3: Revenue Models for Mobile Apps

Tim and Rob discuss the pros and cons of 5 popular revenue models for mobile apps.

In this episode, you will learn:

• The true cost of a "free" app
• The reason why the traditional "paid" app model doesn't work well for mobile apps
• Why "freemium" apps are the most popular source of revenue
• "Paymium" is actually a word, but not a popular revenue model
• The complexities of starting a "SaaS" product

This episode is brought to you by The Jed Mahonis Group, who builds mobile software solutions for the on-demand economy. Learn more at http://jmg.mn.

Recorded October 26, 2017
Edited by Jordan Daoust

Show Notes:

Free Apps:

• Target
• Amazon
• Great Clips
• Facebook
• Twitter

Paid Apps:

• Half Staff App

Freemium Apps:

• Candy Crush
• Angry Birds
• Overcast
• mncraft.beer

Paymium Apps:

• djay Pro

SaaS Apps:

• Kwikly
• Uber

Episode Transcript:

Tim Bornholdt 0:00
Welcome to Constant Variables, a podcast where we take a non-technical look at mobile app development. I'm Tim Bornholdt.

Rob Bentley 0:06
And I'm Rob Bentley. Let's get nerdy.

Tim Bornholdt 0:22
Alright, so today, Rob, we're talking about revenue models for mobile apps. Now, 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 going to make you money. So today, we're going to talk about five different revenue models. We're going to 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.

Rob Bentley 0:45
But apps are just free, right?

Tim Bornholdt 0:47
No, yeah, exactly. That's a great lead into 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 store is 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 certain apps.

Rob Bentley 1:14
And why would you build an app and then put it out for free?

Tim Bornholdt 1:18
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.

Rob Bentley 1:35
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 either 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.

Tim Bornholdt 1:50
Exactly. So something like Great Clips, they would want their app to be free so that you would download it and have an easy time of scheduling a haircut.

Rob Bentley 1:57
Yeah, it gives the users an easier way to use their actualy product which is going in and buying a haircut.

Tim Bornholdt 2:02
Right, which leads into the third reason you might want a free app. If you're going to bundle it with another product or a service that you sell, then you probably want to have the app given away for free.

Rob Bentley 2:11
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.

Tim Bornholdt 2:21
Yeah. And obviously, if it's free, you're not making any money. So you need to have some other way to make money. Now, this is the point in the conversation where we usually ask people, "Well, how are you going to make money?" and they say, "Oh, well, ads, of course." But ads, that's a whole other business. It's a whole other can of worms. And there's a couple of reasons why ad-based businesses can suck sometimes.

Rob Bentley 2:44
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 in ads, and in one sense that's true and another it's not.

Tim Bornholdt 2:55
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 going to 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.

Rob Bentley 3:31
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. Not a lot of apps get there.

Tim Bornholdt 3:58
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. 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 "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 okay with that. If you're going to go down the ad based model of choosing somebody else's ad network, there's going to be all kinds of ethical things that you're gonna need to deal 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 going to 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 example of that would be our Half Staff app. So you pay 99 cents. You get to download the app. Maybe it's $1 99. I can't even remember.

Rob Bentley 5:26
It's $2.

Tim Bornholdt 5:27
Yeah. Okay. So you pay $1.99. And you get to have the app on your phone, and it sends you push notifications. And that's it.

Rob Bentley 5:33
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.

Tim Bornholdt 5:39
Exactly. It's great for it because a Half Staff app is a utility, and it's something that in a niche. Not a lot of people really care if the flag is set to half staff or not. It kind of falls into the sweet spot where people are willing to pay money to have that information sent to them right at that time.

Yeah, exactly. Also a good model for a paid app would be where someone in a certain profession needs this app to perform their work.

So 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 going to be in your movie, that's a perfect chance for you to charge to make money because people are going to pay to have a tool that works and gets the job done.

Rob Bentley 6:21
Especially when it's a business expense and not like a user just buying a game.

Tim Bornholdt 6:25
Exactly. Another really great reason to use this approach is because time and time again, we've seen that if you charge money up front 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 press and your app is getting out there, if you have a paid app, you're going to 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.

Rob Bentley 7:04
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.

