Revenue Models for Mobile Apps (Podcast)


welcome to constant variables a
podcast where we take a non-technical look at mobile app development.
I’m Tim Bornholdt and I’m Rob Bentley let’s get nerdy all right so today Rob we’re talking
about revenue models for mobile apps and I guess you know if you’re talking about
building a mobile app the very first thing you need to think about is how
that app is gonna make you money so today we’re gonna talk about five
different revenue models we’re gonna go over what they are some examples of apps
that fall into that category and then also the pros and cons for why you may
want to choose that model for your app but apps are just free right oh yeah
exactly that’s a great lead-in to our first revenue model the free model so
free apps as they sound they’re zero cost to download zero cost to use you’ll
find these all over the place Target Amazon any retail stores gonna have a
free app great clips their app is free for you to download social media apps
Facebook and Twitter they’re free to download and use it’s a very viable
revenue model for for certain apps and why would you build an app and then put
it out for free well really there’s three ways three pros that we can think
of for that so the first one would be a free app is the fastest way to growth if
your revenue model is dependent on as many users as possible using your app
then taking away the barrier of cost is going to be the quickest way to get
people in the door using your app also businesses will want to build goodwill
with their customers and what this means is they want to be able to extend
themselves make their product be their easier to access or be able to get it in
the hands of more people stuff like that that’s why they would do it exactly so
something like great clips they would want there have to be free so that you
would download it and have an easy time of scheduling a haircut yeah it gives
the users an easier way to use their actual product which is going and buying
a haircut right which leads into the third reason you might want a free app
is because if you’re gonna bundle it with another product or a service that
you sell then you probably want to have the app give it away for free
right so the cons of the free model is if you’re doing an app and you don’t
have another existing product that goes along with it you’ll need to find
another way to make money for your app yeah and obviously if it’s free you’re
not making any money so you need to have some other way to makin money now this
is the point in the conversation where we usually ask people well how are you
gonna make money and they say oh well at course but ads that’s a whole nother
business that it’s it’s a whole nother can of worms and there’s a couple of
reasons why and based businesses can suck sometimes people do think it’s easy
especially when they haven’t done much research into app development they think
it’s easy to build an app and just throw on ads and well in one sense that’s true
in another it’s not yeah the amount of money that you make every time an ad is
displayed is like fractions of a fraction of a cent
you really don’t make much money just having ads in your app you need to have
a very specific niche that people would want to target for those ads or you need
to have millions and millions and millions of people looking at those ads
in order for you to see any sort of reasonable money and what I would
consider reasonable would even be a couple thousand dollars a few thousand
dollars a month something in that range you’re gonna need to have lots and lots
and lots of people like multiple hundreds of thousands of people using
your app with the ads in it in order for you to see some reasonable money the
other way is if you have a really niche segment of users and you can partner
with companies that also have that niche segment they’ll want to maybe pay you on
a monthly basis or a yearly basis something like that to be able to do a
specific targeted advertisement in your app but then you’re building pretty much
your own custom ad network so it’s not just as easy as I put in a view and ads
come to my app and I make money because there’s millions of users using it a lot
of apps get there exactly it’s really really hard it’s not
as easy as you would think the other thing with ad-based businesses is you
have to bear in mind the ethical issues behind it so if you’re building an app
that’s using like Google their ad network to display ads you don’t know
exactly what code you’re putting into your app you basically they give you a
set of code and you put it in your app and you let it run but that app is
tracking so many things about your users their location their device usage what
they’re doing inside your app who they are they’re using your quote unquote
free app to build a targeted profile about your user so that they can go on
and sell more ads to more people and you just need to be ok with that if you’re
going to go down the ad based model of choosing somebody else’s ad network of
there’s going to be all kinds of ethical things that your
to deal with with if you’re okay with selling your users privacy basically for
a few fractions of a penny every time they use your app that’s certainly
something that you need to be comfortable with if you’re gonna go down
the ad based revenue model sounds like building a free app is a
little bit difficult so why not just charge for it well yeah that’s another
option which would be our second revenue model the paid app now a paid app is
again as it sounds you put down some money up front and you get to use the
app a shameless self-promotion of example of that ad would be our
Half Staff app so you pay 99 cents you get to download the app there maybe it’s
a dollar 99 I can’t even remember it’s two dollars yeah okay so you pay a
dollar ninety-nine and you get to have the app on your phone and it sends you
push notifications and that’s that’s it the reason why this is a good model for
