Mobile App Monetization Guide For Startups
All around the world, mobile apps consistently and progressively make it to the daily staple of mobile phone users. With the myriad of options and a rich variety of app categories, mobile app downloads have soared. Just look at the stats according to Statista:
- The year 2020 brought 218 billion app downloads;
- 2021 came with 230 billion;
- 2022 yielded 255 billion;
- And 2023 generated 257 billion app downloads.
A great chance is that whatever you can think of – there is an app for this. Budgeting apps, expense trackers, banking apps, e-commerce shops, food deliveries, transportation, and all the way to gaming and dating. Naturally, brands, marketers, and entrepreneurs rush into the growing mobile app industry to capitalize on the new opportunities.
The chart below shows consumer spending quarterly. The fourth quarter brings in twice as much revenue similar to traditional markets. Consumer spending is growing from year to year. Overall, you can see a healthy stable market totaling 171.3 billion dollars in 2023. Out of this, 89.3 billion dollars belong to the Apple App Store. Google Play generated 47 billion dollars in the same year. Another 35 billion dollars came from other app marketplaces.
The ways mobile apps bring money are varied, and monetization models can be combined. Keep on reading to decide which mobile app monetization models are best for your mobile app startup. (Monetization models are ordered from the most popular to the least popular.)
Table of contents
Fundamentals of Mobile App Monetization
There are different beliefs on what mobile app monetization model will bring the most revenue.
- For example, some believe in versioning whereby you provide a free and a paid version of one app. Advocates of this approach believe that ‘pay per download’ monetization is the most efficient. All the while the free version should exist to drive traffic to the paid version. The opponents of this belief indicate that it cannibalizes sales of the paid app over the app’s lifecycle.
- Other monetization models are in-app purchases and in-app advertising. Users download an app for free and there is an option to buy upgrades or watch ads.
- Next, some offer freemium models and swear by them for their ability to boost sales and tremendously increase app awareness. Within the freemium model, the major decision is whether to make full functionality available for a limited time or basic functionality available without time limitations with a premium upgrade.
How to choose a mobile app monentization model for a startup?
Choosing a mobile app monetization model heavily depends on the app category. If you have an e-commerce app, you won’t charge users to download your store. But if you have an app with meditations, for example, you would want to either have a ‘pay per download’ or a freemium monetization model. If it is a mobile game, you may choose to either let users play for free several levels and then offer to pay to unlock other levels. For content-rich apps, it may make sense to provide content for free but enable in-app advertising and in-app purchases.
When you are a startup, you should heavily rely on analytics tools in the app. It will provide essential knowledge on potential revenues. It will also inform you on the best mobile app monetization models for your startup.
Importantly, you don’t have to choose only one monetization model. For instance, the Duolingo mobile app utilizes several of them.
- The app is available for free, but you watch ads. This makes it an in-app advertising monetization model.
- Duolingo allows you to buy a premium subscription. So it is a freemium model with a subscription.
- Lastly, you can unlock more features or extras. It constitutes an in-app purchases monetization model.
In-App Purchases (IAPs)
When you browse apps on iOS App Store or Google Pay, they are often marked “in-app purchases”. This means you can download an app for free and use it for free, but there are some ‘upgrades’ available to purchase. For instance, the Duolingo app on the iOS App Store, if you scroll down, shows what kind of things are available for which price. On Google Play, this info is available in a separate section called “About this app” and you need to scroll way down. They show only a range of amounts per item available for purchase.
This strategy is by far the most popular and efficient among mobile apps. For startups especially so. Why? Here are several reasons:
- Extras are placed strategically. They are often perceived as money well spent by users because they are designed to elevate user experience. They bring value and increase user satisfaction;
- IAPs offer greater revenue potential. You can design a variety of extras that users will deem useful or enjoyable. Whether it is premium content, extra lives in the game, or ‘tips’ to favorite streamers, the possibilities do not end here. You can design an artifact in a game, or unlock a special feature. It is very imaginative.
