How can free apps make money? Odds are you know three or four of your options like in-app advertising, having an in-app store and some of the others. It’s important for you to know all of your options to avoid leaving a LOT of money on the table. While treating each of your options briefly, we provide some special tips you may not find elsewhere. Some of these do overlap, but without the extra consideration of what distinguishes a regular product from a vanity item, you won’t be able to capitalize on the value model.
The King of Online Monetization Models?
We focus on app design and development for businesses. When it comes to how free apps make money extra creativity is warranted. Specifically, I would suggest that business owners and executives should see if they can draw anything from the mobile and online gaming industry. That may seem like an odd recommendation. In sales, we epitomize how a salesperson can sell a freezer to someone living in the Arctic Circle.
I regard Blizzard Entertainment, the company behind World of Warcraft (WoW), as the (Lich) King of Online Monetization Models. World of Warcraft, the Online MMO, came out in 2004 starting with 60 levels. Blizzard’s added 60 more levels across seven expansions over 14 years, the latest being Battle for Azeroth. Warcraft is still going strong. They haven’t stopped developing their game world – a practice that is equally important when it comes to mobile apps for businesses.
Blizzard’s Many Options to Spend $$$
Gamers (of whom 43% are 35+ years old) spend weeks, even months, playing games like WoW. They buy the initial software package ($50) and then the monthly subscription ($9.99). As Jez Cordon notes, Some want to play Battle of Azeroth with their friends and will pay $60 to start with a 110th level character. Others want lots of in-game money to spend and will pay $20 to get 150k gold. Some will start with a stupid name like Gork but will pay $20 to change it to Mork. There are $8 to $12 cosmetic enhancements, WoW T-shirts ($20), artistic gaming mats ($30), and lots of other merchandise. Then there are deals like subscribe for 6 months now and get a free Dreadwake Mount!
And all the while, you are offered specials on Blizzard’s other games like Hearthstone – its mobile card game, Diablo III, Heroes of the Storm, Starcraft I and II, and Overwatch. They also have partnership arrangements with Activision for Call of Duty and Destiny 2. It doesn’t end there, suffice that every business should make a quick study of Blizzard’s monetization methods and models.
I’d be negligent to not mention Blizzard’s free to play options. Anyone can download and play the first 20 level in Wow for free. Beyond that, they must buy the software and subscribe. Or, well, you can get past the subscription if you can make enough in-game gold. Then, you can sell it and play without a subscription. Several of Blizzard’s other games, like Hearthstone, also have free to play mechanics.
Leastwise, when it comes to making money with Free to Play apps, you also have plenty of options!
1. Free Apps Make Money with Advertising
Freemium apps and in-app advertising are almost synonymous. Leading advertising networks include Google Ads, Facebook Ads, InMobi, Applovin, and Chartboost. However, there are dozens of other advertising networks. Advertising revenue depends upon your number of users, their frequency of use, average session length, the type of ad, your ad network, and advertising niche. Professional services tend to pay more than games, for example.
Their different advertising options pay on a Cost per 1000 views (CPM); Cost per Click (CPC); Cost per Install (CPI), and Cost per Action (CPA) basis. Advertising options include banner ads, interstitials, native ads, video ads, etc. According to Business of Apps, the average banner ad has a CPM of $1.00 (as low as $.15, as high as $8.00). Typically, a banner ad must be on display for 30 seconds to count as an impression.
Let’s say your app has 30,000 monthly active users (MAU) averaging 4 logins per month at 10 minutes each. With a CPM of $1.00, that’s $2,400 monthly, provided you maintain your MAU count. Considering the cost to develop and promote your app, you’ll have a hard time breaking even relying entirely on free advertising. Advertising is one way free apps make money, but it shouldn’t be ignored or be relied upon as your sole or even primary revenue stream, either.
2. Newsletters
Most apps require users to provide and confirm their email address during registration. During this process, you can also promote users to opt-in to your newsletter. Newsletters are another way free apps make money. You can use it to promote your own products, services, and new apps. Additionally, it can be used with affiliate programs and cross-promotions. Your focus here is filling the newsletter with news, tips, special offers and events useful to your users.
Newsletters are best considered a supplemental revenue source, where even a .5% conversion rate is nothing to sneeze at. Using our 30k user example, with an average order value rounded to $10 applies to monthly revenue of $1500. Then the question turns to what your profit margin is, as on a 30% commission basis, that comes down to $450. More importantly, you want to constantly grow your subscriber base.
