1. Rise of the App
2. App Market Opportunities
3. Monetisation
a. Free Lite Version
b. Ad-Supported
c. In-App Purchasing (IAP)
d. App Sponsorship
e. Affiliate Sales
f. Niche App Upfront Purchase
g. Buy-Out/Angel Investment
h. Related Merchandise/Products
The word “app” is derived from the word application, and in the modern era is broadly associated with mobile smartphones and tablet devices. By definition, an app is any digital application programmed with the intention of providing the end user with specific functionality, be it access to data, additional business services or gaming.
Over the past few years, the app has integrated itself into daily life, with 64% of mobile phone time spent on apps. App popularity has been driven by the rapid growth of the mobile market. In 2011, statistics showed there were 835 million smartphone users, and with global Internet usage expected to double by 2015, the majority of these smartphone users will be using apps for a variety of daily tasks.(" Source: Boston Consulting Group, Mary Meeker, Kleiner Perkins, Morgan Stanley Research, Berg Insight; via Business Insider").
Games are a consistent feature at the top of the app download charts. Angry Birds stands out as the most popular example, with over 40 million users worldwide. Where tablets are concerned there seems to be more variation, with apps such as Calorie Tracker and Goodreader making the top ten most popular iPad apps (paid downloads) in 2011.
Free apps that facilitate or add functionality to existing popular services tend to quickly gain popularity in the app marketplace. Examples of such apps include Facebook, Skype, Twitter and the Google Mobile App. However, giving away an app for free doesn’t mean you can’t monetise your development. Many apps are free to download initially, instead choosing to utilise an alternative monetisation strategy to make the app profitable. Neither do you need to develop the next Angry Birds to see a healthy return on your ROI. You simply need to have an original idea that provides great value to the end user, or improve on an existing, popular app in the marketplace.
The app market presents a new way for businesses and brands to communicate directly with consumers in a targeted and contextually aware format. The opportunity is split into two key growth areas; visibility and popularity, and monetisation.
Developing an app opens a huge gateway for an existing business/brand to limitlessly increase visibility and popularity. The app market enables businesses to reach potential new customers, and to explore niche market areas previously unreachable through conventional marketing methods. By developing an innovative app that sparks interest and maintains popularity through consistent downloads, a business can leverage the exposure to drive overall revenue and growth.
A huge 66.2% of apps downloaded from the Apple store in April 2012 were paid downloads, and with adults spending more media time on mobile than newspapers and magazines combined, the app provides a potentially lucrative revenue stream. However, it is also worth noting that the average paid app download costs around $2. So while users do pay for apps, a developer needs to sell a substantial volume of downloads to make a big profit. But don’t let this deter you from developing an app or attempting to monetise an existing app.
Free apps are extremely attractive to the end user, and most new mobile/tablet users are initially attracted to free apps as they begin to experiment with the marketplace. The idea of a lite version is that it acts as a lure, enticing the consumer to download the app for free and take advantage of limited functionality. Once the user‘s experience becomes limited, the paid version can be unlocked by making an in-app payment to the developer.
You are likely to achieve a higher download rate and faster popularity with a free app. It is far easier to break into the app marketplace offering a free service than it is a paid service. That said, positive feedback is essential to success, paid or non-paid. Once the lite version has been downloaded, you can then entice the user with additional paid functionality, which will then provide a return on investment.
One key disadvantage of a lite version is that the end user may quickly become frustrated with limited functionality. If the app doesn’t do exactly what it said it would do without unlocking the full version, the user will feel cheated and exit the app. This may lead to negative feedback and a rapid decline in popularity.
A typical example of a lite version is the standard Angry Birds download, which is upgradable to HD format at a cost of $2.99. In this case, the idea is that the user becomes so hooked to the game, they don’t mind paying for an enhanced gaming experience.
If by excluding an appealing function you won’t entirely spoil the “free” user experience, then the lite version is a viable option. The premise is that the free lite version is good for a specific purpose, and then enhanced to brilliant when the full version is unlocked.
Ad-supported apps are free to download. The developer makes money from third party advertisers who advertise within the app itself. Many game apps are ad-supported, requiring the user to pay an upgrade fee for the clean version. In this example the ad-supported version is a lite version that requires unlocking through payment.
