Opinions expressed by Entrepreneur contributors are their own.
Mobile apps continue to grow in popularity, which offers little surprise when considering the ubiquitous nature of the smartphone. This scenario leads many companies to consider crafting their own app, likely targeting both Apple iOS and Android platforms. Sometimes their goal for the app involves generating publicity for their business or even driving engagement from their customer base.
However, in many cases, businesses craft a mobile app simply as a source of revenue. In this situation, it becomes critical to fully understand the potential revenue models available to any app. This understanding then informs the process of evaluating which model makes the most sense for the business.
So let’s take a high-level overview of the different revenue models available to entrepreneurs building a mobile app and how to evaluate these models to help you decide on which one provides the best opportunity. Remember, this analysis needs to happen before you design any interface wireframes or write one line of code. In the end, a successful app launch likely depends on making this initial effort.
Related: How Can App Makers Improve Revenue and Keep Users Engaged?
In-app advertising
Embedded ads within a mobile app offer one obvious approach to generating revenue. However, this revenue stream really only applies to free apps, as displaying ads in a paid app likely hampers the growth of the app’s user base. In fact, a common practice in mobile games or other apps involves using an in-app purchase to remove ads.
Notably, the market for in-app advertising continues to generate significant growth across the planet. According to Absolute Market Insights, the in-app ad market reached $66.78 billion in 2018 and is forecast to hit $472.64 billion by 2027. This growth shows a compound annual growth rate of 24.4% over that 10-year period. Again, any app needs a large user base to generate significant ad revenue, so consider making your app free to attract users.
The “freemium” app approach
Somewhat related to in-app advertising, a freemium app also serves to attract a large user base to a compelling app experience. Additional content or features then become unlocked after buying an in-app purchase. In fact, we just highlighted the fact that users take advantage of this approach to turn off in-app advertising.
This revenue stream strategy is common in gaming apps as well as music production and instrument apps, with the latter niche more common on the iOS platform. A user might own a free beat-making app, and get access to new synthesizers or drum machines after buying an IAP. Some music app developers also use this revenue model to provide new sounds and synth patches to their user community.
Related: How to Create an App for Your Business With Zero Coding Experience
Offering subscriptions to generate revenue
Additionally, other developers are using subscriptions to provide a repeatable revenue source for their mobile apps typically offered on a freemium basis. Not surprisingly, magazines and comic books sometimes leverage this revenue stream strategy. However, note that Apple and Google Play take a cut of any revenue generated using subscriptions; this also applies to any in-app purchase.
The subscription model can also be very valuable for B2B apps. Creating a mobile app that integrates with a SaaS solution is a great way to expand the platform to a larger audience and deliver more value — which justifies monthly subscription fees.
Monetize your mobile app data
Depending on the nature of your mobile app, its data potential potentially serves as a valuable revenue stream. Of course, this valuation ultimately depends on the size of the app’s user base and the nature of the data. When leveraging data monetization as a revenue strategy, you need clearly note this in the app’s Privacy Policy and Terms of Service.
This is one of the best examples of why you need to determine your revenue model before developing your product. GasBuddy is an example of an app that generated a strong user base with a very sticky venture and zero plans for how to monetize their mobile app. They ended up secretly (i.e. illegally) selling user data and getting into trouble when users started noticing the extra drain on resources and battery from GasBuddy collecting location information.
While monetizing data isn’t the most popular monetization strategy, it can work if it is done legally and you are completely transparent about it from the beginning.
Related: Building an App? Follow These 4 Steps to See Things Through
The traditional paid app revenue model
Of course, actually charging for an app provides an easy way to generate revenue. Paid apps need to provide users with a top-shelf experience and compelling functionality. As such, these apps tend to be mobile games, music creation apps (including synthesizers) and productivity apps, like video editing or graphic design software. Leveraging the freemium model with certain features unlocked through an IAP also works, but paid apps also provide IAPs. Once again, this approach depends on the overall quality of the app and the functionality it provides.
Make sure you fully understand the rules of the Apple Store and Play Store and how they will affect your revenue model. Last month, Apple updated their App Store rules to take 30% of sales on “boosts” for social media posts. This is the first time Apple has directly taxed advertising in iOS apps and is just one example of a recent change that could significantly impact your revenue.
What revenue model makes sense for your mobile app?
As noted earlier, before one line of code gets written, you need to determine which revenue model works best for your company’s mobile app. This analysis includes figuring out the potential size of the user community and the amount of revenue you’ll need to break even. Those factors directly influence the potential of using in-app advertising and data monetization as revenue streams.
If your app requires millions of users to become profitable, you need to set realistic goals for reaching those milestones. Personally, we’ve found more success with subscription-based app revenue models that require a lower number of users to reach profitability. But, charging high subscription fees doesn’t work for every app.
In the end, entrepreneurs need to take this analytical approach to ensure their mobile app truly makes an impact. Anything less simply won’t generate enough interest — or revenue.
