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Josiah Humphrey / July 25

9 App Monetization Strategies: How to Pick the Right Business Model

A startup can be defined as “an organization formed to search for a repeatable and scalable business model” (Steve Blank). Without the ability to grow and scale, a startup will eventually die. And on what does such growth fundamentally depend? Money! A business cannot be sustained if its owners aren’t generating revenue. In this article I’ll discuss 9 specific app monetization strategies, otherwise known as “revenue models”.

Monetization”, i.e., converting an asset or object into money or legal tender, is at the heart of operating a business.

If the amount of money coming into the business does not ultimately exceed the amount of money going out of the business (a state known as “positive cash flow”) then the business will eventually become insolvent (see here).

Similarly, if the amount spent to acquire a new customer (i.e., the “customer acquisition cost”) regularly falls below the value that that new customer brings to your venture (i.e., the “customer lifetime value”) then your startup will not be able to continue operations far into the future.

A “revenue model” can be described as a framework for “how a business will earn income, produce profits and generate a higher than average return on investment”.

In other words, an app revenue model outlines answers to two basic questions:

  1. What kind of value will be offered? To whom? And for what price? and
  2. What source(s) of revenue will be pursued?

A revenue model is one component of a (larger and more comprehensive) business model (see here).

Let’s now consider 9 different revenue models through which you can monetize your app to ultimately grow your business.

1. Advertising

Online advertising is huge and growing steadily.

Consider these statistics:

  • U.S. Internet advertising revenues increased 22% in 2016 from a year earlier to a record of $72.5 billion (surpassing for the first time ever the $69 billion spent on TV ads) (source)
  • U.S. digital advertising is expected to hit $83 Billion in 2017 (source)
  • Global internet advertising expenditure is expected to exceed $200 billion in 2017 (source)

Online advertising can function as one of the core revenue models for your app. 

Implementing online advertising can be done in a variety of ways:

  • You can display third party ads within your iOS/Android app itself or on your company website;
  • You can build your own ad network à la Facebook, Google, LinkedIn, or Twitter;
  • You can charge a listing fee if you operate as a marketplace like eBay or Craigslist; and/or
  • You can list classifieds such as job listings (similar to sites like Stack Overflow and Angel List)

The key downside to using a revenue model based on advertising is the fact that most users really dislike ads — whether they’re iOS, Android, or any other device carrier (evidence: 1, 2, 3).

Users typically respond with frustration or annoyance when they encounter ads, especially when a company starts using ads in its earliest days. This applies to pop-ups, interstitial ads, and native advertisements. 

You can, thus, harm your adoption and/or customer retention rates if you bombard your users with too many ads too often and/or too early.

Furthermore, if your revenue model is based entirely on advertising dollars then you’ll naturally be tempted to sacrifice more and more of the user experience in order to generate greater ad dollars.

Startups that combine advertising with other revenue models—such as Spotify’s Premium service, pictured below—tend to fare better than companies that rely exclusively on ad money.

app monetization strategy

(image source)

2. Affiliate Marketing and Lead Generation

A second monetization strategy you should consider adopting is affiliate marketing and lead generation. 

Pat Flynn, of Smart Passive Income, provides the following helpful description of “affiliate marketing”:

“Affiliate marketing is the process of earning a commission by promoting other people’s (or company’s) products. You find a product you like, promote it to others, and earn a piece of the profit for each sale that you make.

  • You’re happy because you earned a commission
  • The company is happy because they have a new sale from a customer that they might not have normally been able to reach
  • And the customer is happy because they learned about a product from you that will hopefully fulfill a need or desire”.

Practically, affiliate marketing typically involves earning a commission when a user downloads and/or buys a product or service by following a link that you host on your website or within your app.

Podcast Addict uses affiliate marketing by hosting ads at the bottom of its screen (in this case, an ad for Android Pay):

app monetization

You can try pairing affiliate marketing with lead generation or, more specifically, with selling leads to interested parties.

Lead generation” as such can be defined as:

“[T]he marketing process of stimulating and capturing interest in a product or service for the purpose of developing [a] sales pipeline”.

Lead generation, then, involves attracting the interest of potential customers in order to sell them down the line.

(If you’re interested in learning more about the intricacies of initiating and building customer interest in your product or service then this HubSpot article is a good place to start).

Besides selling your own products or services, how else can you make money off leads?

Well, you can sell leads to other interested parties.

This is exactly what the popular app and website mint.com does:

  • Mint provides free personal finance management services to its users, allowing them to track their bank, investment, credit card, and loan balances and transactions as well as generate budgets and create financial goals
  • Mint aggregates and de-individualizes all the financial data it collects and then sells these data to banks, credit card companies, and other interested parties for a fee (who can then mine and target those leads with their own services and products)
  • Mint also makes money via affiliate programs in which it offers users the ability to, for instance, sign up for credit cards on Mint.com or via the app, resulting in Mint receiving a small payment each time a credit card application is processed (source).

One note of caution: selling leads (whether online or offline) can sometimes involve ethical and/or legal ramifications so be sure to confirm that you aren’t violating any moral or legal principles that might harm your business’ reputation or operations.

This caution also applies to the following revenue model, i.e., selling data.

3. Selling Data

A third mobile app monetization model  consists of selling big data to third parties.

If your app collects big data on customer habits or preferences then it’s likely that these data are of value to other companies whose products depend on knowing what people want and do. 

For instance, the ultra popular and free check-in app Foursquare allows users to publically share their locations (i.e., “check-ins”) with others.

