Philosophers say that nothing in the world is truly free. Even when something appears to be free on the surface, there is usually a hidden cost or trade-off involved. This has never been truer than in today’s mobile application landscape. The cost can take the form of attention we devote to in-app ads or the data we share for access to online services, but in the end some sort of payment is always required.
In this article, you will learn how apps make money.
Free app market analysis
The massive demand for free apps is unquestionable. That’s why developers strive to make the best use of existing monetizing strategies or invent new ones. Let’s take a closer look at the most widely used models that you can adapt to make money from free apps.
Freemium apps vs. paid apps market
The term “freemium” is derived from the words: free and premium. Freemium is a business model in which an application or service is offered for free, but in order to make use of more advanced features, the user must pay for a premium version.
The company offers consumers services free of charge to lay the groundwork for upcoming transactions. After building good relations with users, companies make money from free apps by offering advanced features and services, enhanced storage or usage limits, add-ons, and ad-free usage for an additional fee.
A freemium version of an application offers numerous advantages. It is an effective user acquisition tool (no initial cost barrier) and enables upselling of premium features to engaged users. Free users can also offer valuable feedback, which is invaluable when improving the product. By adopting a freemium model, companies can stay competitive and foster brand loyalty while balancing both free and premium user needs.
The term “paid apps” refers to the sector of the application market where customers are required to make a payment before they can download and use the application. Compared to freemium, paid apps generate fewer downloads, and lead to higher expectations.
The most common categories for paid apps are those related to gaming, fitness and health, entertainment, social networking, and e-commerce.
The paid app market has continued to expand too, but the proportions are overwhelming.
97% of Google Play apps and 94% of apps in the Apple’s App Store are free.
Freemium apps vs. free trial apps market
Both of these models are related to free apps. The difference is that users of freemium apps are granted access only to the app’s basic functionalities, while users of free trial apps can enjoy all the features but only for a limited time.
Free trial apps can be divided into those that require credit card information and those that do not. The former run the risk of being initially passed over by users but increase the likelihood of a future transaction.
There is a noticeable market trend for B2C apps to operate in freemium model, while B2B apps show a tendency toward free trials.
How much do free apps earn?
Free mobile applications employ several monetization strategies to generate revenue. These strategies, when executed effectively, enable companies to thrive in the flourishing app market. It is estimated that the global app market was worth USD 206 billion in 2022. The precise numbers are unknown, but since more than 90% of apps on the most popular platforms are free, their revenue must be impressive.
How free apps make money: key app monetization strategies
The choice of the right monetization model depends on the industry, user base, and business goals.
The freemium model offers numerous advantages. Freemium apps attract a larger user base and increase engagement. As there is no initial cost involved, they are more willingly downloaded and installed. By offering free entry, developers can build a loyal user base and choose from various monetization options.
And even though, in general, nobody likes being interrupted by ads, would you stop displaying them in your app if they generated more revenue than purchases or subscriptions? It is no coincidence that this is the most common way of making money from free apps.
In-app advertising
Advertising that appears within a mobile app is known as in-app advertising. It is a common strategy for monetizing free apps, allowing developers to generate revenue through partnerships with advertisers who pay to reach the app’s user base.
The advertisements can appear in a variety of formats, such as banners, interstitials, native ads, or video ads. Usually, they are seamlessly incorporated into the app’s interface. Users may come across them while using the application, and have the option of viewing or clicking on them (sometimes unintentionally, as the close button is either small, hidden, or difficult to tap).
Advertisements displayed within apps have the potential to provide their creators with a reliable source of revenue, though their effectiveness depends on user satisfaction. Invasive, unwelcome, and irrelevant ads can discourage consumers from the app.
Banner ads
An in-app ad banner is the most commonly used form of advertising inside applications. Banners come in many shapes and sizes, but are usually displayed in a rectangular, horizontal area within the app’s user interface at the top or bottom of the screen.
Users are able to continue interacting with the app content while the ad is visible thanks to the relatively unobtrusive nature of these banners.
Interstitial ads
An interstitial ad is a specific kind of full-screen advertisement that appears during logical transitions in applications (e.g., a pause after completing one level in a mobile game and starting another). Their size provides advertisers with a larger screen to promote their products. They produce considerably higher revenue for developers, costing marketers more due to greater size and visibility.