- IAPs capitalize well. In marketing, there is a concept of ‘whale’ users. These are those who enjoy their experience with your app a lot and are willing to spend big on IAPs.
- Scalability of earnings. Your app can continuously be filled with new premium content or your developers might come up with new features to unlock.
Dualingo’s Case on IAPs
As an example, here is a chart of Duolingo’s in-app purchases since it was introduced in 2017 till 2023 Q3. In this chart, NALA stands for North and Latin America. This region generates the most revenue, skyrocketing from 0.66 million dollars in Q3 2017 to 48.07 in Q3 2023. The second biggest area is EMEA – Europe, Middle East and Africa. This region grew from 0.32 million dollars to 27.95 million. Finally, APAC – Asia Pacific region – saw a jump from 0.1 to 11.83 million dollars.
In-App Advertising
Your app might be completely free and not involve any financial transactions. However, you can make money by showing external ads within your mobile app. You make money when the user clicks or simply views an ad. But you need to incentivize users to view or click the ads. To achieve this, you can offer some points for a game or again ‘unlock’ some features after watching a certain number of ads. This monetization strategy is still quite popular with over 31% of apps using it worldwide.
However, this monetization model comes with its downsides. Ads can be very disruptive to a user experience and lead to an extremely negative view of the app itself. This is essentially what gave rise to the in-app purchases monetization strategy. In addition, the trend of in-app advertising is falling among the higher-spending consumer base. 31% of apps use in-app advertising worldwide but only 24% of apps use this model in the US.
On the upside, in-app advertising is what pushes the sales of subscriptions that remove ads. So, now to subscriptions.
Freemium: Subscription
There are different statistics on what subscriptions generate in terms of the percentage of app revenue. Some marketers indicate that it is as high as 80%. And as mentioned above, in-app ads are often that motivating factor to subscribe. Also, subscriptions can unlock premium features or content for subscribers only. Subscriptions can be offered to get personalized recommendations in health, mindfulness, and fitness apps, for example.
Spotify is an example of a mobile app that makes the most out of the subscription model. You can download and use Spotify for free. Yet, with a subscription, users can enjoy an ad-free experience, listen to music offline, and have the ability to skip without limit.
When it comes to app stores, apps on Apple App Store generated 6 billion dollars in subscriptions in 2021. In the same year, apps on Google Play brought in 2.5 billion dollars.
One of the most undeniable advantages of subscriptions is their recurring nature. The subscription model greatly benefited from the autorenewal option that started in 2011-2012 on marketplaces. As you saw from the in-app purchases graph, Q4 is often the highest in sales. This indicates the seasonal nature of in-app purchases. In contrast, subscriptions generate income steadily over time.
Freemium: Free Trial
In the free trial variation of the freemium monetization model, users can download and use full functionality of the mobile app for free. But for a limited period of time. It can be 3 days (32% of all mobile apps), 1 week (around 30% of mobile apps), or 1 month. For instance, Audible offers a 1-month free trial.
Why is this strategy good for startups in particular? With any new product, there is this chasm in users’ trust. The message that the free trial sends to the users is that we believe that you will enjoy the quality of our product.
The other huge benefit, especially if you’re building an MVP, is the user’s feedback. Users get to experience full functionality and provide feedback. Compared with other models where users get only basic functionality for free, only with full functionality free trial can you get the valuable feedback you need. It will be instrumental in aligning the product-market fit.
Lastly, free trials have been found more effective in increasing sales compared to versioning (free app and paid app).
The major dilemma with this model lies in asking users’ card details:
- If you ask the user to provide card details during registration, it may increase the entry barrier.
- If you choose to accept email-only registration, then you may get a lot of users who will be creating new and new emails and keep using an app for free.
Paid App Model
Even though most apps are free, there are still paid apps.
- On the Apple App Store, there are almost 2 million free apps and around 90 thousand paid apps.
- On Google Play, there are 3+ million free apps and around 80 thousand paid apps.
With such a prevailing number of free apps, a paid app must have unique or stand-out features to compete. Often, such features are security, offline functionality, and such.