that kind of app is because it doesn’t require a lot of continual maintenance
to work exactly it’s it’s great for it because the Half Staff app is a utility
and it’s something that it’s in a niche not a lot of people really care if the
flag is set to have staff or not it’s it kind of falls into this sweet spot where
people are willing to pay money to have that information sent to them right at
that time yeah exactly so yeah and also a good model for a paid app would be
where someone in a certain profession needs this app to perform their work
yeah if you work in the movie industry and you have a teleprompter app and
somebody needs to have a teleprompter in order to read the words that are gonna
be in your movie that’s a perfect chance for you to charge to make money because
people are gonna pay to have a tool that works and gets the job done
especially when it’s a business expense and not like a user just buying a game
exactly another really great reason to use this approach is because time and
time again we’ve seen that if you charge money upfront for an app the most money
that you’re going to see back from that is going to be right at your app launch
so between the first three to four days as you’re getting pressed in your app is
getting out there if you have a paid app you’re gonna get the most amount of
users within that first few days and this leads into something we call the
long tail of the app store but basically you see this huge amount of money come
in all at once all at the start of your app so if you’re in that kind of a model
where you’re just kind of churning out apps
time and time again then this could be a really great way to make a lot of money
yeah especially if you are doing the thing where you are making a lot of apps
as soon as you release one it’s time to start working on the next exactly and
use those funds to pay for the next app development now again as we’re saying
here with this model that that is great if you’re trying to make an app that you
can switch away to the next model to the next app and keep building on it it’s
great for that but if your plan is to I’m gonna throw all my eggs into this
basket and build one app and really focus on it it’s really hard to continue
to make money if your app is just give me money once and then that’s it it’s
yours to use forever yeah which makes it hard to because not only do you not keep
making the same amount of money continually but users expectations are a
lot higher they want it to work all the time and forever because they paid a
dollar for it right exactly and you can in this day and age it’s not realistic
phones are updating all the time software is updating all the time you’re
gonna need to keep putting in a lot of work so the amount of money you charge
upfront might not be exactly enough to break even at the end of the day if
you’re gonna continue to support this tool for a long time and if you are
trying to think about a paid model but you also depend on having a lot of users
download your app a lot of people won’t even touch it if they see a price on it
because of the expectation that apps are free right even if it’s $0.99 people are
gonna get really weird about dropping $0.99 on an app and I feel bad because
I’m an app developer and I do the same thing well I guess if you’re having that
issue though if you’re worried about paying for an app upfront that kind of
leads into our next revenue model Rob which is the freemium model freemium
woohoo it’s kind of one of the big ones these days I think a lot of apps choose
to go down the freemium route especially in 2017 right because you get that
adaptation of users a lot of people will download a free app because why not
you give them it this way it gives some kind of a try it before you buy it model
exactly so in freemium it’s a portmanteau of you’ve got you’re free
but then premium upgrades included in the app so that’s where freemium comes
from and a lot of games are using this right now that’s the
big one exactly or candy crush in your Angry Birds they’re gonna use it but
also overcast which could be a podcast listener that you’re using right now
overcast uses freemium where the app is free and then you pay to unlock
additional features inside of it right so also this lets you charge for new
features as you come out with them yeah so if you’re launching on day one with a
certain set of features and then you think oh man the app would be really
cool if it did this whatever this is you can put it behind a 99-cent in-app
purchase and people who would also agree with you that that’d be a cool feature
to have they’ve already been using your app they
trust you they’ll give you the $0.99 and you’ll see a lot higher conversion on
that than you would if you were just trying to put it all in at once at
launch right the trust issue is big and that’s why people stay away from the
paid app model or the users won’t download because they don’t trust you
yet once a user has been using you for six months to a year they’re a lot more
willing to spend the cash exactly another reason that you might want to go
with the freemium model for your app is because it really lets you experiment
with all kinds of things if you want to go down the ad route which I think we
just kind of dogged on for a few minutes before but if you choose to throw ads
into your app it’s pretty easy to throw those behind a put them up so that you
need to onload the app there’s some ads there so you can make a little revenue
that way but then you can have somebody pay ninety nine cents or two dollars to
unlock the app and to remove the ads and you’ll actually probably see more money
doing that than you would if that user using your app and getting the ad
revenue long-term right I mean we did doggone ads a little bit and there are
great ways to make money with them I just think it’s not as easy as a lot of
people would assume exactly there’s there’s a lot more to it than just make
some money off of ads not everybody can be Google right
so freemium sounds great why wouldn’t someone want to go that route well