Unlike smaller ad banners, interstitial ads can contain a wide range of appealing, interactive elements, videos, sounds, rich media, etc. This raises the likelihood that the reader will interact with the content or carry out particular actions, such as making a purchase or downloading an application.
It is crucial to implement interstitial advertisements carefully. Ads that are too frequent or poorly timed can frustrate users and decrease their engagement.
Native ads
Native ads closely resemble the look and feel of the app by being incorporated into the content and user interface. They look like a natural part of the software, in contrast to flashy banners, intrusive pop-ups or interstitials. They often match the aesthetics, color, composition, fonts, etc.
More importantly, such ads are supposed to be more contextual. Advertised goods or services are interconnected with the content of the software. This makes them less annoying, more engaging, and more effective.
There are also legal and ethical considerations. In most countries, native ads should be clearly labeled as advertisements.
Offerwall ads
Offerwall is an interesting approach to monetization, as it provides software users with the comfort of choosing a task to be able to start or continue using an app. These tasks may include watching a video, taking a survey, installing another app, starting a premium trial, signing up for a service, or making a purchase, etc. It is worth noting that participation is voluntary.
In exchange for completion of these tasks, users get rewards such as: additional lives, power-ups and in-app currency (all extremely popular in the gaming industry), time trial extensions, premium features for a limited time, extra points and hints, etc.
Developers can generate revenue from a desired user action, like watching an add or signing up for something, using the cost-per-action (CPA) or cost-per-install (CPI) models. Users usually willingly accept this form of advertising as it gives them the opportunity to get a better experience without spending money.
Incentivized ads
Incentivized ads are similar to and often confused with offerwall ads. The key difference is in the way that users interact with them. Offerwall ads provide a list of tasks that users can choose from to get rewards. These offers do not necessarily involve watching ads, whereas incentivized ads do. Users are actively interacting with advertisements in order to gain benefits.
In-app/in-stream video ads
In-app video stream advertisements appear as short video clips before (pre-roll), during (mid-roll), or after content (post-roll), blending naturally with the experience of using the app. Their resemblance to TV commercials is quite legitimate. The first format is particularly worth considering. According to IPG Mediabrands’ Magna report, only 83% of survey participants find pre-rolls intrusive.
Typically, the video ad content is relevant to the app audience. Users can interact with in-stream video ads by watching them, skipping them after a specific time, or clicking on them to learn more.
In-app purchases
App developers commonly monetize their apps through in-app purchases, or transactions made within mobile applications. They allow users to purchase digital products or services right from the app and are frequently used to unlock premium features, remove ad banners, access extra content, or acquire virtual items such as lives, power-ups, in-game currency, etc.
The goods purchased within the app can be either consumable or non-consumable. The former include coins, gems, etc. that are spent on virtual goods like power-ups or premium items. The latter refer to digital products or services that are bought once and remain with the user. The most common examples include unlocking premium features, removing ads, or purchasing additional levels (in mobile gaming).
Premium features
Depending on the industry, the list of premium features can be impressive. The most common functionalities are as follows:
- access to extra content (exclusive videos, early releases)
- unlimited storage (usually in cloud solutions)
- offline access (highly useful for flight mode)
- premium customer support (freemium might not have support at all)
- customization options (themes, skins, fonts, etc.)
- advanced syncing (cross-device synchronization of data, photos, calendars, etc.)
- advanced tools and/or a watermark-free experience (in photo and video editing apps)
Ad removal
Ad removal is a strategy for making money from free apps by promising undisturbed use of the app. Customers no longer have to deal with banners, mid-roll in-stream videos, and other annoying advertising formats. As a result, the app experience is significantly enhanced. The ad-free interface not only looks better, but is also more friendly in terms of UX (no accidental clicks).
By upgrading from freemium to premium, users are able to enjoy the full potential of an app without interruption.
Subscription model
Next to one-time purchases or in-app advertising, the subscription model is another popular way of making money from apps. It requires regular, recurring fees (monthly, quarterly, or annually) from users in exchange for access to the app or its premium features. Users are usually charged automatically.
It is common practice to provide limited-time free trials for various subscription plans so that potential users can evaluate and appreciate premium functions.
The most well-known companies using subscription monetization strategy apps include Spotify, YouTube, Strava, OpenAI.
Sponsorship model
This is a relatively new model of app monetization, where brands get the opportunity to connect with users in a really engaging way. Developers offer their sponsors in-app advertising, branded content and sponsored challenges, etc.