Tim Bornholdt 7:11
Exactly and use those funds to pay for the next app development. Now, again, as we're saying here with this model, that is great. If you're trying to make an app that you can switch away to the next app and keep building on it, it's great for that. But if your plan is to "I'm going to 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.

Rob Bentley 7:39
Yeah. Which makes it hard too 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 $1 for it.

Tim Bornholdt 7:52
Right, exactly. And you can't. In this day and age, it's not realistic. Phones are updating all the time. Software is updating all the time. You're going to need to keep putting in a lot of work. So the amount of money you charge up front might not be exactly enough to break even at the end of the day if you're going to continue to support this tool for a long time.

Rob Bentley 8:09
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.

Tim Bornholdt 8:21
Right. Even if it's 99 cents, people are going to get really weird about dropping 99 cents on an app.

Rob Bentley 8:27
And I feel bad because I'm an app developer and I do the same thing.

Tim Bornholdt 8:31
Ditto. 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. Whoo. 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.

Rob Bentley 8:48
Right, because you get that adaptation of users. A lot of people download a free app because why not? You give them it. This way it gives them a kind of try it before you buy it model.

Tim Bornholdt 8:58
Exactly. So freemium, it's portmanteau of, you've got your free, but then premium upgrades included in the app. So that's where freemium comes from.

Rob Bentley 9:07
And a lot of games are using this right now. That's the big one.

Tim Bornholdt 9:10
Exactly your candy crush and your Angry Birds, they're going to 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.

Rob Bentley 9:24
Right. So also, this lets you charge for new features as you come out with them.

Tim Bornholdt 9:29
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 99 cents, and you will see a lot higher conversion on that than you would if you were just trying to put it all in at once at launch.

Rob Bentley 9:53
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.

Tim Bornholdt 10:04
Exactly. Another reason that you might want to go with a 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 minutes before, but if you choose to throw ads into your app, it's pretty easy to throw put them up so that when you download the app, there are some ads there. So you can make a little revenue that way. But then you can have somebody pay 99 cents, or $2 to unlock the app and to remove the ads. And you'll actually probably see more money doing that than you would of that user using your app and getting the ad revenue long term.

Rob Bentley 10:41
Right. I mean, we did dog on 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.

Tim Bornholdt 10:49
Exactly. There's a lot more to it than just make some money off of ads. Not everybody can be Google.

Rob Bentley 10:55
Right. So freemium sounds great. Why wouldn't someone want go that route?

Tim Bornholdt 11:01
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 in-app purchases inside your app. So the initial development cost of including in-app purchases could be a barrier for you choosing to add them into your app.

Rob Bentley 11:23
And also on 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 continual development around it just because of the variables involved with in-app purchases. You have your front end code, you have a server code, 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 along the way, it can be costly and difficult to figure out where it went wrong and how to fix it.

Tim Bornholdt 11:54
Yeah, really hard to test and find out where you'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 can be tough when you're initially developing your app to say, where's the point at which 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, okay, you get it, now pay up for the whole thing or deal with the limited version.

Rob Bentley 12:32
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. It does take a little bit of back and forth experimentation, users using it, feedback, all that.

Tim Bornholdt 12:45
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 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 three hours, so I'm going to buy an in-app purchase and pay 99 cents for 1000 coins, and then I can move on now." 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 going to be three of your really major revenue models for an app. There are some others though. This one's a little bit less common, I think. But since this is an informational podcast, we're going to cover it.

It's true. We do want you to know what your options are.

Rob Bentley 13:47
And this one is paymium.

Tim Bornholdt 13:49
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 app, you pay for it, but then you also pay for it with in-app purchases to unlock even more features inside the app.

Rob Bentley 14:03
So who would benefit from a paymium style app? There are uses for it.

Tim Bornholdt 14:07
Yeah. So really, this would be great for, again, going back to some of the pros for paid apps. If you have a tool that your clients are relying on to use for their jobs, so let's say you're a lawyer. You download a lawyers reference app. You probably would have them pay up front 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 tools to do their job so you could charge for it up front, but then you can also have them pay to get 2017's tax info abd 2018's tax info.

Rob Bentley 14:48
Right. So anything that's sort of subscription based, you would want to do a paymium model. You need to pay for it to get the information but you also need to pay to get the updated information.

