February 10, 2017 Last Updated 1:03 pm

Advice for app publishers: Making money with apps may mean utilizing freemium model

Guest column: Successful app maker says that offering a free app allows app creators to formulate a large, active user base and premium IAPs are a great way to generate user engagement

It’s almost become cliche, but “there’s an app for that” is often true. In fact, as of June 2016, Android users had access to an astonishing 2.2 million apps, and Apple fans could choose from about 2 million total apps.

With so many apps competing for attention — and often budget — the question many developers pose is simple: how do you make money on apps?

Typically, apps fall into one of three categories:

  1. Free. These apps are free to download and free to use. Sometimes they have very limited functionality (before Apple made a flashlight function part of the operating system, there were dozens of free flashlight apps. Sometimes these are just simple apps that someone developed for fun, sometimes they accept advertising and sometimes they are feature sets of a larger purchase or service — think of your banking app, for example).
  2. Freemium or in-app purchases. Many apps are free to download, but you’re able to unlock features or turn off advertising by converting to a paid version. This is also the model for most major media. The New York Times app, for example, is free, but you’re limited in what you can access until you buy a subscription. Some apps (most commonly, games) are free, but allow you to purchase specific features to generate revenue. This method, as you might imagine, often sparks heated conversations between parents and game-obsessed teenagers.
  3. Paid. These apps are often popular games, but in many cases, they offer a better piece of functionality — like a great alarm clock or a photo to .PDF tool — that users are happy to pay a small amount to own, often just 99 cents.

It’s important to note that the majority of last year’s top-grossing apps didn’t cost anything to download. But, in a market where users have come to expect their apps to be free, how do app creators actually create revenue and have a business?

Consumers also tell us through their buying habits that some prefer a free app with limited functionality or advertising, but some find they want the choice to upgrade. Letting users test drive an application and its features before investing even 99 cents of their hard-earned money in it is becoming more important, and app creators need to pay attention if they want to survive in this nearly $90 billion industry.

The name of the game if you don’t want to simply charge for your app or sell advertising is simple: eyeballs. Many mobile app developers quickly discover that even when they offer an app at a low price — even 99 cents — they make less money than when they give the app away and create the option for users to purchase a premium version or make in-app purchases (IAPs). As a matter of fact, an app’s download count can prove to be much higher when it is free and it allows consumers to decide whether they want to buy specific features — kind of like trying that new IPA before committing to a full pint.

But a freemium model only works if you provide real value to those who take a chance (from, let’s face it, billions of choices) on putting your app on their device. If you can deliver value and offer consumers new and fun upgrades, apps can be the ideal platform for either one-time upgrades or ongoing purchases — and I quickly learned that my app, Lumyer, an augmented reality app that allows users to put video and sound effects into their videos, selfies and live streaming, is enjoying strong revenue from in-app purchases. Obviously, ongoing purchases are going to drive more long-term profit than their one-time purchase counterparts, but with either option it is essential to develop premium features that entice users to come back and continue to spend their money.

Over the holiday season, Lumyer, Google Play’s #2 top-trending app of 2016, tested a number of premium effects for 99 cents and the results were stunning for both Apple and Android users. Among Lumyer’s predominately millennial user base, made up of more than 11 million downloads globally, the premium holiday- and winter-themed effects were a huge hit. We found that more than seven percent of monthly active users purchased one or more premium services and that 20 percent of Android users completed more than one premium purchase, exhibiting their affinity for the premium effects.

Despite the short timeframe used for reference, we found that if a premium effect works once and we consistently bring fresh, new content that continues to add value, users will come back and spend more money in our app. As a result, during December 2016, our revenues were higher than our acquisition costs.

We have learned at Lumyer that offering a free app allows app creators to formulate a large, active user base and premium IAPs are a great way to generate user engagement, loyalty and most importantly, revenue. It’s clear to us that smart app monetization strategies demonstrate which monetization options are not only available but viable for your specific app — there is no one-size-fits-all solution. Developers need to study the marketplace, trends, their competition and leverage knowledge of their audience and business to be able to cater premium IAPs to the right user experience.

Diego Mortillaro is a three-time successful entrepreneur in the mobile industry. He is the CEO of Lumyer, an augmented reality app that was #2 on Google Play’s Top Trending App list in 2016 and is available on iOS and Android

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