Finding The Most Profitable App Business Models
Finding a profitable app business model is an important part of building your app business. How do you monetize your indie app? It’s a crucial question to ask, because it determines the viability and profitability of your indie app.
In this tutorial, we’ll take a look at the 5 most profitable app business models. We’ll discuss their advantages and drawbacks. We’ll also focus on how you can find an app business model that maximizes 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.
- App Business Models: What Won’t Work?
- Maximize Revenue, Minimize Effort
- Virtual Goods with In-App Purchases
- Free and Paid App Business Model
- Advertising, Sponsorships and Native Ads
- In-App Upgrades and Subscriptions
- Comparing App Business Models
- Further Reading
App Business Models: What Won’t Work?
Before we discuss 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 the revenue it generates.
As an indie app developer…
- You don’t always have a large userbase to rely on. You’ll start out with dozens, or hundreds, of monthly active users. Business models that require tens of thousands of app installs will not work.
- You may not have a network or connections to rely on. Thinking about native advertising or sponsorships as a business model? It takes time to build those connections, so it’s not a viable model in the short-term.
- Especially in the early stages of your new app business, you need a business model that you can tweak and optimize. This flexibility is important as an indie dev, because it allows you to pivot when things don’t work out.
- If you don’t have a business model or revenue right now, no money is coming in. That excludes app business models that require a significant amount of capital upfront, such as acquiring users (at a loss, potentially) with ads.
Oops! That’s a whole lot of things you don’t have.
Is that so bad? NO! It’s a good thing. Constraints like, the ones above, force you to think creatively. And there’s a flipside: you’ve just eliminated a whole lot of business models you don’t even have to try.
Maximize Revenue, Minimize Effort
You’ve got 2 valuable assets as an indie app developer: time and focus.
You have time to build features in your app that are worth charging money. You can apply deliberate focus and effort to finding out what business models work for you. As an underdog you have to be ruthless: you need a business model that maximizes revenue, for minimal effort. This focus is important, going forward.
At this point, this is the definition of an optimal app business model:
- Does not require a lot of users
- Does not require any upfront capital
- Does not require an extended business network
- Runs profitably with a small amount of users
- Only requires time and focus as input
What are app business models that fit this list? Let’s dive in!
Virtual Goods with In-App Purchases
Creating an app like FarmVille is a dream for indie app developers. You earn money whenever someone’s farm needs an upgrade. What about a viral arcade game? It’s free, but you’ve got to pay to win.
You need 2 things to make this business model happen:
- A popular mobile game with plenty of users
- Game mechanics that rely on virtual goods, that can optionally be bought via IAPs
A disadvantage of selling virtual goods is that you need a large amount of users. A smart approach to get a steady stream of users is to use advertising, like Facebook Ads or Search Ads. Those ads cost money, which you can fund with revenue from In-App Purchases.
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, for every $1 you spend you make $1.25 in revenue.
How do you know the Lifetime Value (LTV) of a user? That’s challenging to figure out, especially when your app is new in the App Store.
Still determined to pick Virtual Goods as an app business model? Here’s how to get started:
- Create a simple, fun arcade game with just one quantifiable “product”, like more levels, more upgrades, more puzzles, more farms, or a greater chance to win. The game is free to play for everyone.
- Limit the amount of new levels a user can play, unless they unlock these levels with an In-App Purchase (or wait). Present the user with the In-App Purchase upgrade when the urge to continue is greatest, i.e. after completing a free level.
- Avoid making the In-App Purchases more complicated with elaborate products, tiers or subscriptions for now. Focus on making this work, and then focus on maximizing profit.
Don’t apply this app business model to the wrong app category. 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. Instead, offer a premium subscription or a Pro upgrade.
Take-away for indie app developers? Selling virtual goods is a perfect business model for games, especially if you can hook users with rewards.
Author’s Note: I’m not a fan of this business model – it seems unethical – but unfortunately it works well. Major game publishers use this model to generate revenue beyond the purchase of a game.
Free and Paid App Business Model
It’s simple: a free app is free, and you pay a (small) fee prior to installing a paid app. Free apps, strictly speaking, don’t generate revenue. The prices of paid apps range from $0.99 to $2.99 and upwards.
How does a free app make money? The fact that it’s free – free as in, free lunch – doesn’t mean it’s not generate revenue, it simply means the revenue is earned in a different way than charging for the app install.
A free app can make revenue with:
- Selling other goods and services
- Advertising, sponsorships and native ads
- Virtual goods with In-App Purchases
- Pro upgrade for premium features
Paid apps have a disadvantage. New users cannot try out your app for free, so they’ll have to take a leap of faith when paying for your app. Paid apps typically see an install rate that’s 90% lower than free apps; they simply get less foot traffic.
Since the early days of the App Store, the number of paid apps has declined. And with good reason – it’s smarter to make a free app that has a paid upgrade. People can try out your app with zero risk and you get a chance to convert to become a paid user.
