Introduction

Apps can make big money if you go about it correctly. This post is going to explain to you the various ways to achieve that and it is going to be an epic read. By the end you’ll have more knowledge on being successful than 95% of developers out there!

Before we get going however there is one question that you’re probably itching to ask:

Will I make money as an app developer?

And the simple answer is absolutely! The top 25% of iOS developers and top 16% of Android developers make more than $5,000 per month [1].

In fact, if you’re really good the sky’s the limit:

App developer income distribution

Distribution of app developer income

Now, a lot of developers don’t believe this but facts don’t lie. They tend to think that their app will be lost in the app store among the millions out there, but that’s utter rubbish! They’re just looking at it the wrong way. Let me paint this in a very different light for you:

Using the above numbers as a rough guide let’s say that 20% of apps are good or excellent, 30% of them are OK and 50% are just plain rubbish.

Those numbers are beautiful to me because they mean that 80% of apps are badly coded, don’t do what they say they will or show constant adverts. All I have to do is be in the top 20% with my quality app and that makes my app look absolutely amazing.

Think about it, humans are nothing more than walking comparison engines.

“Jack is stronger than Ben”

“Fuel is cheaper across town”

“Jill is prettier than Jane”

We can’t help but do the same when it comes to apps. You’ve probably done this yourself – after downloading 2 to 5 apps for a particular need you will usually settle on one that performs the best for you. And because you’ve effectively compared it to lesser apps the winning app will seem absolutely miles ahead of all the others.

This fact reminds me of a YouTube lecture on irrational behavior. The researcher asked women to rate 3 men on their looks. 2 of the men had a different look but scored equally in attractiveness when presented next to each other. However, when the researcher introduced a third option who was a slightly uglier version of one of the men, well….I’ll let you watch the 20 seconds of video to find out for yourself!

dan-ariely-1

Of course, if you want to be in the top 20% peering down at inferior competitors you need information on two topics:

a) Making the app

b) Monetising it

Making the app is a topic for another day so for now sit back and enjoy discovering how apps make serious money.

Which App Categories make the Most Money?

App revenue is usually calculated as revenue per download. In other words how much money do you make from each download regardless of pricing / purchases / anything else. Here are the latest average figures for 2016 [2]:

Highest earners per app category ($ revenue per download)

Highest earning app categories

Well there’s a surprise (not!). Games make the most money! I always smile when I see people playing mobile games because I know how much money they’re putting in someone else’s pockets!

That said, these numbers are simply averages, some apps earn far more than games! I was lead developer on a popular music streaming app and the income was far in excess of $1 per download – easily earning more than games that cost 10 times as much to develop!

PRO TIP: On average, games make the most money, but not always.

In my experience, and from talking to other developers, mobile games are actually a pretty risky strategy. Competition is fierce, consumers are fickle and you need a big budget for marketing. Far less risky to build a non-game app that fulfills a market need. It’s far cheaper, less risky and it leads to recurring income year on year.

 

How to Monetise your App

Monetisation is the act of getting your users to hand over money for anything related to your app. Here is a high level overview of the major options you have.

 

a) Free App – With Advertising

This is a great strategy if you can display ads in a non-intrusive way so that you don’t annoy your users. Ads can earn very healthy incomes and once your app starts to grow you can identify specific companies that would be a great fit to advertise in your app. Contact them directly to see if they want to open an advertising contract directly with you – that way you cut out the Google middleman who takes 32% commission [3]!

Cutting out the middle man has another benefit. You can negotiate higher rates with the interested company. A music streaming app I made under contract did this. They made commissions on advertiser products sold which increased their revenue 3 fold literally overnight!

Relative Ad Display Incomes

  • Paid by advertiser to Google 33%
  • Your cut 22.4%
  • Googles cut 10.6%
  • Negotiated by you direct with advertiser 100%

 

b) Free App – With in-app Purchases (Freemium)

Freemium apps are downloaded for free and your revenue comes later on when users buy something in your app. The key is to strike a balance between giving away just enough for free so that users still want more and will pay for it. This is very tricky to get right but it can pay off enormously. Candy Crush makes $600,000 per day running this strategy [5].

