Free Vs. Paid Apps – Which Is More Profitable?

How Free Apps Generate Revenue

The truth of the matter is, there’s really no such thing as a free mobile app. While the download process itself might be free, mobile apps cleverly utilize various monetization models to generate revenue from users.

6 of the most commonly used app monetization strategies (for free apps) are:

• App advertising
• In-app purchases
• Subscriptions
• Selling merchandise
• Sponsorships
• Collecting and selling data

Let’s look into each of them in detail…

#1. In-App Advertising

In-app advertising happens to be one of the easiest app monetization models to implement. You just need to find a way to display ads within your mobile app, and revenue will start streaming in from third-party ad networks.

By 2019, mobile advertising was attracting spending of 189 billion U.S. dollars. The trend continues to grow, and experts project that it’ll surpass 240 billion U.S. dollars by 2025.

So, yes – there’s a lot of money to make here if you attract a sizable number of mobile app users.

Now, to be specific, app owners typically get paid based on the number of ad impressions, the volume of ad clicks, or the number of conversions made through the ads.

If that sounds like something you’d want to try out, there are 4 primary types of ads you could build into your mobile app:

• Native Ads: Just like the name suggests, native ads are embedded to appear as a natural element of the app. They intend to promote a relevant product or mobile app, usually as part of an affiliate marketing arrangement.
  The good thing about native ads is, app users themselves find them to be less intrusive than other monetization methods that rely on ads. On the flip side, though, it turns out native ads generate less ad revenue compared to other types of ads.

• Banner Ads: These are basically displayed as banners within the mobile app layout. They mostly appear at the top or bottom sections of the screen, leaving app users to work with the rest of the mobile app interface.

• Interstitial Ads: Interstitial ads are full-screen pop-ups that appear occasionally as users interact with the mobile app. They also come with a close button on the upper right or left corner of the screen.

• In-App Reward Video Ads: These are special video ads that offer app users various rewards once they view them. You could, for instance, set your gaming app to unlock additional features for users who choose to watch video ads.

This app monetization model is known to have far better retention rates than other types of app advertisements.

#2. In-App Purchases

In-app purchases are built to give app users the option of buying extra features for a fee. The apps themselves can be downloaded and used to a certain extent for free, after which users are requested to pay in order to unlock additional capabilities.

This monetization strategy is particularly common among free mobile game apps, where in-app purchases are typically used to access special “power-ups” or extra gaming levels.

You’ve probably seen it in action on apps like Angry Birds or Clash of Clans. While the games themselves are free of charge, they allow players to purchase various virtual items for enhanced gameplay.

This is a thoughtful way of generating revenue from your mobile app without being too intrusive. App users have, in fact, been responding much more positively to in-app purchases than other types of app monetization options. That’s why, according to Forbes, mobile apps with in-app purchases generate the highest revenue for app owners.

#3. Subscriptions

Apart from mobile app advertising and in-app purchases, you could strategically use subscriptions as a monetization strategy. The trick here is to provide free content on your mobile app for a limited period of time, and then request users to pay a subscription fee in exchange for full content access privileges.

In particular, this monetization model is mostly leveraged by apps that specialize in audio streaming,  video streaming, cloud services, and news.

Take Netflix, for example. Once you download the app for free, it allows you to proceed with watching videos for a month or so. Then when the trial period lapses, you’ll be required to subscribe to one of its premium plans to continue accessing the content.

If you choose to build a similar subscription-based app for iOS users, you’ll be pleased that Apple doesn’t take that much from the revenue kitty. While the company continues to deduct a commission of 30% from in-app purchases, it sweetened the deal for subscription-based apps by reducing its revenue share to 15%.

Please note, however, that this only applies after the first year of subscription. So, expect to split your first-year subscription payments 70/30.

#4. Selling Merchandise

It’s also possible to generate revenue from your free mobile app by selling different types of merchandise.

This monetization strategy is particularly common among eCommerce businesses that rely on product sales. Instead of monetizing the app itself, they choose to offer a free version through the App Store, which users then proceed to shop with.

The Amazon app is a great example of one. While you’ll never pay to use the app, Amazon manages to generate revenue from all your merchandise shopping.

#5. Sponsorships

Although it’s not very popular, the sponsorship model packs a lot of revenue generation potential for well-connected app developers. You just need to find yourself a sponsor in your niche and then come up with a sponsorship deal that serves both parties.

You could, for instance, strike up a deal with nutrition brands to run sponsored content on your fitness app. They’d be willing to pay you to perhaps popularize their brands, market their products, or probably send leads to their website.

#6. Collecting and Selling Data

One thing about mobile apps is, they always gather a lot of user data on behaviors, personal interests, and app usage. This is valuable information, as some advertisers and platforms are willing to pay top dollar to tap it.