really the biggest issue with freemium is that developing it is pretty tough
there’s a lot of edge cases that you need to worry about there’s a lot of
complexity that goes into building and app purchases inside your apps so the
initial development cost of including in-app purchases could be a barrier for
you choosing to add them into your app and also
other apps that we’ve built we’ve seen that a lot of the recurring support
issues have to deal with in-app purchases too so not only will it add on
to your initial time of development but there will be a continual development
around it just because of the variables involved with in-app purchase you have
your front end called you have a server called you have Apple or Google and then
you have the payment so there’s these four interactions taking place with each
other and if something breaks on the way it can be costly and difficult to figure
out where it went wrong and how to fix it yeah really hard to test and find out
we’re actually going to solve that issue the last I guess there’s a couple more
cons here another con that we have is it’s it can be tough when you’re
initially developing your app to say where’s the point at which these if you
have a set of 10 features let’s just say what number of features come for free
and what number of features get hidden behind that in-app purchase sometimes
it’s pretty obvious and easy to know but other times it takes some experimenting
and really trying to figure out where that sweet spot is of how much of the
app do you give away for free before you say ok you get it now pay up for the
whole thing or deal with the limited version yeah you usually won’t have this
exactly right at your 1.0 launch unless you’re such a fantastic designer or you
just got really lucky yes take a little bit of back and forth experimentation
users using it feedback all that exactly and then finally the last con to this
model is that again kind of going to the ethics of advertisement there’s also
issues when it comes to ethics with in-app purchase if you think of games
like candy crush or Angry Birds or anything really where you have this kind
of gambling mentality of you’re forcing people using psychology to get them to
unlock apps or like oh man it’d be really great if my tower would build
faster I don’t want to wait for 3 hours so I’m gonna buy an in-app purchase and
pay 99 cents for a thousand coins and then I can move on there’s some ethical
issues to be comfortable with when you’re going down that route if you’re
really building out a system that does this you just want to make sure that
you’re okay with the trade-offs that you’re making yeah exactly I mean those
are gonna be three of your really major revenue
models for an app there are some others though this one is a little bit less
common I think but since this is an informational podcast we’re gonna cover
it it’s true we do want you to know what your options are and this one is paymium yeah so the opposite of freemium where a freemium app you you don’t pay
anything and you get to have the app a paymium you pay for it but then you
also pay for it buy it with in-app purchases to unlock even more features
inside the app so who would benefit from app a Miam style out there there are
uses for it yeah so really this would be great for
again going back to some of the pros for pro ah for paid apps if you have a tool
that you have your clients are relying on to use for their jobs so let’s say
you’re a lawyer you download a lawyers reference app I you probably would have
them pay upfront to have it but then you also would probably pay to have them
unlock continual additional features or like an accountant for example how often
does the tax code change all the time at least once a year so you
want to make sure that you have this way to give them the tool to do their job so
they could charge for it up front but then you can also have them pay to get
2017’s tax info and 2018’s tax info right so anything that’s
it’s sort of subscription-based you would want to do a payment model you
need to pay for it to get the information but you also need to pay to
get the updated information exactly another reason you might want to go this
route is we were talking about the long tail of the app store where you get all
your money right away upfront in the first few weeks for first week and then
it just kind of tails off as the app lives this kind of helps you combat that
because you can offer continual incentives and on reasons for people to
give you more money so that kind of helps bolster your income so that that
long tail doesn’t get all the way to zero immediately yeah so this will
usually be more for a business use where people absolutely need it and though
they’re willing to pay for it because it absolutely does help them do their job
exactly paymium is probably one of the hardest models to get right there’s
a lot of cons here pretty much when we were talking about this beforehand we
were thinking it’s pretty much every single con from every single category
for for paid and and freemium you’re gonna see in this paymium column
as well so you really need to hit home with a good niche market if you’re gonna
go this route yeah you you you really also you need to think through what
initial value you’re providing upfront so that you can get people over that
hurdle of well I had to pay money for this so like no I’m gonna find a free
version it’s like you really need to give them an incentive to want to use
your app so the last one we’re gonna cover is software as a service yeah so
another SaaS yeah so SaaS tools it’s an ongoing subscription so generally
there’s a free tier that lets people try it out get started but then you have
paid upgrades and it’s a monthly subscription or yearly or whatever it’s
just ongoing revenue that helps you to continue to sustain the development of
your app so yeah the big pro of this is you get a lot of ongoing revenue you
make a lot of money yeah and and having the ongoing revenue is key cuz it’s nice
