How Do Free Apps Make Money?
Have you ever wondered how free apps make money? Most of the time, you download an app from the store and simply start using it. Naturally, developers who offer apps for free expect pay in some other form. If you are thinking of developing an app and are unsure how a free app brings profit, the following article provides clarification.
In the article, we check out how famous free products made money off their apps, offer advice on how to choose an app monetization strategy, and check out which software development services and tools to integrate.
In a nutshell, free applications make money from one of the following 8 most well-known monetization strategies:
- Advertising (via banner, video, native ad, interstitial ad, incentivized ad)
- Referral Marketing (Amazon)
- In-App Purchase & Freemium Model (PokemonGO)
- Subscription Model (Wall Street Journal)
- Sponsorship (Weather Channel)
- Crowdfunding(Hello Earth)
- Email Marketing (NY Times)
- App Merchandise & E-commerce (Angry Birds)
1. Freemium Apps vs Paid Apps Market
Our smartphones are used for essentially everything. With the help of a particular app, we can communicate across long distances, order pizza, or find a route in an unknown city. The amount of apps with rich functionality is growing annually, resulting in harsh app market competition among developers.
As of 2018, there are 3.8 million apps on Google Play and 2 million in the App Store. The market is huge and worldwide app revenue is expected to increase to almost $190 billion by 2020. According to Statista, the top grossing apps are all free of charge.
These days, users have become picky and usually have only 4-9 daily active applications.
On average, 5 to 10% of users are willing to pay for an application, but only one with high quality and performance, and specific functionality. Thus, the majority of downloads and profits (98%) come from the free app segment.
Additionally, Gartner Research Group states that 24% of users would interact more via in-app purchases rather than paid apps. Once an app proves its value, the users are prone to conducting more in-app transactions, purchases, and to unlock extended functionality.
The chart illustrates the revenue of each app monetization model in 2017 where:
- Game apps in general generate more revenue (top 8 out of 10 grossing apps in Google Play Store are games: Pokemon GO, Candy Crush Saga, Clash of Clans, etc.)
- Advertising (36% of non-gaming ad revenue) and M-commerce (21%) channels generated the most profit in 2017
To sum it up, developing a free app for your business is a wise action to pursue. The next decision is to choose your free app monetization strategy correctly.
2. App Monetization Strategies
Neither the Google Play nor Apple App Store pays for app downloads, even there are millions of users who completed this action. Instead, stores take some share from an app’s earnings (30% from in-app purchases).
Thus, in order to receive money from a free app it is necessary to set up revenue streams. Based on the statistical data, the most effective monetization method in 2017 was the use of rewarded video ads. This is a win-win strategy for both the app provider and customer, as once the user watches an add, they receive points and app bonuses.
These days, mobile ads are the easiest and most common way to receive money from a free app. Currently, 7 out of 10 apps has embedded commercials that generate payments per its display (per impression), per click, or per install.
There are 5 different ad variants to utilize in a mobile app:
- Banner Ad
These ads are placed at the top or bottom of the mobile device screen. In general, these are less intrusive, as users are still able to use the mobile app normally. On the other hand, banners have lower engagement rates (CTR- click-through rate) and these ads are dependant on brand recognition.
Example: Even with some of the downsides of banners, Flappy Bird was successful with this tactic and received on average of $50k per day while being in the top app charts.
- Video Ad
A video ad, lasting 10-30 seconds, is placed within the app where it plays automatically when there are natural pauses. A subset of video add category is a rewarded video ad, where consumers receive some perks (app currency, extra points, etc.) after watching the video ad until the end.
Example: A great example of a video ad is a VSCO photo-editing app advertisement. It was presented on Instagram as a 15-second video using bright colors to grab attention from the very start.
- Native Ad
These ads are intended to be naturally integrated into an app. These added elements can be sponsored content or videos used to promote a particular brand or product. As a result of their integration, these apps are acknowledged as irritating and tiresome the least, so it gets more popularized as a monetization model among app providers.