Tim Bornholdt 14:58
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 up front in the first few weeks, or 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 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.

Rob Bentley 15:24
Yeah, so this will usually be more for a business use where people absolutely need it, and they're willing to pay for it because it absolutely does help them do their job.

Tim Bornholdt 15:33
Exactly. Now, 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 paid and freemium, you're going to see in this paymium column as well.

Rob Bentley 15:49
So you really need to hit home with a good niche market if you're going to go this route.

Tim Bornholdt 15:53
Yeah.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 going to find a free version." It's like you really need to give them an incentive to want to use your app.

Rob Bentley 16:08
So the last one we're going to cover is software as a service.

Tim Bornholdt 16:13
Yeah. So another way to say it is SaaS. Yeah, so a 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.

Rob Bentley 16:34
But yeah, the big pro of this is you get a lot of ongoing revenue, and you make a lot of money.

Tim Bornholdt 16:39
Yeah, and having the ongoing revenue is key because it's nice to have that hit of money all at once. It's great to, like Overcast, when they launched, they made just north of $80,000 in that first couple of weeks, you know. Like you really can make a lot of money going that route, but this way, instead of making all this money and then that's it, if you were to say, every user gives me $1 a month or $2 a month, you can see how that scales to be really good money going forward.

Rob Bentley 17:08
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.

Tim Bornholdt 17:17
Exactly. Usually the app is kind of free. You don't 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 would make people want to continue to pay for your app,

Rob Bentley 17:32
Right. An example of this would be Uber.

Tim Bornholdt 17:34
Yeah, exactly.

Rob Bentley 17:37
Users download the app for free, and then they pay to get a ride and then part of the money goes to Uber, part of the money goes to the driver, and then everyone wins.

Tim Bornholdt 17:46
Yeah. And one thing to keep in mind as a con with this, too, is that as a result of that, there's a lot more infrastructure involved upfront and 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 app that's isolated to just an app in the app store.

Rob Bentley 18:05
Also, 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 that'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.

Tim Bornholdt 18:24
Well, and that's only if you're really building like a three sided marketplace like Uber. If you're building just a SaaS tool, if you're offering a tool that lets you save documents in the cloud, like Dropbox, for example, Dropbox doesn't have a three sided marketplace they're worrying about. But it is something you need to worry about is the infrastructure to support lots of users using your tool all at once. If you get really successful and you have hundreds of thousands of people paying you something a month, they're going to all expect that your app works exactly when they want it. So you have to worry about support going forward.

Rob Bentley 18:55
Yeah, lightning fast all the time.

Tim Bornholdt 18:57
Yeah. And the last thing too, did we mention churn already?

Rob Bentley 19:01
Yeah, I think so.

Tim Bornholdt 19:01
In a sense, yeah. It's easier to forecast your revenue with this. But you just basically need to keep incentivizing your users to use the app. Otherwise, they're going to leave, and you're going to lose out on that juicy, ongoing revenue. So Rob, what are your final thoughts for revenue models? And what's appropriate for our listeners to know to take away when they're deciding what revenue model's 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? And what did you want it to do? What is the user interface going to look like?" And now my first question is, "How are you going to make money doing that?" And then I get cricket noise.

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 the first gut instinct is ads. And our answer is "Well, okay, have you thought about abcdefg as it relates to ads" and that ends the conversation.

Right. And you know, 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 throw in 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 is how is it actually going to make money and make that a focal piece of the purpose of the app. Because if your app doesn't exist, and your app can't sustain itself, then your users aren't going to be happy and you're not going to be happy because you'll be gone.

Rob Bentley 20:41
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.

Tim Bornholdt 20:50
Exactly. The freemium model wasn't even considered a few years ago, like before in-app purchases really got going People just really didn't even use them. And now with subscription, people are trying to figure out how to use the subscription based model because now with Apple 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, that will 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.

Rob Bentley 21:38
Exactly. I think that about rounds that out.

Tim Bornholdt 21:40
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 hello@constantvariables.co. I'm @TimBornholdt on Twitter. Rob is @ScottMahonis. He posts all the time. You guys will love seeing what he posts on Twitter.

Rob Bentley 21:59
It's important.

Tim Bornholdt 22:01
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.