An ad-supported model will pay for your development costs. Revenue potential is unlimited and dependent on popularity.
Ads can negatively affect the user experience and repel customers. Many users will instantly delete an app based on excessive in-app advertising. It will also take considerable time to generate substantial revenue from an ad-supported app.
By signing up with ad networks you are given access to multiple advertisers without needing to contract with them individually. Two popular ad networks are iAd and AdMob. iAd is a specific Apple network that works in a unique way. If the user taps on an iAd banner, a full-screen advertisement appears within the application itself, whereas AdMob ads will take the user to a landing page via a web browser such as Safari or Google Chrome.
If you opt for an ad-supported model, ensure you don’t overuse ads. Carefully position ads so that they don’t negatively affect the user experience.
The in-app purchasing model makes it possible for the user to purchase content, services or products inside the app; things like bonus game levels, maps, monthly subscriptions to greater functionality and other recurring services. Many apps take advantage of this model by offering a free trial of the full version, which expires after a specific number of days. The basic approach is to provide a fully functioning app that is still limited in some way, and then to provide an IAP as an upgrade path to additional functionality.
In the iTunes Store there are four types of in-app purchasing model; non-replenishable, replenishable subscriptions and auto-renewing subscriptions.
1. Non-replenishable in-app purchases are items that only require you to purchase them once, and can be transferred to multiple devices authorized with the same iTunes Store account.
2. Replenishable in-app purchases are items that have to be purchased every time and cannot be downloaded again for free.
3. Subscriptions are one-time services that must be purchased again once the subscription period expires.
4. Auto-Renewing Subscriptions are services that can be purchased with different renewing subscription durations.
In-app purchasing allows users to try a service before they buy, albeit for a limited time and depending on the trial conditions. This model promotes trust in the app, and will attract more downloads that competitors who expect users to pay for the download upfront. A key advantage of allowing users to upgrade inside the app is the avoidance of data transfer problems.
Where a free trial is concerned, or where better functionality is available only through purchase, the user may feel cheated and consider the app not to be free, as advertised. To avoid this, the app description should be as transparent as possible, letting the user know exactly what to expect once inside the app.
A classic example of in-app purchasing is the subscription-based Gokivo GPS app. Gokivo is free on a 14-day trial, after which the user can in-app purchase a subscription at $4.99 via credit card.
On one hand in-app purchasing can work very well in terms of hooking customers into a long-term relationship through a subscription and/or upgrade(s). On the other hand, to avoid complaints and refund requests, you must ensure users understand the implications of purchasing, e.g. what it will cost them now and in the future.
App sponsorship is becoming increasingly popular as the power of app marketing furthers its reach. Large businesses/organisations are realising the potential exposure that can be leveraged from a popular app, and as such are on the hunt for the next big opportunity. The app sponsorship model is similar to the ad-supported model, but instead of signing up with an intermediary ad network, you sell your own sponsorship, giving you more control over ad type, size, placement and frequency. App sponsorship is particularly well suited to hobby and special interest categories. For example, a music related app could attract sponsorship from music labels or online music services.
The key advantage of app sponsorship is that your development costs will be covered in the sponsorship contract, and the more positive exposure a brand receives the more likely they are to continue the relationship and provide you with more financial backing.
Finding sponsorship is a huge task, and convincing a sponsor to part with their money on the basis that your app is the next big thing can be difficult. However, if you release a free app and it gains popularity, you may well find yourself inundated with sponsorship deal offers.
German automaker Mercedes-Benz used its sponsorship of the latest Mashable iPad application to push its C-Class models. The Mashable audience aligns well with the Mercedes C-Class audience, who are tech-savvy and relatively affluent, which makes the app and sponsor well suited to form a partnership.
App sponsorship from a company like Mercedes Benz isn’t easy to come by, unless of course you are already a popular brand/company. However, there is nothing stopping you from seeking low-level sponsorship to cover development costs. Many smaller businesses/organisations will be willing to apportion part of their marketing budget to get involved with a potentially lucrative new mobile app.