Example: In association with the New York Times’ T Brand Studio, Airbnb created a campaign for Ellis Island. It played a great role in history and was a way for immigrants to enter a happier life in America. This completely coincides with Airbnb’s value of giving their customers a great welcome anywhere they travel.
- Interstitial Ad
These ads are full-screen pop-ups shown in a specific moment within an app. These are typically displayed when the app is opened or closed. The user has 2 taps to choose – either close the ad or check out the promoted content.
Example: Emirates Airlines effectively incorporated an interstitial ad resulting in over 5,000 clicks to the website and 170,000 complete video views. Emirates promoted their new destination, New York – Dubai, by showcasing their full-screen ad to travellers in the NY airport once connected to WiFi.
- Incentivized Ad
Everyone likes rewards and hates advertisement. With the help of a tool set, it is possible to provide users with rewards for a specific in-app action or engagement like: fill out a poll, content sharing, etc. These app bonuses can increase app loyalty and user engagement. The profit from this tactic is gained via in-app currencies and sponsorships.
What is important is that these rewards should be positioned wisely, as a part of the app’s involvement.
Example: The RunKeeper app, used for personal activity tracking, was among first to use incentivized ads. It offers the unlocking of additional app functionality and receipt of rewards without disturbing use of the app.
Disadvantage of the advertising model
App advertisement is the most popular app revenue stream. However, it is no wonder that this has begun to annoy and irritate customers. This prolific use of ads has become ineffective, as less than 20% of users click on them. As well, this monetization strategy can be effective only with apps that have a large pull of users, not for a startup project.
2.2. Referral Marketing
Referral marketing is closely connected with the previous model of in-app advertisement to monetize your app. There is even a separate direction in marketing – affiliate marketing. Informational content about an affiliate company is placed in the app and, based on clicks and installs, you receive rewards. These rewards are based on a cost-per-action (CPA) model or revenue share.
The referral marketing model can be used in the following ways:
- promote another application
- in-app advertisement
- advertise products or services via in-app-store
There are also many affiliate network companies (AdMob, Flurry) that specialize in finding a suitable affiliate for your application. There are different software programs and tools that can help to integrate this model.
The same as with the advertising model, campaigns used in affiliate marketing include:
- CPM (cost-per-mille, cost-per-impression)- you receive payments based on the number of impressions, the advertiser is usually charged every 1,000th time (mille, in Latin, is one thousand)
- CPC (cost-per-click)- you receive payment based on the number of clicks on a displayed app
- CPV (cost-per-view)- you receive payment based on the number of video views or other ad interaction
- CPI (cost-per-install)- you receive payment each time the promoted app is installed via its ad in your product
Example: Amazon is a great example to show how affiliate marketing works. Select a product you would like to advertise in your app and receive advertising fees based on each redirected purchase.
Free apps are also making money without ads. Check out 6 more monetization tactics, namely:
- In-app purchase & freemium model
- Sponsorship model
- Subscription model
- Crowdfunding model
- Email marketing
- App merchandise & e-commerce
2.3. In-App Purchase & Freemium Model
In-app purchasing is a very popular strategy used in the freemium app model. It is possible to sell virtual or physical items, offer premium functionality or bonuses, block ads, or open new app content. All these transactions are managed by the app store and the owner gets a commission from every trade.
In-app purchase strategy has three categories:
- Consumable: these items are used once, mostly in mobile games. Example: digital currencies, health points
- Non-consumable: these are features used permanently. Example: ad blocking, extension in-app functionality
- Subscription (described in more detail below)- this allows one to unlock additional content and features for a particular amount of time. Example: monthly or annual service subscription
Example: Some apps have received huge amounts of revenue by implementing this model. The Clash of Clans game earned $1m per day on purchases, and Pokemon Go users bought in-app purchases for $1.5m daily. Within 2017, Pokemon Go’s revenue crossed over $1 billion making it the top grossing game in history.
