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How Apps Make Money Using Smart Design

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The tremendous reach and revenue of Pokemon Go is impossible to ignore. Within one week of its release, it was already the biggest mobile game in US history and in the first month alone its developer, Niantic, had earned over 200 million USD. This is despite the fact that the game is a free downloadable app – so where is all this money coming from?

Though not a new concept, the success of Pokemon Go proves without a doubt that in-app monetization is the working model for web developers in the mobile marketplace, and not just within the gaming industry. Let’s take a look at how this design concept works.

In-app monetization is the (now much more popular) alternative to paid apps. In the first years of the App Store (iPhone) and Play Store (Android), users had to purchase most apps in order to download them. While this remains a viable business model and many apps are monetized this way, most are now free to download. Instead of making money by selling an app, developers and distributors make money within the app in a variety of ways. This allows them to build and grow a user base while avoiding the greatest of all friction points: the initial point of sale.

In-app monetization comes in many forms but, put simply, it is based on the same philosophy as loyalty programs in that the app offers a rewards system for regular users. The purpose is to fit in revenue streams organically within the app, without significantly affecting the user experience. Depending on the type of app, one or more of the following revenue streams may be used:

1) In-app advertising

The most traditional form of in-app monetization is to simply include advertisements. This allows for a relatively reliable revenue stream based on ad sales, but people generally find in-app ads annoying and disrupting to the user experience. Generally, consumers will gravitate towards an ad-free alternative if one exists.

2) “Freemium”

A portmanteau of the words free and premium, freemium apps get their name from the fact that they are free to use but users must pay to unlock optional “premium” content and features. This has proven a very successful model for many developers especially in the gaming industry, with 50% of gamers only playing free-to-play games, but this is also the model behind Amazon’s Amazon Prime service, a subscription-based paid upgrade to their normal free services.

Because well-designed apps breed loyalty in their user base, it’s easier to sell premium features to existing users than to sell the complete app to someone who hasn’t used it yet. However, designers should be careful with how much they limit functionality in the free version, or risk receiving criticism from frustrated users.

3) In-app purchases

More specific and versatile than freemium, in-app purchases allow developers to sell specific items to their users. Many mobile games sell in-game currency which can then be only used within the game world. Some social media and dating apps offer the ability to promote yourself or your posts for a nominal fee. Retail apps are typically free, but profit from any sales made through the app.

4) Affiliate Marketing

This revenue stream refers to promoting other apps, products or services within the app and collecting a commission off of any leads or sales generated by the promotion. An app developer becomes an affiliate for another developer or business and is then rewarded for each visitor or customer directed their way. You may find more information on affiliate marketing here.

5) Incentivized Advertising

According to a new report from Unity, this new revenue stream has proven to be one of the most effective forms of in-app monetization. Incentivized advertising is the optional inclusion of ads within an app – the user is given the choice of whether or not to view an ad in exchange for some kind of reward. For example, a mobile game may offer extra lives if the player chooses to watch a video from an advertiser, or a retail app may offer a discount code in exchange for the same thing.

The number of apps available is literally in the millions and in 2015, 93% of all apps downloaded were free. The pay-once-and-use model is only realistic for large companies with strong brand awareness and loyalty and a lot of marketing dollars. For the rest, in-app methods of monetization are likely the better option.

The key to successful in-app monetization is smart design. When done well, these five revenue streams don’t get in the way of a good user experience, don’t frustrate customers, and don’t significantly limit functionality. A free app still has to be a good app, even for those users who don’t generate any income for you. Keeping user experience and monetization in balance is the secret to good app design.

Stay tuned to the Payza blog for more insights on ways to increase your revenue, whether you’re designing an online game, developing your e-commerce store, or marketing your products and services online. Be sure to follow us for company news and product updates on:

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