You can, for instance, set your mobile app to track user activity, and then sell the data to third-party researchers and marketers. Alternatively, you could simply forward user details like personal preferences, social media accounts, and email addresses.

But, while you’re at it, you might want to take extra caution. User data should only be shared with other parties after getting a go-ahead from the users themselves. That’s why it’s very important to have them accept the terms and conditions before using the app.

How Paid Apps Generate Revenue

Paid apps, on the other hand, rely on these two revenue generation models:

• App purchase
• Freemium Upsell

#1. App Purchase

The first monetization strategy is the most obvious. Create an amazing app, charge consumers for your amazing app and you’re done.

Both Google Play Store and Apple App Store allow app publishers to set their app purchase prices. You could, for example, make your app available for even as low as $0.99. It all depends on the value you’ve attached to your app, plus its target market.

As of January 2021, the Apple App Store had more than 38,000 mobile apps that cost less than a dollar. That was pretty much the same trend across the Google Play Store, as its paid apps by then had a combined average price of less than $1.

It’s worth noting, though, a study at Cambridge University showed that just 20% of paid apps are downloaded more than 100 times and only 0.2% of paid apps are downloaded more than 10,000 times.

So even if you are assured to receive that $0.99 from every download, having your customers pay for your app directly will not necessarily bring in the biggest profits.

#2. Freemium Upsell

Another great monetization strategy to explore is known as the freemium model. Under this framework – which dates back to 1994, according to Forbes Magazine – companies and developers offer a free and a paid version of their app to consumers.

The whole thing works because it allows users to test out the free version before deciding for themselves. If they like what they see, they might commit to buying the paid version of the app – which, in most cases, comes with superior features.

In an interview with USA Today, the Executive Producer at developer XMG Studio, Ross Dixon, explained that:

“People are willing to invest their time — rather than money — to try out a new app.” He says, “if [users] like it, some will pay for additional content.”

So, in essence, you could say the freemium version is great at increasing downloads and generating reviews for your mobile app, while the premium version is ideal for revenue generation.

#1. Define The Mobile App’s Business Goals

To determine the best monetization model for your mobile app, you need to start by defining what exactly you intend to achieve in terms of business goals.

In other words, what do you consider to be the biggest priority for your business right now? Are you seeking to build revenue or simply gain mobile app users? Is your business interested in promoting its brand by attracting as many downloads as possible, or would you be comfortable with fewer downloads but a higher conversion rate per user?

If you’re looking to generate quick revenue from the mobile app, then you might want to consider proceeding with a free app that makes money from in-app advertising.

The subscription-based monetization strategy, on the other hand, is best left to businesses that have already built a decent customer base way before launching a supplementary mobile app.

#2. Consider The Mobile App’s Target Audience

Apart from your business goals, you should consider the type of audience that you’ll be targeting with your mobile app. Some of these app monetization models have been shown to work best with certain groups of users, but then end up performing dismally with others.

For instance, a gaming app will have an audience that won’t necessarily mind in-app advertisements. Mobile gamers will simply ignore the advertising or click through onto other games and apps.

In contrast, a business app will have a more professional audience that is likely to find in-app advertisements annoying and distracting to their experience.

So, before anything else, try to determine the purpose of your app and its audience,

#3. Understand Who Is Willing To Pay More

In the free vs paid apps debate, it is important to keep in mind who pays for what. While paid apps are directly paid for by hesitant consumers, free apps are most commonly paid for by companies in the form of advertisements.

Unlike app users, companies are eager to spend on app advertisements. In fact, as users are increasingly choosing to download free apps, ad spending on apps is growing immensely.

#4. Assess Your Competitors

If you’d like to compete fairly against millions of other mobile apps in the market, then you need to understand your competition before taking the plunge. This is particularly critical for mobile app developers who are planning to venture into an already crowded mobile app niche.

You should take the time to analyze your app industry and the main competitors you’ll be facing once the app launches. Review not only their monetization strategies and options but also their corresponding weaknesses and strengths.

Are your competitors offering free or paid mobile apps? What types of app advertisements are the freemium competitors running? Which extra features do they offer on their premium mobile apps? How are their users responding to the monetization experiences?

A comprehensive analysis here might take you months, but it’s ultimately worth the effort. You get to not only understand the risks but also identify opportunities that you could capitalize on in your app’s monetization strategy.

#5. Test The Mobile App Monetization Strategies

There’s only one way to accurately counter-check the suitability of your selected app monetization model. Yes, that’s right – you need to run it through the very audiences that you intend to target.

More specifically, you ought to come up with various prototypes of your app during the beta development stage. Integrate different monetization models into them and then distribute the prototypes among your target users.

Ultimately, you’ll be able to track the response and usage patterns, as well as collect feedback from the app users. You can then combine all that to make an informed decision about the best monetization strategy for your app.