How To Choose A Profitable App Business Model
Your app’s business model is its most integral part, especially when it comes to your app’s profitability, viability and ultimately: the money you make as an indie app developer.
But which app business model is best for your app?
In this article, you’re going to take a look at the 5 most common app business models, and their pros and cons. We’ll discuss how you can pick an app business model that results in the most revenue, for the least amount of work. When you’ve finished reading this post, you’re ready to move forward with your business model of choice.
Ready? Let’s go.
The App Business Models That DON’T Work…
Before we take a look at these app business models, let’s first figure out what a “good” business model is. You want to keep your app business model as simple as possible, while maximizing it’s effectiveness.
As an indie app developer:
- You don’t always have a large userbase to rely on. In other words: business models that require a large amount of users or app installs won’t work.
- You may not have network relations and partners to rely on. It takes time to build the relations for native advertising or sponsorships, so although that’s a good business model, it’s not viable in the short-term.
- Especially when you’re building a new app business, you want a business model you can tweak and optimize. Once you figure out a model isn’t working, you need to be able to change.
You don’t have a working business model either, so there’s no money coming in. That excludes app business models that require a significant amount of capital upfront. You won’t be able to generate revenue by spending money on Facebook ads or Search ads, but don’t discount that tactic just yet: it will work after you’ve picked a profitable app business model.
Oops! That’s a whole lot of things you don’t have. Is that bad? No – it’s a good thing! Constraints like the ones above force you to think creatively. And on the flipside: you’ve just eliminated a whole lot of business models you don’t even have to try!
The Most Revenue, For The Least Effort
The one thing you have as an indie app developer is time. You have the time to build features in your app that are worth money, and the time to try out different business models. As an underdog, with an app that has a small amount of installs, you’re forced to maximize the revenue from each and every user.
You can define an optimal app business model like this:
- It doesn’t require a lot of users
- It doesn’t require any upfront capital
- It doesn’t require an extended network of partners
- Runs profitably with a small amount of users
- Capitalizes on the one resource you have: time
So, what are app business models that fit this list?
“Addictive” Virtual Goods with In-App Purchases
Building an app like FarmVille and earning money whenever someone’s farm needs an upgrade is a dream for indie app developers. Likewise, creating an addictive arcade game and having users play for free, but pay to win, is an excellent business model.
The biggest downside of selling virtual goods is that you need a large amount of users. The only way to get a steady stream of users is to use advertising, like Facebook Ads or Search Ads. Those ads cost money, sometimes as much as $4 USD per app install.
That’s not necessarily a bad thing! When you know you can make $5 USD on average per app install, you’d gladly pay the $4. After all, you’re left with $1 in profit.
The problem is: how do you know what one user is worth? That’s hard to figure out, especially when you’re new to developing indie apps, or when your app is new in the App Store.
If you’re still determined to pick Virtual Goods as an app business model, this is what you can do:
- Create a simple arcade game with just one quantifiable “product”, like more levels, more upgrades, more puzzles, more farms, or a greater chance to win
- Make the game addictive and funnel the reward system into the game towards the product, i.e. when you win you feel good, so if you can keep playing, you keep feeling good, thus you pay gladly for more levels, so you can keep playing
- Avoid complicating the In-App Purchases with elaborate products, keep it at one IAP, for one price, of which it’s perfectly clear what reward the user is purchasing
If you have a productivity or cloud-based app, resist the temptation to charge users for items in your app, like to-do’s. Such items don’t offer an intrinsic rewards, they’re “cost centers” instead of “reward centers”. It’s much easier to let users purchase a subscription or “Pro upgrade” if they want to keep using your app.
Take-away for indie app developers? Selling virtual goods is a perfect model for games, especially if you can hook users with addictive rewards (which is hard!)
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Boring But Proven: Free and Paid Apps
The easiest of all app business models is the free vs. paid app. There isn’t much to explain: a free app is free, and effectively doesn’t generate revenue. To install a paid app you need to pay a small amount upfront.
So how does a free app make money? The fact that it’s free doesn’t mean it’s not generate revenue, it simply means the revenue is earned in a different way than charging for the app.
A free app can make revenue with:
- Advertising, sponsorships and native ads
- Selling virtual goods with In-App Purchases
- Letting users upgrade the app with paid features
Charging users upfront for your paid app has a lot of downsides. New users unfortunately can’t try out your app, so they have to take a leap of faith when paying for your app. New paid apps typically see an install rate that’s 90% lower than free apps, simply because users would rather try out a free app than a paid one.
Generally, paid apps work better if you have a well-established brand outside the App Store. This builds trust, and when users trust your brand, they’re more inclined to give you the benefit of the doubt.
Quick note: never publish two versions of the same app, one free app and one paid “Pro” app. It only has disadvantages: you have to maintain and rank two separate apps, and before you can upgrade a user from the free version to the paid version they have to install a second app, migrate their data, and delete the old one. It’s easier to offer an In-App Purchase for the paid “Pro” version.
Take-away for indie app developers? Don’t charge upfront for your app, unless you have enough app installs to justify the 90% install rate penalty.
125.000+ MAUs: Advertising, Sponsorships and Native Ads
With very few exceptions, the advertising app business model is only viable when you have a large amount of users. Reports vary, but the average Revenue Per 1000 Impressions (RPM) on Google’s AdMob advertising network lies between $0.20 USD and $4.00 USD.
Let’s say you get $1 per 1000 ad impressions, so when a thousand users see that advertisement, you earn one dollar. Hypothetically, a user opens your app 4 times a month and is exposed to 2 different ads.
