Originally published at thinktank.personagraph.com.

All app developers want their app to be a success. Most people measure success by the amount of revenue or profit an app makes. Although this doesn't reflect everyone’s opinion about success, it is a very important part of building an app, especially when you’d like to make a living of it. At Personagraph, our mission is to help developers understand their users so they can make their app better. If you are in it for the money, we advise you to look at your app as a business and a brand.

It pays off to consider the different ways to monetize your (future) app. In recent years, people have come up with smart business models that rake in considerable revenue. Developer Economics performed several surveys to uncover which business model was most profitable for app publishers. We’ll discuss them here from most to least profitable. However keep in mind that different app categories can have different optimal business models.

1. E-Commerce (M-commerce)

With players such as Amazon, Target, Groupon and Walgreen it’s not surprising that mobile e-commerce apps generate the most revenue in the app industry. Reports say that this sector will continue to grow because consumers are increasingly adopting this way of shopping. If you’re considering this business model, you need to take into account the back-end processes that are needed to operate. There are two ways you can approach it: you can have physical inventory and sell your own collection of goods and services (e.g. Target) or you can have virtual inventory and sell others’ inventory (e.g. Amazon). The latter is considerably less risky and can provide you with a much broader offer, however profit margins are minimal and it is hard to differentiate from competitors. Also important to keep in mind: research company Forrester predicts that tablets will be the mobile device of choice forconsumers to shop online with.

2. Royalties and licensing

This business model is a “high risk, high reward” game. The most common way to receive royalties is to offer your app to a device manufacturer like Samsung, HTC and Motorola and have them pre-install it on their devices (note that Apple does not do this). For every device that is activated they will make you a pre-agreed upon royalty payment. Alternatively, you can license out your app to one of these players so they can use it under their own name. Licensing can be based on the number of devices, time period or a combination thereof. This business model is unusual for startup apps. It takes a good reputation, good connections and a great amount of time and money to close these deals. Established apps are therefore more likely to engage in these sort of practices. Famous examples are Flipboard, Zynga, Polaris and TripAdvisor.

3. Contract work

Contract work is a developer’s safest bet. Studies show that, on average, developing software and apps on commission gives developers a comfortable monthly income. Customers place orders for their desired apps and will lay out the essential requirements. You bill the customer on an hourly basis until the project is finished. Make sure to agree on milestones and rewards for these beforehand. As a freelancer you can make significantly more money than you do as a permanent employee of a company. The catch is that you need to be able to handle the stress of irregular income since orders vary over time. Also, since you can never sell more than 24 developing hours a day the upside potential is limited. This can be be avoided when you start a studio and hire employees but this will increase your financial risk as well.

4. Developer services

In today’s age where software is an booming business there is an unprecedented demand for supporting material and services. Several niche services arose and grew up to be full blown industries. SaaS, BaaS, PaaS, etc. popped up like mushrooms to facilitate the growing needs of developers. Since it doesn't look like the (mobile) software industry’s growth spurt is slowing down, providing services for developers is like selling pickaxes during goldrush. What’s essential for succeeding here is first to know what this “pickaxe” is and subsequently be able to build and provide this tool.

5. Subscriptions

Subscriptions based revenue models are especially suitable for tablet and big screen smartphone owners. There are several examples of apps that provide music, movies, books, newspapers, magazines and more to its paying members. For a fixed amount per month or year users can consume all the media they like. As with m-commerce, the back-end of this business model involves great efforts and often needs a big budget if you produce your own content. Offering 3rd party content can only provide low margins. Also, the music and movie industries are especially characterized by strict copyright rules which makes closing licensing deals with content producers a time and money consuming task. From the past we learn that success lies in crowdsourcing. Youtube, Vine, Soundcloud and others, although they were not “mobile first”, grew to be huge successes.