Freemium apps are great at first because they get downloaded at least 17x more than paid ones [4]. They do have their fair share of problems though, pricing something for free attracts low quality users, known as bad leads. Chances are pretty low that they will make a purchase. Also, users don’t value free anywhere near as much as something they pay for which means more uninstalls and bad reviews for you!

But the best thing about freemium? More people download free at first – which means more people talk about it – which means more publicity for you. As usual I’ll back up my claims, but this time from the software as a service world (SAAS). I compared Hootsuite and Sendible which are social marketing platforms as well as Mailchimp and Aweber which are email sending platforms. Hootsuite and Mailchimp have free tiers whereas Sendible and Aweber do not. Here’s a comparison between them using Google trend numbers [8] [9]:

 

Paid only Service vs Freemium Services – Popularity in Terms of Google Searches

Freemium vs Premium Search Traffic

c) Paid – Pay then Play

If you create a quality app then a lot of people will pay for it up front, especially Apple users who tend to spend 4x more on apps than Android users [6].  However I wouldn’t recommend this for your first apps, as you won’t have an existing audience who love what you do and therefore very few customers who know you well enough to open their wallets. This is a phenomenon on which the concept of touch points is based. The following is the most important lesson in marketing you will ever learn:

Users buy from developers they know and trust. That trust is built by reaching out and interacting with a user before asking them to part with money. Each time contact is established it is known as a touch point. The more touch points you have the more trust is built and the more users are willing to pay.

Hence, by all means go with paid if you have existing users that you’ve already touched (sorry, bad pun).

 

d) Subscriptions

Subscriptions allow you to charge for services within your app on a monthly or annual basis. If you can model your app business around this idea then do it because subscriptions provide recurring revenue month after month. They do have a downside however…

Freemium apps make most of their money from “whales” – players who spend hundreds of times what the average player does. When you introduce an “all you can eat” subscription model you will effectively remove the whale income [7] as they can pay a standardised rate. If you find yourself umming and ahhing between the two then consider a hybrid approach – subscription for upgraded service with purchases for “rare” perks.

Personally I try to opt for subscriptions when I can. It makes accounting a lot easier when you can reliably predict income levels.

 

PRO TIP: If it makes sense, build your app around a subscription model.

 

How Apps Really Make Money

So now you have a basic idea of how apps make money. There are lots of strategies you can implement, even mixing them sometimes. However there’s a subtle secret I’ve come to realise over the years. It’s hiding in plain sight and to prove it to you try the following:

 

Pull out your smartphone and list the 5 apps installed on your phone that have been there the longest.

Mine has Gmail, YouTube, Facebook, Dropbox and 8 Tracks (music app). What do you notice about this list? Well they are all more than a simple app because they pull in data from outside sources and present it in a meaningful way. They effectively allow me to connect to a service.

Popular apps

The Gmail App makes it easy to communicate with everyone through my favorite email service.

YouTube let’s me see all the amazing cat videos.

Dropbox helps me to share files easily.

None of the above would be possible without first providing a service or integrating with an existing one.

On the other hand, think about Flappy Bird – the once viral mobile game. Yes, it made hundreds of thousands but it soon died, because it did not provide a service. There were soon numerous clones on the market taking it’s market share. On the other hand, the apps I have listed have few equal competitors, because it’s harder to copya good service than a good game. The apps above will be around for generations to come, earning direct or indirect income year after year.

Flappy bird mobile game

(Interesting idea – Flappy Bird might have been shut down by its own developer as a brilliant marketing method)

Service based apps have one other major advantage – loyalty. Think about it in terms of maybe a great housekeeper you employ. If they provide good and continuous service then you feel loyal towards them. A real life example is my own housekeeper. As I write this I’m just listening to her finish up cleaning the apartment and she’s fantastic at her job. Rest assured, when I move my business to an office in the next month or so she will be first on my list to be housekeeping supervisor.

Take this as a lesson: Any apps that you create should provide a good service to inspire loyalty in your customers. Get this right and competitors won’t even be a worry for you.