Another example of a freemium app model is MX Player, a well-known video player on Google Play with ads for the free version. MX Player Pro is offered as the ad-free version for a small charge.
Disadvantage of the in-app purchase model
The model is only plausible and lucrative for top apps in the segment that have many users. This system is harder to implement due to the complex payment system development and integrations. As well, a downside to this model is the high commission fee (30%) taken by app stores. In a freemium app model there are two app variants – light and full, and a user may only use the free version.
2.4. Subscription Model
As mentioned, the subscription model sets up revenue streams from the weekly, monthly, or annual fees for a specific service provided by the free app. This model is mostly used in cloud services, audio and video content providers (Spotify, Google Music), and digital news portals. Consumers receive access to the content according to their chosen subscription plan.
Example: The most dominant newspaper apps, Wall Street Journal and New York Times, gained 1 million customers with a subscription model.
Disadvantage of the subscription model
It is necessary to have resources and detailed content strategies to provide fresh, up-to-date materials to keep up with competitors and guarantee a high level of subscriber services.
2.5. Sponsorship Model
Getting a sponsorship is a profitable model to follow to make money from a free app. This model is usually available for developed apps that already have regular users. The most benefits can be gained by applications with a specific market niche. Thus, you may contact sponsors in the same industry to match their brand with ads, information in the app, or adapt the app design to the brand.
Two primary sponsorship deals:
- Equally divide revenue from the app
- Set a monthly sponsorship fee
Example: A good sponsorship monetization example is seen through the Weather Channel app. The app placed an animated background for Home Depot, a retailer in the field of construction and household goods.
Disadvantage of the sponsorship model
This model works well in case you have a specific niche and unique app idea. And, even with the right app and niche, it is still challenging to find a proper sponsor.
2.6. Crowdfunding Model
This one is fairly a new way to monetize an app for free. Custom software developers may use the following platforms to raise funds for app development and marketing needs: Kickstarter, Indiegogo, CrowdFunder, and AppsFunder.
Example: In general, apps of another category than games receive funding. In 2017, In any scenario, in order to receive profit from your free app,138 app ideas were crowdfunded and raised $10k-$100k on Kickstarter. As an exception, the Hello Earth game with a popular cat character, generated $148k.
Disadvantage of the crowdfunding model
These are thousands of applicants and can become very difficult to be crowdfunded. It is necessary to show the value of the product and that idea that is worth taking a risk and investing.
2.7. Email Marketing
Email marketing has always been a profitable strategy in any industry. This is an old technique of collecting user data, mostly emails, and sending corresponding marketing materials to heat up the subscribers’ interest in a product or a service. It is helpful when your user retention indices drop or when used to notify about new features, rewards, app news, etc.
It is possible to collect email addresses in several ways:
- ask for the email with a pop-up message by offering something in return (app coins, bonus)
- via Facebook SDK for a user to sign up where it collects emails
- through third-party tools for easy email collection
In any situation, do not forget to inform, ask permission, and state the purpose of using personal user data. This is a concern especially if your target audience is in Europe, according to the GDPR (General Data Protection Policy).
Example: The New York Times, The New Yorker, ad The Washington Post generate web traffic and hook their subscribers with pieces of tasteful content in their email distribution. The rest of the information is received once paid.
Disadvantage of the email marketing model
Email marketing, due to its wide usage, has become less effective today. The biggest advantage is for the top branded apps, while for a startup it is less powerful.
2.8. App Merchandise & E-commerce
The e-commerce industry is blooming and more and more consumers are joining the online buying community. Most physical items are sold with the help of free mobile apps.
Amazon offers the opportunity to earn a profit from this app model with the help of its Merch tool, an easy program allowing app owners to create and sell their branded items within their apps. All the logistics are managed by Amazon: production, selling, payment, and delivery, while you get a share of the profit.