In order to earn $1000 USD from that app, you need one million ad impressions, or 125.000 monthly active users (MAUs, 1000 * 1000 / 8). That’s a lot of app installs…
What about sponsorships and native advertisements?
A quick refresher: revenue from sponsorships comes from companies that are willing to “sponsor” your app. You could for instance offer sponsorships of issues in your app, like you would do in a newsletter or magazine.
Native advertising is similar, but different. A “native” advertisement is exactly the same as ordinary content in your app, but then it’s paid for by a company. Say you have a magazine app for cat owners and they read content about cats. A native ad could be an article about cat food, sponsored by a cat food company, or an article about the benefits of cat insurance, from an insurer. The content is valuable for the users of your app, and it generally doesn’t disturb the in-app experience (like typical ads do).
To make sponsoring and native ads work, you generally need a specific niche for your app. Logically, the sponsor or native ad needs to fit in this niche. It doesn’t make sense to include fashion advice in an app for cat owners…
What’s the revenue you can make from sponsorships and native apps? It depends. I’ve seen paid content for $2.500 USD per article, and newsletter sponsorings for $20 USD per placement per week.
Take-away for indie app developers? Don’t expect ads to work with less than 100.000 MAUs. Only work with sponsoring and native ads in a niche content app.
The Silver Bullet: In-App Upgrades and Subscriptions
My favourite! Build an app and charge users that really like your app. That’s what this app business model is about…
Here’s the low-down:
- In-App Upgrades generally work best for productivity apps or app suites, or apps that clearly have “Pro” features
- You reward users that already like your app by offering an upgrade. Typical users that occasionally use your app can do so for free, but power users that receive more value from your app pay more
- You don’t need a large amount of app installs for it to work, and you can be generate revenue from Day 0
Let’s do the math. A typical app makes $500 in it’s life-time. I know, I know, it’s appalling! (See what I did there?)
If I’m building an app business, I’m looking to make at least $2.000 USD per month from that app. If that’s the only way I can make money, I need the app to be profitable enough to live off of its revenue.
In-App Upgrades come in two flavors:
- Subscriptions, i.e. a $ amount per month or per year
- A one-time fee, i.e. a $ amount that’s only purchased once
Subscriptions work best for “consumables” that aren’t easily quantified. You can charge a user for cloud storage, but you don’t do that by the gigabyte, you simply say: “You can use cloud sync for $10 a month”.
Likewise, if you have an app with a back-end that uses intensive resources, you could charge for those resources. Think about Zapier, or Trello, or Mailgun: in all those tools you use resources, and you pay a flat fee for using them every month.
Back to the calculation. What if you built a productivity to-do list app. You can either:
- Subscription: Offer cloud sync with the web app for $5 a month
- One-off: Or offer a paid upgrade for power users, like “You get 1 project for free, and unlimited projects for $5”
If you want to make $2.000 USD a month, you either need:
- Subscription: $2000 / 5 = 400 paying monthly active users
- One-off: $2000 / 5 = 400 new paying users every month
The calculation gets more complex for the subscription, because you need to figure out how many months the average user keeps paying. The disadvantage of the pay-once upgrade is that you need a fresh batch of users every month.
How many users do you need in total? Not all users will upgrade, and intuitively you’d say that the amount of paid users is smaller than the total amount of users. How many users you need overall depends largely on the funnel you use to upgrade users. Can any user install and use the app for free, or are they forced to upgrade or quit? Is the paid upgrade compelling enough to warrant a purchase?
The math is a bit easier than that: if you need 400 paid users to be profitable, and 1 in 10 users upgrades, you need 4000 users total.
An interesting advantage of this app business model is it’s effect on business validation. If you’re still figuring out whether your app business works, i.e. whether users want to pay for it, you can very quickly try out different price points and features with a small amount of effort. You can also identify and get in touch with users that upgraded (or didn’t). A free, paid or ad-supported app doesn’t have these benefits.
One advantage stands out: you need less users for this app business model to be profitable, and you start generating revenue from your first user.
When you have 20 users, you can start investing that $100 to buy Search Ads to get more users. Provided you have a well-performing ad and an infinite audience, you can earn upwards $1 profit for every $4 spent. Even if you take in account the free vs. paid users, as long as the ratios stay the same, you know what you can spend on ads to make a profit.
Take-away for indie app developers? The In-App Upgrade business model is very effective for productivity apps, and apps with unquantifiable consumable monthly resources like cloud sync. You start earning from your first customer, and you need a smaller userbase to become profitable.
Conclusion: Which Is Best?
Which app business model is best depends on your situation and on your app. Here’s a quick rundown of pros and cons for each business model.
- Free App
- Pro: users are more inclined to try your app, and you have the option to earn revenue in a different way than an upfront purchase
- Con: you don’t earn money immediately, and you run the risk of not earning cash for a large set of users
- Paid App
- Pro: you earn money immediately, and it’s literally as easy as setting a price for your app in the App Store
- Con: users typically install paid apps less than free apps
- Virtual Goods
- Pro: incredible way of making money, provided your app is addictive, rewards winning, and you have a large amount of users
- Con: you need a large amount of users, and an addicting game app
- Ads and Sponsoring
- Pro: ads are fairly easy to install in your app, and you can offer native ads and sponsoring just as easy with content
- Con: you need a large amount of users for your app to be profitable, and you need a partner network to get sponsoring deals
- In-App Upgrades
- Pro: you make money from your first user, you need less users to be profitable, and it’s the most sensible app business model for productivity apps
- Con: it takes a bit of time to figure out a good price point and offer, and you’re only guaranteed a small subset of paying users vs. free users
What kind of app do you have? Are you considering an app business model? Let me know in the comments, below!
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