PRO TIP – To have continuous long term income your app must provide a service.

 

How to Establish and Price Your Apps Unique Service

In theory this seems simple but in practice it is pretty tough. However you can answer it all with 2 basic questions and activities:

1 – What need does your app fulfill?

Needs are the lifeblood of any economy, apps included. I need my email so I have Gmail. I need seamless file synchronisation, hence Dropbox. These are obvious to you on the outside but when you’re on the inside of your own app it’s almost impossible to see. The solution is really simple – ASK PEOPLE!

Do not be a closed book when developing your app!

Ask your users, family, brothers, sisters or even random people in cafes what they think of your idea. Show them sketches and prototypes. Do NOT tell them it’s your idea, say it’s a friends idea – that way they won’t try to appease you by telling you what you need to hear.

Getting critical feedback is tough but don’t let your ego get in the way. If people consistently tell you the same thing they need from an app then listen to them – within reason of course.

2 – Split your service into 3 levels – Free, Paid and Ultimate

Why three? Because humans are nothing more than difference machines. It goes like this:

** You see free and say to yourself, “Hey, it’s as cheap as cheap can get!”

** You see paid, “Hmm, $3 per month is a lot of money”

** You see ultimate, “Wow, $20 per month is extortionate. The paid version is much more reasonable!”

** Back to paid, “What do I get for this then?” (You then enter the purchase cycle)
NOTICE how you never go back to free. This effect is called price framing [10] – making your middle of the road price seem like an absolute bargain by framing it with a minimal offer (free) and extortionate offer (ultimate). Try this on someone you know. Open the first image below in a new tab and ask them which one they would buy. The answer will probably be 50-50.

Then open up image 2 and ask them. You’ll probably find that the majority go for the middle of the road option – $45 earphones.

Price Choice 1

Headphones price comparison

Price Choice 2

Headphones price comparison

Determining the price levels is done by using your own intuition and asking people what minimum level of service would get them to download and use your app. It really helps here to take a wide survey of people from poor to rich. You may find that rich people will give the most honest feedback in terms of what they will pay for the value you’re offering.

Summary

 

Step 1 – Check out the competition and validate:

  – Think of an app idea then go search for existing apps.

  – Design yours such that it surpasses the others in features / usability / design.

  – Ask friends and strangers if they think it’s a good idea and what they would change or like to see.

Important: Get feedback anonymously so people tell you the truth!

 

TAKEAWAY: Don’t assume your app is a good idea. Check.

 

Step 2 – Choose your app category:

– Games make the most money per download (but this is only an average).

– Games are fiercely competitive so not recommended for a first app.

– Games have a shelf life of a few months before your users leave to get the next big game.

Important: Choose an app category that has less competition, more longevity and where you can provide genuine ongoing value to your users.

 

TAKEAWAY: Don’t go for a category based on average revenues. Go for one with less competition.

 

Step 3 – Choose your monetisation strategy:

– Paid up front. Has become less successful over time and distribution is lower than free apps. Not recommended for a first app.

– Free with ads. If your app can leverage high spend advertising networks then this is a great strategy.

– Free with in-app purchases (freemium). If you can convince your user that an in app purchase is necessary then this is a real winner. The trick is to balance free vs paid features.

– Subscription. Provides recurring revenue without having to get new customers all the time. This is the way everything is going on the internet. Eg: Microsoft Office, Adobe Creative Suite and the NY Times are all subscriptions.

 

TAKEAWAY: Aim for a subscription.

Step 4 – Choose your pricing levels:

– ASK people what they would or wouldn’t pay for your apps products / service levels.

– Create three price levels. Free – paid – ultimate.

 

TAKEAWAY: Frame the price you want people to pay.

I hope that this has been informative – it certainly was for me when I was researching it! If you think this would provide value to friend looking to make an app then please share it:

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Where to go Next

This tutorial comes straight out of The Complete iOS Developer Course. Over 40 hours long it contains everything you need to create awe inspiring apps fast!

Click here to check it out!

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