Example: Among the first successful free app merchants was the Angry Birds game. The game earned a revenue of $1m each month from plush bird toys alone, not counting the T-shirts, stickers, and backpacks.
Disadvantage of the app merchandise model
This option is only available for the top apps with a large audience. Another alternative would be to develop a free app for your regular business and sell any other items with its help.
3. How Much Money Do Free Apps Make?
According to the recent statistics, approximately top 25% of iOS developers and 16% of Android developers make up $5k on average each month with their free apps. This can serve as a benchmark in the industry. This also means that only 20% of the applications on the market bring a profit based on their high quality and know how to make a profit from their free apps wisely. The 75-80% of apps are not needed.
The majority of the top free apps use in-app purchasing and/or advertising monetization models. The amount of money each app makes per ad depends on its earning strategy. For example, in advertising, the general revenue per impression from:
- banner ad is the lowest, $0.10
- interstitial ad is moderate, $1-3
- video ad is the highest, $5-10
Most app advertisements use the CPC model where optimal RPM (revenue per mile) is 1.5%-2%.
Ad Revenue= Impressions (Clicks) x RPM
For example, if you have 50,000 banner ads displayed per day, your average number of clicks is 750, while the revenue comes out to $75 (750 x $0.10).
AN of clicks= ad number x (1.5/100)
Moreover, free apps also make money by hiding ads from those who pay to improve their user experience. Other microtransactions of 1 to 5 dollars are aligned to coins – accessories that increase the user’s level and make them more competitive. By adding all of these and multiplying by the number of users, it is clear now that game owners receive great revenue.
In dating apps, such as Tinder, users can purchase premium functionality. The unlocking of paid functionality (unlimited liking possibility, endless right-swiping) is the most common monetization strategy for dating apps. Other variants include: in-app advertisement, subscription to the premium plan, and different packages of seasonal bonuses, stickers, icons, etc.
In terms of app categories, free app games make far more than any other app segment. According to App Annie, the top grossing app, in the US as of August 2018 are free games like Fortnite and Pokemon Go on iOS and Android platforms, respectively. The leading Android apps worldwide are Pokemon Go and Candy Crush, which have earned $71.03m and $41.6m in 2018, respectively.
In January 2021, according to Statista, Candy Crush Saga generated approximately 32.29 million U.S. dollars in global revenues through the Google Play Store. All of the highest-grossing apps were gaming apps.
This does not mean you should just jump into a game category, as there are distinctive apps in each field. For instance, the top earning non-game app, Netflix, generated almost $560m in 2017, which is more than double its income from the previous year.
According to SensorTower, the top non-game apps with the highest sales revenue in the USA in Q1 of 2017 (iOS/Android combined) were:
- HBO NOW
- Google Drive
Spotify, Netflix, HBO, and Hulu are all services with a subscription. Tinder and Pandora radio use freemium models and offer the ability to unlock premium functionality.
4. How to Make Money with Mobile Apps
At this stage, we have selected the best tools and tips to make your free app profitable. There is a slight gap between how app developers and app consumers see the value and revenue generation. Hence, app developers should examine how to earn money from apps from different angles. Try to examine the possibilities of a mixed monetization model – not only by using ads and in-app purchases, but by seeking to enhance user experience based on target audience needs.
It is currently quite hard to make money from mobile apps, as the market is oversaturated. The best advice is – you need to displace the existing user behavior.
Currently, WhatsApp is worth $19 billion, following an acquisition deal with FB in 2014. Mark Zuckerberg notes that WhatsApp is a product with the same level of engagement as Facebook itself. This cross-platform messenger is free across the globe and has gained colossal popularity.
But, how does WhatsApp make money? For a period of time it was a paid app and cost $1 per download on iOS. Then, it cost $1 per year for every device, not even for every client. Even with such ambiguity, this innovative communication tool has 450 million users worldwide. The company now decides more definitively what monetization model to follow, as there is plenty of room for larger earnings.