These data are compiled into massive databases, which Foursquare then sells to interested third parties (see here: 1, 2).

Foursquare has thus far collected check-in data on more than 10 billion check-ins—that’s a huge(ly valuable) amount of data!

Here’s an example of a heat map from Tokyo, Japan comprising check-in data over the span of a week in 2012:

urban-visualization-four-square-check-ins-tokyo

(image source)

To whom are these kinds of data valuable?

Perhaps Starbucks is looking to open up 3 new coffee shops at the busiest intersections in Tokyo. 

These data would help Starbucks decide where exactly to build their new stores by visually assessing where most people congregate, for which purposes, and so on. 

Another example: Microsoft invested $15 million in Foursquare in 2014 in order to license the app’s location data.

4. Transaction Fees

If your startup operates as a digital marketplace or a platform where financial transactions regularly occur (such as Kickstarter, the global crowd-funding platform geared toward creatives) then transaction fees represent the most obvious app revenue model to consider.

Stripe, the online payments processing startup currently valued at $9.2 billion, generates revenue exclusively by charging users small fees for every completed transaction:

stripe

 (image source

5. Freemium

The “freemium” approach to creating revenue is very common amongst today’s web-based services, including digital apps.

The basic approach is easy to understand: your provide your users with a basic, functional, and completely free version of your product or service whilst simultaneously enticing users to become paying customers by offering them a more advanced, feature-rich, premium version for a price.

Many SaaS- (Software as a Service) based products utilize the freemium business model.

For example, the cloud-based file hosting service Dropbox offers new users 2 GB of free storage alongside premium options that allow users to buy additional space:

dropbox plans

(image source)

Using the freemium revenue model, Dropbox has scaled to more than 500 million users

There are actually several different ways in which startups can implement the freemium-structured approach to app revenue.

Three of the most common include:

  1. Capacity-Based freemium: a free version of your product or service is offered up to a certain capacity—such as usage amount or number of users—beyond which users are required to pay to keep using the service. Examples: Dropbox, Evernote
  2. Feature-Based freemium: a free version of your product or service is offered but its functionality is limited unless users pay to unlock the full range of features. Examples: Buffer, Skype
  3. Time-Based freemium: a free version of your product or service is offered but only for a limited time, i.e., the standard “free trial offer”. Examples: Audible, Shopify 

6. E-Commerce

E-Commerce is a revenue option to consider even if your startup doesn’t operate primarily as an e-shop. 

Many startups, especially those with dedicated user communities, sell promotional items (such as brand t-shirts) on their websites.

Beyond this, it’s possible to combine a freemium-based revenue model with e-commerce by selling products or services related directly to what you sell.

An example of this is the note taking, organizing, and archiving app Evernote, which, up until 2016, combined its freemium model with additional e-commerce revenue in the form of physical product sales via the Evernote Market.

Unfortunately, Evernote was ultimately unable to generate sufficient profit through its Market and so it discontinued its e-commerce operations in 2016.

A screenshot of Evernote’s now-discontinued e-commerce Market:

market evernote

7. Virtual Goods

The global market for virtual goods—ranging from stickers, avatars, and coins to potions, weapons, and special levels—is currently valued at approximately $15 billion

In principle, any electronic good can serve as a potentially monetizable virtual good, with videogames (Angry Birds, Farmville, etc.) likely being the most common type by far.

The ultra popular Pokémon Go offers users the ability to buy many different types of virtual goods, including “PokéCoins”:

pokemon

(image source

8. Software-as-a-Service (SaaS) / Subscription

SaaS, i.e., subscription-based, revenue models can be a very attractive option for startups, provided that their services are well suited to the subscription approach.

Subscriptions allow your company to lock users into long-term payment commitments (typically either monthly or yearly), thereby increasing the lifetime value of customers.

Furthermore, the recurring revenues that come along with offering subscription-based plans represent a relatively predictable and secured income stream on which you can rely.

Amongst the different approaches to SaaS-based revenue from which startups can choose, two of the most popular optins are:

  1. Pay as you go (PAYG): You charge your users according to their individual usage rates. Back in the day this was highly popular with mobile phone plans. Today, companies like Amazon Web Services and Twilio use this model in an attempt to offers their users flexible pricing plans.

    The key downside to the PAYG model is the fact that, because it’s inherently based on how much of a particular service a customer uses, it’s often difficult to sustain highly predictable revenues (thus potentially introducing considerable uncertainty into your business).

  2. Tiered pricing: You divide your services into different tiers (or levels) based on features and usage amounts such that the customer pays more as his/her needs evolve and expand. Tiered pricing is the most common model used within enterprise SaaS.

One key benefit of this approach is the fact that it clearly shows your users that their specific needs can be met, both now and in the future, even if they change over time.

Shopify’s revenue model, consisting of both time-based freemium (14-day trial) and SaaS approaches (tiered subscriptions):

shopify

9. Other

Depending on their objectives, the nature of their products or services, and the kinds of business they (wish to) do, there are various other revenue models that startups can implement.

The key is learning how to effectively apply creativity to revenue generation.

For instance, the free language-learning app Duolingo capitalizes on the power of large crowds with regards to the mechanics of its translation services.

Duolingo uses software to analyze and select out the best version of completing translations.

The result is a translation service that produces translations superior to those of Google Translate.

News organizations (and other websites) that need to produce multilingual content can then purchase these translations from Duolingo.

Duolingo also engages in sponsored articles wherein the content is translated for a fee.

(image source)

Other businesses have managed to make millions with in-app purchases and other engagement strategies. 

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