Why offering free apps may be more profitable than charging users

Why offering free apps may be more profitable than charging users

Summary: Is the future of the App Economy an ad-supported model?


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.

iPhone-2 CNET

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.




Topics: Apps, IT Priorities, Tech Industry

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  • Too much weight on download...

    Common sense tells you that a free app is going to be downloaded much more frequently. But the true metric is really how much apps are used, not how much they're downloaded.

    What risk is there to downloading a free app? Maybe some security/privacy concerns, but not much else. But, how much revenue is a developer going to gain from ads if someone downloads it on a whim but abandons it after a few uses? Not much. I've downloaded countless free apps that do nothing but collect dust before I ultimately decide to abandon them.

    It all comes down to the idea and implementation of the app (and maybe a little marketing). If it's good, it will gain traction whether it's free or it's a couple of dollars. Personally, a few dollars is well worth it for an app I use heavily if I can be freed of ads.

    And, what's wrong with the current model that many developers employ. A paid version and a free version?
  • There Are Also In-App Purchases

    Some games seem to get success from giving away the basic app for free, and then enticing the user to pay for additional enhancements.

    But the general pattern still applies: the initial app installation is primarily a promotional tool, not a revenue generator in itself.
  • Market rules

    The problem with the ad-supported model will be, that the more games/developers jump on this latest bandwagon, the less the worth of the screen estate they offering will be. This will first lead to bigger, more obtrusive ads, and then later, in turn will lead to users either figuring out blocking technologies, or abandoning ad-supported games all together.

    I rather doubt that even today ads displayed in a game could truly support it, in that sense, that it could generate nearly as much revenue for the publishers/developers as a stand-alone game sale would. Even Facebook, which has 300 million daily users who spend sometimes 6-14 hours on it, can only make a dollar in a year on every user. A single game obviously could never make that much, and the revenue it actually could generated would be nowhere near the $10-25 the publisher makes when the game is sold in a shop or online.

    Maintaining and generating content for web sites that garner the same audience and make users spend the same amount on time on them simply costs far less than creating games for the same purpose (ie. for shoving ads in the face of the user).

    So, no, I don't think this model will ever be profitable for AAA titles and high profile games - and the more publishers opt for trying it, the less profitable it will be, both for them and for also everyone else already on the market. The industry will in a few years simply revert to the old model or figure out some new, better model to fight privacy. But that one will not be ad-supported (or not alone), that's 100% sure.
    • One-time pay

      One advantage is that ads provide revenue that grows as the app becomes more popular.
      Here's a great article I read following the selling of Sparrow, pointing out the problem with the one-time pay model: http://appcubby.com/blog/the-sparrow-problem/

      It seems that apps peak early in terms of downloads, and people who have bought the app expect continuous updates without generating any new revenue.
  • Annoying

    Ads are annoying, especially on productivity apps. I'd rather pay for the app than have ads flashing away in the corner, when I am trying to concentrate on the task at hand.

    It also looks "cheap", when you are trying to show somebody else information in an app and it has apps blinking away or interrupting the app.
    • Re: It also looks "cheap"

      That is the point, I think. Which is why it's good to have the choice.
    • Not only annoying...

      But for apps that crossover into enterprise use, it can create the perception that the developer isn't serious about the enterprise. I'm not talking ERPs, CRMs, etc., but things more along the lines of utilities like task managers, reminders, RDP/VNC utilities, etc.

      And, similar to you, I don't want my apps to look like a NASCAR car or soccer uni. I can deal with it for some little stupid game or app that I download on whim to kill some time, but not for an app I rely on for more serious things.