Another free app now worth billions, Snapchat, is known for disappearing messages and makes money from ads, sponsored lenses, a discover section, and through the application of branded geofilters. The app displays ads in core places, similar to its main competitors Facebook and Instagram. However, due to harsh competition, Snap Inc. has experienced downturns and lost $443m in Q4 of 2017. Despite the unstable state of Snapchat, it is predicted to gain $2b in revenue based on the growth of its user base by 221m in 2018.
To summarize, monetary gains with a free mobile app lie in innovation and reinvention. Each of the aforementioned apps, all worth billions, provide something unique and create a new experience for the user.
Uber is a great example here. The company offered a great taxi solution for transportation which with the help of an app and shifted people’s behavior. This allowed Uber to gain gross revenue of $37b in 2017.
5. 04 Steps to Define the Best App Monetization Model
Step 1 – Research the Market for Competitive Products
Step 2 – Determine Your Target Audience
Step 3 – Create an Innovative App Concept/Idea
Step 4 – Identify a Successful App Monetization Strategy
In any scenario, in order to receive profit from your free app, you need to have a great app concept and implement a high-performing and user friendly product.
It is vital to conduct deep market research or turn to business analysis services provided by MLSDev. This way, you can check out what apps are already available, their successes and failures, and their monetization strategies. Usually, these products have a unique feature – offering solutions for peoples’ pain points.
Get to know what inspires potential app users and/or irritates them. Based on this information, you can define how to earn money from the app and which model(s) to choose. The model should be natural, as well as relevant, to your target audience.
Moreover, in order to attract target users, the free app you develop should have precise app presentation with:
- Catchy App Name
- Clear and Specific App Description
- Great App Previews (demo video, app screenshot, other visuals)
6. Leading Trends in App Monetization
6.1. In-app advertisement
User experience is taking a dominant role. The right ad, at the right time, for the right audience defines app monetization success. But note: do not overuse advertising and make sure that the promoted brand has a positive effect and coincides with your app’s purpose.
6.2. Freemium app model popularity increases
The majority use free apps, so the freemium model is a healthy solution, as it gives the chance to educate your users, provide a great user experience, and offer premium features. Consumers are nurtured to exchange these options and make transactions.
6.3. Growth of in-app purchases model
Again, focus is shifted to the best user engagement. Having this idea in mind will definitely push a user to buy items. Once done, users will likely continue to pay you.
6.4. Subscription method adoption
This monetization model will also grow in 2018. Apple made it available for all app categories. Earlier, it was limited to media, entertainment, and cloud services. Therefore, the subscription dashboard allows for the data analysis in order to define the best-selling products.
6.5. Native ad placement
With the advancement of machine learning and contextual signs, the advertisement will become more natural for consumers.
6.6. Free app monetization models in emerging markets
Previously described monetization models are effective in developed markets. High purchasing power and usage of functions of modern smartphones allow you to make a lot of money from the app.
New app users are expected to appear in the emerging markets. Here, access to the more advanced smartphone features is limited and the average income is low.
Thus, it is suggested that you create a “crowdsourced by-product model.” App providers offer an app that solves some of the users’ pain points for free. In return, users are a pool of labor that can generate in-app product that the company can sell. For instance, DuoLingo receives revenue by selling translation services to businesses like CNN and Buzzfeed in 2014. Their news articles were used as translation materials for students and this in-app product was transferred back to the news portals.
As of now, in-app ads still hold the top position as a successful method, while in-app purchases and subscription models are among the other highest earning revenue models.
Each method has its pros and cons, making it necessary to understand the product you would like to develop in the first place.
- What value will it bring?
- What is the target audience?
- Are there any competitive products?
Based on some market analysis, it is possible to create a well-planned business strategy including the revenue streams from the application and using a few different monetization strategies simultaneously. Customer satisfaction and monetary gains go hand in hand.