The affiliate sales model works by driving traffic to a third party, who then pays the developer for each user conversion. For example, you may develop an app that advertises cheap flights. The app would be downloadable for free, but when the user clicks through to purchase a flight, you make a commission on the purchase. This revenue model works well for sporting and musical events, and in any ticket/booking purchase situation.
For a successful affiliate sales-based app the potential return on investment is limitless. The app is also free to download in the first instance, and by nature provides valuable information to the end user, giving it a positive platform from which to build popularity.
The ROI is dependent on commission, over which the developer has no control. Competition is high in niches best suited to the affiliate model, and as such it will be difficult to corner a solid section of the marketplace.
Contrary to popular belief, it is possible to sell your app for a high download price, and also possible to make a lot of money without mass appeal. This is achieved by becoming a niche leader in a small market that has high demand for a specific service. If you can identify an affluent niche that is under-catered for in a particular area, you can then develop an app specifically for the requirements of its mobile users.
Getting paid upfront for an app means instant monetisation, and with the niche upfront model revenue potential is high. Operating in an affluent market also means greater potential for upsell on future products and services.
To command a high price point your app must provide huge value to the end user, and of course be the best in a field where there are few competitors. Another disadvantage of setting a high upfront price point is downward price pressure. If you start high, competitors are likely to enter the market and push your price lower.
Popular examples of the niche upfront market model include iTeleport – remote computer access ($24.99), OmniGraffle – diagramming application ($49.99), iRA Pro – mobile video surveillance ($899.99), Bar Exam Courses – law exam study ($499.99).
Finding a niche where the end user is prepared to pay a high price upfront is a difficult task. Also consider that development costs are likely to be high and success not guaranteed. However, developing a unique app, tailored to a niche, affluent market for a specific “must have” purpose is a potentially high-value investment.
Acquisition is the dream of many app developers, and is a long-term strategy that involves a lot of hard work. The idea is to build popularity to such epic proportions that a larger company offers to buy the rights to your app. Alternatively you may be approached by angel investors who want to fund further development in return for a share of your company.
A bigger company may be able to take your app to the next level, to add better value or to combine it with their own product or service; something you can’t do. In this situation, although you might feel emotionally attached to all your hard work, taking a large sum of money will allow you to live comfortably for a while and start a new app project. Outside investment (angel investment) is also potentially very positive. It will give you the monetary power to better develop your app and achieve greater success. You will also benefit from the business knowledge of experienced entrepreneurs.
In many cases acquisitions aren’t successful for the buyer, and your app may fade into oblivion, failing to achieve the success you’d hoped for. Aside from the sentimental emotion of losing “your baby”, at the very least you will walk away with a large chunk of money. Similarly, allowing investors to buy shares in your app project may end up causing a situation where “too many cooks spoil the broth”. Outside investment can turn to outside interference, stifling the creative vision and creating internal conflict.
A prime example of a successful acquisition was that of Instagram, a service launched in 2010 that allows users to take a photo, apply a digital filter and then share it on a variety of social networking services. In April 2012, Facebook acquired Instagram for approximately $1 billion in cash and stock, with plans for the company to remain independently managed.
It is highly unlikely you will receive a big buy-out offer unless your app is extremely popular and has serious monetisation potential. However, if it does happen, you will receive a substantial amount of money.
Depending on the brandability of your app, and of course its success, aftermarket products and accessories can end up making you more money than the app itself. This revenue source is well suited to gaming where logos and characters can be reproduced on t-shirts, soft toys, posters and stickers, etc.
The more popular your app becomes the more merchandise you will sell, and the more contracts you will sign with businesses wanting to use your brand in various ways.
Entering this area of monetisation means expanding your business, and that means employing more people, managing third party manufacturers and a supply chain. That said, if your brand becomes as big as Angry Birds has, no doubt you would sign a deal with a merchandising company to take care of such things.
Angry Birds is the perfect example of an app that has branched out into merchandising. It seems you can’t go into a shop these days without seeing something branded with the Angry Birds logo. Certainly not a bad position for any app developer to be in.
Being in a position to merchandise and license the rights to a brand is the most lucrative outcome for any app developer, and a level of success very few reach. As mentioned previously, merchandising is best suited to highly brandable apps like games and social.