Blizzard shows how a newsletter helps free apps make money.
A newsletter requires extra work, so normally it is best to limit it to once or twice per month. But, what’s this? Blizzard sent me seven emails in August alone! You can get away with that when you have multiple products and are promoting special events. Of course, that doesn’t mean readers will open every email. It’s doubtful even the Lich King knows how many people are subscribed to receive announcements from Blizzard – but you can bet each mailing generates more than $450.
Over time, you’ll improve not just your number of subscribers, but your conversion rate, average purchase value, and profit margin.
3. In-App Store
An app is an opportunity to have your own storefront. Every app should have one. It’s an almost indispensable part of how free apps make money. Plus, it is worthwhile to note that you are not limited to selling the products and services offered by just your company. Explore opportunities with affiliate programs or negotiate reseller agreements with businesses offering products or services compatible (the same theme) as your app. There’s a lot of advice regarding in-app stores available on the internet that you can find easily. We’ll stick to a few very important tips others tend to miss:
- Try to offer a variety of products and services at different price ranges, that are interesting and relevant to your users. We’re talking low, medium, high and very high price ranges to entice different user segments – first-time buyers, loyal users, and whales.
- The Pareto Principle holds true across nearly all online and mobile sales. That means 80% of your revenue will come from 20% of your users. By extension, 50% of your revenue is likely to come from 1% of your users (whales).
- Americans love Customer Loyalty Programs – they like to be rewarded for their volume and frequency of purchases. Machine learning and other algorithms can provide considerable insight to increase conversions based upon a customer’s previous purchasing history.
The layout and design of your in-app store are every bit as important as the rest of your app, and so is product placement. It is a chapter unto itself, suffice that you should take care to use high-quality graphics and provide detailed product or service descriptions.
4. Feature Unlocks and Upgrades
A freemium app that runs in-app advertising can charge a fee to turn the advertising off. That counts as an upgrade and a common way free apps make money. World of Warcraft offers its first 20 levels for free, users can then subscribe for access to the next 90 levels. That counts as an unlock. Subscribers can then pay for the latest expansion, Battle for Azeroth – another unlock. It is common to offer basic features for free and then charge users to unlock premium features, new or special content. Even if you have nothing else, you can add these to your in-app store.
If your app happens to be a game, you have all kinds of options. Other games take the approach of offering almost all content for free but then charge for “quality of life” unlocks like extra storage space, faster travel time, faster leveling, and other perks. I’ll take this as an opportunity to note that many games offer “in-app currency” that can be used in lieu of real money to buy these upgrades and unlocks. In-app currency is itself a huge topic that we explore in detail separately.
Feature unlocks and upgrades are commonly used in “real” business, too. Google, Dropbox, Flickr, among others, all provide free basic accounts but then charge for extra storage. A financial app may let users view reports. For a modest fee, users can upgrade so they can save and export them. Other apps may have limits on the number of times a certain feature can be used; upgrades can increase the limit.
5. Vanity Items
Carly Simon “You’re So Vain”
You walked into the party
Like you were walking onto a yacht
Your hat strategically dipped below one eye
Your scarf, it was apricot
You had one eye on the mirror
And watched yourself gavotte
For our purposes, a vanity item is a very rare or unique item that can be offered at maximum price while involving least effort. Virtual (digital) items are very good candidates. In the game Dota 2, someone paid $38,000 for an Ethereal Flames Pink Wardog – absurd considering the very brief appearance they make in the game.
Vanity items appeal to four main types of people – starting with the self-obsessed, the ultra-competitive, collectors and philanthropists. Some simply refer to them as whales, the 1% of users responsible for over 50% of revenue. So, there’s a bit of psychology involved. For that, it is worthwhile to explore the gamification of business apps. While Pink Wardogs probably won’t fit your business, they provide an incentive to get creative about what your business can offer that people might want.
6. Explore Crowdfunding for Creative Ideas
If you’re a startup, you might find a more viable example with Grinding Gears Games. They independently crowdsourced Path of Exile with $12,500 founder packs (and less expensive ones, too). “Founders” received a variety of special or unique in-game items, but also had their names added to the game credits. If people love you, your business and/or your app, they will often want the best you have to offer. So, just like there are credit cards, there are Gold and Platinum Cards. It is up to you to find a way to put the gold into your app.