to have that hit of money all at once it’s great to like overcast when they
launch they made just north of eighty thousand dollars in that first couple of
weeks you know like you really can make a lot of money going that route but this
way it’s instead of making all this money and then that’s it if you were to
say every user gives me one dollar a month or two dollars a month you can see
how that scales to be really good money going forward and the thing to keep in
mind about this one too is although the app is how the platform is delivered
it’s not really about the app as to why it makes money it’s because of the
service exactly there’s usually the app is kind of free you don’t really charge
people to download your app but you charge them to use your service so you
need to bundle it with something that really makes sense to use that that
would make people want to continue to pay for your app right an example of
this would be Uber yeah exactly they download the users download the app for
free and then they pay to have their to get a ride and then part of the money
goes to Uber a part of the money goes to the driver and then everyone wins yeah
and one thing to keep in mind as a con with us too is that as a result of that
there’s a lot more infrastructure involved upfront it’s it can take a lot
more effort and money and time to build a SaaS tool than it would to build a free
tool or just an that’s isolated to just an app in the
App Store also you have to you have to worry about like the three sided
marketplace where you have you you have the people that are supplying and you
have the demand for the app too so yeah it’s kind of like all the things you’d
have to think about with building any on-demand app you would have to think
about first as to how many people are using it how many people are coming on
board how many people are leaving well and that’s only if you’re really
building like a three sided marketplace like uber its yeah if you’re building
just a SaaS tool if you like if you’re offering a tool that lets you save
documents in the cloud like Dropbox for example Dropbox doesn’t have a 3-sided
marketplace that they’re worrying about but it is something you need to worry
about is the infrastructure to support lots of users using your tool and once
if you get really successful and you have hundreds of thousands of people
paying you something a month they’re gonna all expect that your app works
exactly when they wanted so you have to worry about support going forward now
lightning fast all the time yeah and the last thing to it did we mention turn
already yeah I think so in a sense yeah you just you know it’s
easier to forecast your revenue with us but you just basically need to keep
incentivizing your users to use the app otherwise they’re gonna leave and you’re
gonna lose out on that juicy ongoing revenue right so Rob what are your final
thoughts for revenue models and what what’s appropriate for our listeners to
know to take away when they’re deciding what revenue models right for their
business well whenever I’m talking to someone and I tell them what I do the
next thing that happens is they give me their app idea and then I used to really
go in depth with well what is the idea what do you want it to do was the user
interface gonna look like and now my first question is how are you gonna make
money doing that and then I get because that really is people will come up to us
all the time and say man wouldn’t it be great to have an app that does this and
yeah it’d be great to have an app that does that now how is that going to make
you any money and usually the first gut instinct is ads and our answer is Wow
okay have you thought about ABCDE F and G as it relates to ads and that ends the
conversation right and a specific targeted ad or a partnership
with a company with a niche market that’s the same as your app those are
totally different but what we usually get is just throwing ads yeah like it’s
that easy and it’s not so you really need to take care when you’re thinking
through your product how is it actually going to make money and make that a
focal piece of the purpose of the app because nobody if your app doesn’t exist
in your app can’t sustain itself then your users aren’t going to be happy and
you’re not gonna be happy because you’ll be gone and so say you do get your app
launched you’ve really thought through your revenue model and you’re trying it
out don’t be afraid to change it up because times change technology changes
a lot of things change exactly the freemium model wasn’t even considered a
few years ago like before an app purchase is really guy going people just
really didn’t even use them and now subscription people are trying to figure
out how to use the subscription-based model because now with Apple with with
the way that they distribute money usually they take 30% of whatever you
put in the App Store as the cost so let’s say your app is $1
they’ll take 30 cents of that just straight off the top but if you have a
subscription and you’ve had a user that stayed with your service for a year
they’ll go from 30 cents to 15 cents so so many people now are trying to figure
out what’s the best way to use subscriptions so you just need to not be
afraid to play with what model you’re using as as your app because like Rob
said times change and you need to keep your software up to date with the times
exactly I think that about rounds that out yeah I think so too
show notes for this episode can be found at ConstantVariables.co You can get in
touch with us by emailing [email protected] I’m @TimBornholdt on Twitter. Rob is @ScottMahonis He posts all the time you guys will love seeing what he posts on Twitter it’s important it is today’s
episode was edited by the incredible Jordan Daoust. This episode is brought to
you by The Jed Mahonis Group who builds mobile software solutions for the
on-demand economy. Learn more at JMG.mn

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