For startups, it can rarely be a good idea. The main barrier is that paid apps might struggle to get any traction. No traction means no feedback. No feedback equals no direction for aligning product-market fit.
But there is always a ‘but’. If your app provides a unique value proposition, the paid app model can work. And also if your target audience is premium users willing to pay. It mostly depends on positioning your app to potential users.
Affiliate Marketing
Affiliate marketing is on the rise within mobile apps. Marketers recognize that 50% of all affiliate marketing deals are coming from browsing on mobile phones and tablets. For startups though, it might not be a starter monetization strategy. To engage in affiliate marketing, you should have some user base and visibility. But once you do, you simply tap into existing affiliate networks. They can be CJ Affiliate, Amazon Associates, or ShareASale.
You promote certain products within your app and earn a commission on each sale. Compared to in-app advertising, you get to choose products that are consistent with your user base. It can also be presented in a less random or disruptive manner than in-app advertising. So, you get less damage to the user experience.
Partnership Model
This model requires having a large user base with knowing specifics about their interests. So, immediately, this cannot be a very effective monetization model for a startup. Once your app has a large user base, you as an app owner can offer partnerships to certain brands and companies. So, instead of in-app advertising, your app will show logos and offers from those brands. You embed partners’ logos, slogans, and products within your mobile app.
Compared to in-app advertising, this monetization model takes more time to establish. However, the promotion of partners can be placed sparingly and strategically to not cause disruptions of user experience.
In terms of potential revenues, partnership deals can be much more profitable than regular in-app advertising. And you often receive a large sum according to the agreement rather than percentages or commissions. Yet, with partnerships, you accept dependency on a few partners. It can be risky if they have a change.
Mobile App Monetization Model: FAQ
Mobile app monetization refers to the process of generating revenue from a mobile app. This can be achieved through various strategies such as in-app purchases, in-app advertising, subscription models, affiliate marketing, and more.
The most popular monetization models include in-app purchases (IAPs), in-app advertising, freemium models (subscriptions and free trials), and paid apps. Each model has its unique advantages and can be chosen based on the app’s category and target audience.
In-app purchases allow users to download and use an app for free but offer additional features, content, or upgrades for a fee. This model is popular because it enhances user experience and satisfaction, offers scalability, and can generate significant revenue from users willing to pay for extra content or features.
The freemium model offers basic app functionality for free while charging for premium features or content. There are two main variations: subscriptions (recurring payments for premium access) and free trials (full access for a limited time). This model helps increase app awareness and user base while generating revenue from those who opt for the premium version.
In-app advertising can be an effective way to generate revenue by displaying ads within the app. Users can be incentivized to view or click ads in exchange for rewards or unlocking features. However, ads can sometimes disrupt the user experience, leading to a preference for other monetization models.
Yes, a mobile app startup can combine multiple monetization models to maximize revenue. For example, an app can use in-app advertising, in-app purchases, and a freemium subscription model simultaneously. This approach allows for diversified income streams and better caters to different user preferences.
The paid app model requires users to pay upfront to download the app. This can be challenging for startups as it might limit user acquisition and feedback. However, if the app offers unique features or targets a premium audience, this model can still be successful.
Affiliate marketing involves promoting third-party products or services within the app and earning a commission on sales generated through these promotions. Startups can tap into existing affiliate networks like CJ Affiliate or Amazon Associates once they have a user base and visibility.
The partnership model involves collaborating with brands to promote their logos, products, or offers within the app. This model requires a large user base and can be more profitable than in-app advertising. However, it involves dependency on a few partners, which can be risky.
Startups should consider their app category, target audience, and market trends when choosing a monetization model. It’s also essential to rely on analytics tools to understand potential revenues and user preferences. Test runs and MVP trials can help determine the most effective monetization strategies.
Final Thoughts
With any mobile app monetization model, you should know How to find a target audience? Then, you need to decide How to market a mobile app? After all that, you can choose the most suitable mobile app monetization model. Additionally, you can do test runs on which monetization models work better with your MVP and complement each other.