Many crowdfunding campaigns raise money through autographed postcards, or even lunch with the founder. Crowdfunding is a way to start generating money even when you don’t have a finished product to sell. It is hardly new, but Kickstarter and IndieGoGo are two of the more popular crowdfunding platforms (CFP’s). Incidentally, IndieGogo shares office space with Y-Combinator, which we rank as the best startup accelerator in San Francisco.
7. Subscription Payments
Ever since credit card companies enabled recurring billing, subscriptions have been the “gold standard” of monetization options for consistent monthly revenue. Apple followed by Google even recognized that by reducing their normal 30% commissions on in-app sales to 15% commissions for subscriptions. That’s good news for every business that has a mobile application capable of providing content, services or at least other digital products (reports, music, entertainment, etc.).
Subscriptions, however, have inherent limitations unless you make some effort to structure them. One limitation is that a single subscription option places a hard cap on how much any given customer can pay you. Leastwise, you don’t want it to be your only monetization option and there’s nothing precluding you from employing any of the other monetization options here. You can have a subscription service, newsletter, in-app store with vanity items, and even make a white label version. There’s also nothing to preclude you from having different subscription tiers – like basic, silver and gold, each with its own cache of goodies.
If you do use subscriptions, make it easy for customers to cancel their subscription. Their cancellation experience will be a big part of their opinion of your business. Figure 78% of Americans live from paycheck to paycheck. They may cancel for any reason – travel, unexpected expenses, or to free up money to spend on other apps. But if they like your app, just like many love World of Warcraft, they may come back to it after a break or when you have something new. Knowing a customer’s preference for monthly, quarterly or annual billing helps you define when you should contact customers again to renew their subscription.
8. Big Data
Probably the most complex monetization option, there’s big money to be made in Big Data. What you know about your customers, industry, and area of operations can be monetized better than your regular products and services in many cases. Some businesses have even stopped their premium and subscription revenue models in favor of monetizing data.
The majority of Big Data is generated by IOT devices. However, mobile devices not only generate more data but higher quality data. Smartphones and tablets are in people’s hands for up to five hours every day. There are two main methods involved in monetizing data.
- An app can detect a different “user behavior or condition” and communicate the fact to a third party. They can seek permissions from that user to market a “solution” (product or service) to them.
- An app can collect and sell aggregated data to interested parties. This runs from the obvious, like user purchasing patterns and health or medical data, to the growth rates of vegetation in specific agricultural conditions (soil, weather, fertilizer, etc.).
If you’d like a lot more about big data, check out Big Data and the Data Economy.
9. White Label
Last, but by no means least, there’s the White Label option. In developing a mobile app on the freemium model, you have options for two basic strategies. The first strategy is to keep all the rights to yourself and your business. Your goal here is to maximize your app’s popularity and distribution, reaping all of the rewards that brings. Most businesses end up leaving a lot of “potential” on the table, being constrained by their marketing and advertising budget.
The second strategy involves seeing your mobile app as a product unto itself – software. It also involves understanding that your business may not be able to achieve “Uber-like” market penetration. The white label approach enables you to license your app to other businesses similar to your own. You have the option to:
- Sell the license outright.
- Offer your app as a service (Software as a Service or SaaS),
- License it on the basis of service fees or royalties.
With White Label apps, you own the app, but you can license it out to other parties. This is an approach that has been used by companies like Qcare, WashClub, and Opera Mobile Store (OMS). Though dated, a very good white label example involved the 7-digit deal of OMS licensing its storefront to Yandex for launching Yandex.Store. White label arrangements let you define the terms and conditions whereby other companies can use your software.
10. App Design is the Most Important of All
Developing a quality mobile app involves a significant investment. Obviously, you want to get a great return on your app. As Warcraft players can tell you when facing the game’s greatest challenges, there’s a big difference between having good and great gear. They go to great lengths to get an extra 1% increase in damage per second. If they have blue gear, they’ll go for epic gear or legendary if it is at all possible:
- Grey – Poor Quality
- White – Common Quality
- Green – Uncommon Quality
- Blue – Rare Quality
- Epic – Purple Quality
- Orange – Legendary Quality.
As we recently explored in The Business Case for 10,000% Design ROI, app design is critical in over a dozen different metrics that directly impact your monetization potential. Are you interested about how we can use Continuous Product Development to make a legendary quality app for you? Let’s talk!
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