of the payout you receive.

  • Cost Per Install

    With this method, you will get paid from the app users if they install an advertised application.

Launching a Mobile App

Successfully Integrating These Approaches into Your App

Now that you know and understand the various strategies involved with monetizing your mobile application, you'll need to understand how to integrate these methods into your mobile applications.

It helps if you’ve designed your app from the beginning with at least one of these strategies in mind. So, for example, if you’re creating a ecommerce marketplace, you should specify in your app's design document functionality for embedded ads, promoted listings, and affiliate/sponsorship relationships. Because you've planned for these functions to be added into the app before active development begins, you won't have to return to the app's source code alter the application after its launch to add additional monetization methods. This will help your budget in the long run, and reduce feature creep during the app's development.

When it comes to mobile game apps, you'll find that there are many more in-game app monetization strategies available to you. Most pay-to-play games will use two or three methods in order to monetize their playerbase without alienating free users. Increasingly, games are turning to so-called cosmetic items, or items that have no impact on gameplay, to avoid the problem of unfairly balancing games to favor users who spend more money. While subscription models still exist for certain games, game publishers have largely abandoned the model. For your game, make sure to have a firm sense of what your playerbase's expectations are regarding monetization. If you are planning on rolling out a large change with regards to charging for parts of your game, make sure to compensate veteran players through coupons, cosmetic items, or a lump sum of free in-game currency. If you are creating your first mobile app and integrating a monetization strategy you might want to consider working with an experienced mobile app development and design company.

Studying Competitors

Finally, it's important that you have an accurate overview of competing applications and services, and adjust your pricing accordingly. For example, if you want to launch a cloud storage service, but are charging much more than mainstream competitors like Google Drive or Dropbox, you need to offer additional value to your users. If you want to sell a puzzle game with in-game-purchase content packs, but are charging well above what other apps are charging, you may need to reassess your pricing model and development investment.

After reading this guide, you will be fully up to speed when it comes to understanding how to earn money from apps. Whatever the monetization strategy you choose to implement for your app, it should be closely aligned with emerging market trends, your business goals and, above all else, an accessible user experience. Keeping these strategies and tactics in mind while you plan your mobile game or app will help you create apps that make you money.


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