When you think of making money from apps through sponsorship, we bet mobile gaming comes to mind first. But other industries make eager use of this strategy too.
Expedia is a travel and booking app that has partnered with Delta Air Lines. The outcome of this sponsorship was prominent branding, special discounts and offers, booking system integration, and loyalty programs. Nike has collaborated with the Strava fitness tracking app, offering rewards to users who complete certain activities. Other industries favoring app sponsorship include, among others, fashion and retail, food and beverages, entertainment, education and e-learning, finance and banking.
Transaction fees
Apps that enable transactions between buyers and sellers can charge one or both parties a transaction fee or commission for each successful sale made through the platform. This primarily refers to marketplaces and e-commerce applications. Digital content distribution apps take a percentage of the sales revenue when users purchase ebooks, music, and videos. Booking and processing fees are extremely popular in the hotel, flight, and restaurant industries, too.
Transaction fees also play a significant role in the peer-to-peer payments app segment, where users rely on these apps to send money to friends, family, or acquaintances. When individuals transfer money to one another, an essential fee is frequently deducted from the total amount. These fees can vary depending on factors like the amount transferred, the method used, and the urgency of the transfer.
Sale of goods and merchandise
An app monetization strategy based on the sale of goods and merchandise involves using a mobile app as a platform to sell physical or digital products directly to your users. Products ought to correspond to the content of the application. Obviously, your software should possess or be integrated with an e-commerce ecosystem, payment gateways, etc.
This business model takes advantage of the existing app user base, generates revenue through product sales, and builds customer loyalty. Fitness apps selling sports clothing or photo editing tools selling photography courses serve as textbook examples.
How to choose the best app monetization model
The way you choose how to make money from an app is critical for future success, and requires careful consideration. The best monetization strategy should align with your app’s goals and user needs while maximizing revenue potential.
Step 1. Define your app’s business goals
Every single business decision should start with defining business goals, and monetization strategy is no exception. It is of fundamental importance whether you want to maximize revenue, grow your user base, or build brand awareness. Remember that in the ever-changing app landscape, business goals may evolve and should be revised regularly.
Step 2. Define your target audience
Precisely identify their demographics, psychographics, and interests, as these are the cornerstones of picking the right app monetization model. A well-defined group increases the likelihood that users will interact with your app and be willing to purchase it. Otherwise, you run the risk of implementing a universal strategy that might miss its target and fail to maximize revenue or user satisfaction.
Step 3. Research your target audience’s purchase behaviors
Purchase decisions are influenced by a wide variety of diverse needs and preferences. In search of convenience, some users regularly make in-app purchases and subscriptions. Others prefer free content. There are also impulse buyers and bargain-seekers. Understanding these purchase behaviors is crucial for your monetization strategy.
Step 4. Check your competitors and evaluate the risks
There is no shame in looking at your competitors’ solutions and copying their best practices. Install their apps and find out what monetization strategies they use. Try to assess the risks based on your experience with their products. Evaluate what is working well, what is missing, and what is wrong. Learning from the mistakes of others rather than your own saves time and money.
Step 5. Calculate the economics
Your app is a bit like your company – the equation must be positive. Do the math, calculate your costs and estimate your revenue. Try to anticipate indicators like user acquisition costs, customer lifetime value, conversion rates, and average revenue per user to make sure the app will be profitable.
Step 6. Build a prototype and test your selected monetization models
Prepare visual and interactive mockups of the app’s interface and functionality to see how well your preferred monetization strategy resonates with your target users. It is safer to find out about mismatches at this stage of development. You can always test more than one model.
Step 7. Build an MVP
Building a Minimum Viable Product (MVP) is invaluable when selecting the right app monetization strategy. An app with only core features and monetization components is enough to clearly identify the preferences and pain points of your target users.
Step 8. Adapt and refine
Tests and iterations are crucial in shaping an app's monetization model. They allow developers to adapt and refine the approach based on user behavior and feedback. By assessing the strategy, one can optimize revenue generation and ensure a positive user experience.
RST Software – your trusted MVP development company
Looking for a company that can help you out with your software? Look no further. At RST, we have mastered the art of creating free apps that make money in a number of ways. Let us advise you. We also understand that there is no better way to choose a monetization strategy than by building a rock-solid MVP. Should you want to develop one with us, just hit us up via our contact form.
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