6. Affiliate and CPI services

Cost per install ads have skyrocketed in popularity over the last few years. Over 59% of Facebook’s ad revenues are derived from mobile ads and estimates are that a significant portion of that comes from app install ads, which they only started offering during the fall of 2012. Needless to say, app install ads are big business. Mobile ad networks allow apps to serve app install ads as well which can provide a significant revenue for app publishers. App install ads are considerably more profitable than other types of in-app advertising. If your app can get an app install ad noticed by the right target audience, advertisers (dominantly game apps) are willing to pay a relatively large amount per install. They are able to pay more than regular advertisers because they can calculate exactly how much revenue an acquired user will provide. Several ad networks offer this ad format but you need to keep in mind how you will serve the ad to your users. There are several methods but suitability varies with app categories.

7. Freemium

The freemium business model has become widely popular among app publishers. A pure freemium model means that a user can download a stripped version of the app for free and then needs to pay to unlock the premium features or remove its ads. Usually these versions go under the names of “free” and “pro”, respectively. By using this “foot in the door” tactic, developers hope that users will enjoy using the app which will make the barrier to actually spend money on the pro version lower. Utility apps are particularly suitable for this revenue model. They usually fulfill a pressing need or offer real solutions to everyday problems a (professional) user might have which forms a strong argument to buy a pro version. In contrast to in app-purchases which usually ask for 99 cents at a time, pro versions of premium apps can easily cost $90.

8. In-app purchases

Apps that are monetized through in-app purchases operate similarly as freemium apps. The key difference is that with this model users can buy new virtual goods over and over again. Games especially seem to do well with this system in place. Just look at games like Candy Crush, Clash of Titans, FarmVille, and many others which make millions of dollars in revenues. Both freemium as in-app purchases have significant risks of not performing well enough to provide the developer with a comfortable income. However, apps that offer in-app purchases have enormous upside potential if you manage to make them into viral hit apps. This model represent the American Dream in the app industry in that any developer can make it to the top. You don’t need a lot of money to build an addicting app nor do you need to have the right connections to create its content. You are in total control. However, just like so many people chase the American Dream in vain, many of these apps only barely provide enough revenue to survive.

9. In-app ads

Apps that show regular ads (in contrast to app install ads) are among the lowest performing business models. The essential problem is that an app that relies on advertising revenue often needs to sell millions of impressions to make it an undertaking worthwhile. That is because the CPM (cost per thousand impressions) is often very low for these types of ads. Especially banner ads perform poorly, providing little value to both the publishers as the advertiser. Ad networks play a fundamental part in this business model since they provide you with ad supply. Choosing the right ad formats in combination with the right ad network means the difference between life and death for your app.

10. Paid downloads

Apps that ask money upfront have gradually become less and less fashionable in the app markets. They do still exist in big numbers (although that seems inevitable considering the total amount of existing apps) and are often produced by established app developers. Dominant categories are games and utility apps. Games giant Electronic Arts publish a variety of games this way which means that it’s definitely still a viable model. However, they have a huge advantage of an existing portfolio of highly popular games (brands) on other platforms.

Apps for enterprises

Although some of the business models described here are on a B2B basis, developing apps and software specifically for businesses is a different ballgame and is therefore excluded from the list. Targeting this segment can mean winning the jackpot. There are many companies and institutions that are more than interested in finding new ways to increase productivity and streamline processes. There is a trend visible that an increasing amount of enterprises adopt the “Bring Your Own Device” policy. Employees with a variety of devices are in constant need of communicating with each other, accessing company resources and much more. Finding an opportunity here might be harder but is definitely worth the try.

Combining business models

Naturally, these various business models do not have to be standalone solutions. There are several combinations possible that can provide a better yield than having a single revenue stream. A bit of research of what has been done before can give you inspiration on designing a model that is perfectly tailored for your app. Creativity can come in many forms and an original and a brainy business model is one of them.

Whatever model you decide to implement, make sure to keep reevaluating its performance and adapting it. The app industry is a fast moving environment and standing still means falling behind. Personagraph provides you the means to gain deep insights that are needed to monitor how your app is performing.