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. Instead, consider making a free app and combine it with a different app business model.
Don’t create a free and a paid “Pro” app. It’s easier to create one app with an In-App Purchase, when you consider ASO and data migration, for example.
Advertising, Sponsorships and Native Ads
The advertising app business model is only viable when you have a large amount of users, with a few exceptions. 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. When a thousand users see that advertisement, you earn one dollar. In this hypothetical example, a user opens your app 4 times a month and sees 2 ads during every session.
If you want to earn $1.000 with that app, you’ll need one million ad impressions or 125.000 monthly active users (MAUs). That’s 1000 × 1000 divided by 8. Your mileage may vary, of course, but you still need a staggering amount of users.
What about sponsorships and native advertisements, as a business model?
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.
Imagine you’ve got 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. The native content is valuable for the reader, and it generally doesn’t disturb the in-app experience like typical ads do.
You can make sponsoring and/or native apps work for you, if your app serves a well-defined, specific niche. You can then find sponsors that are interested in reaching your audience, and set up a collaboration.
How much can you make from sponsorships and native apps? It depends. Pricing ranges from for $2.500 USD per article to $20 USD per placement per week. An advertiser is willing to pay more if they’re more likely to turn a profit, or if they’re guaranteed to increase their brand’s visibility within your niche.
Take-away for indie app developers? Ads aren’t a suitable app business model if you’ve got fewer than 25.000 to 100.000 MAUs. Only work with sponsoring and native ads in a niche content app.
In-App Upgrades and Subscriptions
It’s such a simple but beautiful app business model. Build an app that people enjoy using and charge the users that want more features. That’s what in-app upgrades, subscriptions and Pro upgrades are all about.
Here’s the low-down:
- The IAP/subscription business model generally works best for productivity or prosumer apps; apps that clearly have “Pro” features or power users.
- You reward users that already like your app by offering an upgrade. Regular users who occasionally use your app can do so for free. You generously provide more features to power users.
- You don’t need a large amount of app installs for this to work, and you can generate revenue from Day 0
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 a flat fee for cloud storage. Not by the gigabyte, but you simply say: “You can use cloud sync for $10 a month”.
If you have an app with a resource-intensive back-end platform, you could charge users for those resources. Think about tools like Slack, Zapier or Trello. For each of those tools you pay a flat fee per user per month.
Let’s do the math. Say you’re looking to make at least $2.000 USD a month from your indie app. This is ramen profitable; enough to eat ramen for breakfast, lunch and dinner, and pay rent for a one-bedroom studio. You get the idea…
What does that look like for a to-do list app? You can do either:
- Subscription: Offer cloud sync with the web app for $5 a month
- One-off: Offer a paid upgrade, like “You get 1 trial project for free; unlock unlimited projects for $15”
If you want to make $2.000 USD a month, you either need:
- Subscription: $2.000 / 5 = 400 paying monthly active users
- One-off: $2.000 / 15 = 134 new paying users every month
This back-of-the-napkin calculation is more complicated than that, of course. You also need to figure out how many months an average user stays a customer and what your churn rate is. A disadvantage of the pay-once Pro upgrade is that you need a fresh batch of new users every month.
How many users do you need in total? Not every user will upgrade. Your app’s profitability depends on the effectiveness of your upgrade funnel. Can a user keep using the app for free? Is the paid upgrade compelling enough to warrant a purchase?
The math is simple: if you need 400 paid users to be profitable, and 1 in 10 users upgrades, you need 4.000 users total.
A benefit of the Pro upgrade business model is that it’s easy to try out and validate different upgrades. You’ve got your free app, and a few users, and you can use that as a playground for features and upgrades. You can even present different offers to different users, and compare their effectiveness.
A free, paid or ad-supported app doesn’t have these benefits. And of course, the biggest benefit of the subscription model: you don’t need many users to make it work.
Take-away for indie app developers? The subscription app business model is effective for productivity apps and Pro app features, like cloud sync. You generate revenue from Customer no. 1, and you need a smaller userbase to become profitable.
Comparing App Business Models
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 app business model.
- 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 carrying 90% free users that cost money can be heavy on the bottom line
- Pro: you earn money immediately, and it’s as easy as setting a price for your app in the App Store
- Con: users can’t trial your app; you get less foot traffic
- Pro: incredible way of generating revenue, provided your app is fun, rewards winning and you have a reasonable amount of users
- Con: challenging to get the game mechanics right
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
- Pro: you make money from your first user, you need fewer users to be profitable; best app business model for productivity apps
- Con: it takes time to figure out a good Pro upgrade, and only a percentage of free users upgrades
Awesome! Here’s what we discussed:
- How to find the best business model for your app
- 5 different app business models; their pros and cons
- Why it’s smart to maximize revenue with minimal effort
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