Why offering free apps may be more profitable than charging users

John Manoogian, co-founder and CTO at 140 Proof, makes an interesting observation about making money in the App Economy: free apps may deliver more returns than the micro-paid apps.

Can this be?

Manoogian, writing in TechCrunch, suggests that advertising-supported apps may bring in the most revenues over the long run. Here's why:

"Ad spending on apps of all kinds – both mobile and desktop — is growing. Most industry analysts choose to measure only mobile app spending though, as most apps are created for the mobile and smartphone space. Mobile advertising revenue increased nearly 1.5X in 2011, to top out at $1.6 billion for the year. The future of app monetization clearly lies in ad-supported model. A recent study by Cambridge University computer scientists found that 73% of apps in the Android marketplace were free, and of those, 80% relied on advertising as their main business model. Free apps are also far more popular in terms of downloads, the researchers said. 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. On the flipside, 20% of free apps get 10,000 or more downloads."

Trying to wring payments out of Android and iOS users is a difficult undertaking, Manoogian states. On the other hand, advertisers are much more willing to pay developers than users are. Just like developers, advertisers need to market their product."

Advertising may be the path of least resistance to building sustainable app revenues.  Esepcially considering the slog to make just a few thousand dollars. Various estimates put the total revenue achievable by selling apps to be somewhere between $4,000 and $8,000.

As anyone who's been in the software business the past two decades can tell you, there's no such thing as simply writing code and expecting revenues to start pouring in, simply based on its greatness and elegance. To get software out to your users, it takes a lot of marketing and sales sweat -- first, to let them know it exists, then to explain to them why your code is better than anything else anyone has out there. Finally, you need to reassure them that you will stay around for as long as it takes to help with any installation or support problems.

Whether it's selling software to one user at a time, or selling it to advertisers, marketing is a key piece of the software business model. And, as Manoogian suggests, perhaps it may shorten the cycle to convince an advertiser to make some bigger payments to support an app, versus trying to convince 10,000 users to hand over their credit-card numbers. The beauty, as Manoogian also points out, is that app developers can also still maintain a chargeable, premium version of the app at the same time. 

A caveat: The ad-based model has had mixed results in the software space, however. Sarah Needleman of The Wall Street Journal spoke to startups and startup experts, and observes in a recent article that the freemium model -- in which many software vendors hope for sponsorship or buzz from giving away free software -- has not worked out too well. These include situations where there is a low volume of business, products with limited scope, or a base of enterprise customers.