AppEconomy — How do apps make money?

Pascal Maniraho
May 2, 2017 · 5 min read

Questions similar to: “how do people make money selling apps?” or “How do free apps make money?” are quite familiar to you, if you are tech savvy or a software guy. On the other hand, developers wonder how to “monetize” an “app”. Quick answer: “It depends on your business model”.

Dollar bills yeah! — photo curtesy of unsplash.com and photographer — Vitaly

Business model being a keyword, let’s dig into various options at your disposal. In real life, you make money from a transaction: You sell a merchandise M for a price P to a customer C. To be brief, business model figures out WHO pockets the bill, Your app being your merchandise(product), and customer being a category of individuals craving for your product.

Upfront. The quick, popular but suicidal way to make money out of apps is to sell the app per download. Basically, One download equals One dollar, or 10. This model fails to cover lifetime maintenance costs. You have to figure out how many downloads you need to pay a developer for initial development, and extend that to new maintenance fees. Maintenance includes but not limited to bug fixes, adding new features, customer support, hosting costs, etc. Suicide: download cash flow cannot sustain your app maintenance fees.

Licence. Selling licence is an upgraded version of upfront sale model. Customer buys a licence to use a particular version of your app. Customer will not have access to future versions, unless customer pays extra money. This model used to work well when apps(software) were sold on CD-ROMs. Microsoft products were mainly sold this way. Even if it resolves costs to develop new versions, costs to fix bugs or hosting fees are hardly covered by CD-ROM sales.

Subscription. The subscription model is mainstream in SaaS businesses. Customers subscribe to a service and pay X amount periodically. The period can be a week, a month, a quarter or year depending on how often you want to get paid. Compared to 2 previous models, Subscription model is more viable when it comes to income prediction, covering future iterations and day to day operations. New versions are available to customers as long as they are paying. Operations costs and developer salary play a major role in determining how much you charge. Journals, Streaming services all use this business model. It is possible to charge per seat, time, usage, or flat fee(customer has unlimited number of seats, time and bandwidth).

Freemium. Freemium model speculates that a customer uses(or acquires) your apps for free. You either start charging after x amount of time or You charge the customer to use VIP features. This model may work in conjunction with subscription model, as well as licence model.

Loyalty. The loyalty model distributes the app to a wide range of users for free. It is fair to say that users are not your customers but your merchandise(horrible)! Users get rewarded with loyalty points, You get paid per number of customers you make to your partners. As a quick example, a Movie rating app that rewards 100 movie points every time user check-in at a local movie theatre, and You get paid a commission on sales per check-ins. To keep users engaged, the movie review app can augment experience with in theatre games or announcing theatre offerings: “Tuesdays’ girls night out”, or “Thursdays’ buddies time offers”, You get the picture.

Ads. Selling Ads space in your app may be considered as a variation to loyalty. Except you promise your customers(people who buy Ads spot) the number of eyeballs are going to roll on his ads(content), without a guarantee of users(people who see see that ads) to interact with the ads(buy, subscribe, etc).

Virtual Goods. Selling virtual goods is popular in games. Customers acquire app for free or, depending on how popular/confident your app is, for a fee. To play the game, customers may have access to basic game features, as they progress in ranking, customers may need to “buy things” via “in app purchases”. Things are powers, weapons in tactical games, seeds(FarmVille), land and construction materials(SimCity Social). When users are obsessed, this model can be a winning model, or disaster(based on your perspective). Customers keep buying to perform better, or to have top-notch rankings etc. Obsessive games accentuate gambling problems, and sometimes lead to accidental purchases[1].

PYWW. Pay what you want is basically collecting donation. Happy customers pay what they want. Companies like Wikipedia, Simple Tax(available in Canada only) operates from donations and PYWW model.

Flip. Flip works like flipping a real estate or flipping cars. You purchase an app, revamp it and resell it for a marginal profit. Other app makers gathers gigantic user base and resell to highest bidder before[2].

Exit(Acquisition). The acquisition model is popular for Venture Capital backed app-startups. The app figures out how to attract a niche of massive user base, before it figures out how to make profit! Owner of the app sell the app(gets acquired) to bigger companies in need of new customers, for a stake in a company(stock), cash or both. App owner may stay post acquisition as a part of the deal, or transfer ownership: exit. Whatsapp($19B), Instagram($1B), Beluga(Unkown) are couple of apps acquired by Facebook.

So, “How do apps make money” again? the answer is: It depends. As an app maker, part of your job is to figure out which model suits better your situation. And know if your customers are in “shut up and take my money mood”. At Hoo.gy, as a marketplace, our providers pocket 90%, we take in charge of our credit card processor(2% + 30c), pay servers+developers with reminder. The reminder of the reminder is profit.

Thanks a lot for reading. Your ideas — comments and critiques are welcome. Your support(green heart) will motivate me to go deeper into every model, and share insights from other makers.
Special: We are planning to go mobile this time, be among our founding members. Your email is to communicate you the download link, and nothing more.

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