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Over the turn of the decade, mobile applications transformed from being primarily employed only as promotional tools to business avenues for reaping sustainable profit. The increment of mobile-app developers, alongside that of smartphone usage, has drastically changed traditional business models. A testament to this is the fact that in 2018, 95% of all apps commercialized in the Google Play Store were free.
Free and paid app distribution for Android and iOS 2021 Image Credit: statista.com
Fast forward, by March 2021, Statista reported that 96.7% of mobile applications in the Google Play store were freely available, while 92.9% of iOS applications were free. That being said, a common question many spectators and enthusiasts ask is, ‘how do free apps make money?’ Especially with the statistical evidence that ‘free’ is the route for many developers and enterprises.
Image credit: appcentricsolutions.com
What are Free Apps?
In the simplest sense, free mobile apps are applications that don’t incur any cost to download from a mobile app store. Such apps typically take on different monetization strategies, such as the commonly known freemium.
Smartphone users worldwide 2016-2023 Image Credit: statista.com
The freemium adopters (combining “free” and “premium”) primarily earn from in-app purchases, offering users additional functions or upgrades for full content and services, or even the elimination of pop-up advertisements.
This model is prevalent in mobile game apps since it revolves around incentivizing users to pay extra to enhance their experience. Furthermore, the freemium model allows users to try an app before they pay for anything, thus increasing a developer’s chances of generating revenue. For example, the three top-grossing freemium games of 2020— PUG Mobile, Honor of Kings, and Pokemon Go—reported total earnings of over US$6.5 billion.
The top mobile games app by worldwide revenue as of February 2021. Image Credit: sensortower.com
Another example is Slack, a communication tool that facilitates information sharing within workspaces to get work done. Slack employs a classic freemium approach where its free version allows users to utilize its core functionalities, while its paid version delivers additional upgrades like full messaging history access, unlimited integrations, and screen sharing.
The Slack mobile application. Image Credit: slack.com
How Much Money Do Free Apps Make?
According to Statista, the mobile application market revenue will peak at $935 billion by 2023. These numbers lend credibility to apps being a profitable niche.
According to the latest statistical baseline, 25% of the top iOS developers and 16% of the leading Android developers make up to $5,000 per month with their free apps. This principally means that approximately 20% of the mobile apps on the market bring a profit based on their high quality.
How Do Free Apps Make Money?
Free apps make money in various ways that we shall detail below with a few case studies. Let’s delve in, shall we?
In-App Advertising
With this approach, app owners generate revenue by displaying third-party ads within their mobile applications. Principally, app owners focus on earning income from advertisers as the global spending on mobile advertising is predicted to reach $240 billion in 2022.
Furthermore, in this model, app developers can also charge the users a small sum of money if they wish to block advertisements, for example, YouTube and Spotify.
Spotify’s In-app advertising model. Image Credit: spotify.com
In-App Purchases
This medium of making money revolves around the mobile app being free while allowing users to purchase various digital goods such as additional app features, customization options, in-game currency, power-ups to extra content, or new levels.
Despite the few users(approximately 5%) who make in-app purchases, In-app purchases make up about 47% of the total revenue generated from apps globally. However, many analysts predict that the advertising revenue model will soon dwarf it.
The beauty of this model is users can ‘Buy once, keep forever’ their features, goods, and content. This means that purchased digital items and content never expires, for instance, extra lives in a game or in-app currency that can be spent on other premium features.
A case study example is Candy Crush. Having made approximately $1.19 billion in revenue in 2020(with $473 million generated in the USA between January and September of 2020) and maintaining over 300 million active users, Candy Crush Saga applies in-app purchases to the best effect. With its casual gameplay, users are easily enticed to make small in-app purchases that accumulate over time. According to Sensor Tower, Candy Crush players spend nearly $4.2 million per day on the Google and Apple App Stores.
Candy Crush’s in-app purchase interface. Image Credit: king.com
Data Licensing
Some free apps with a vast number of active users collect information on their behavior and sell the data in an anonymized format to third parties like advertisers and analytics companies. In essence, the more daily active users an app has, the more accurate, pertinent, and valuable that data is for data collectors.
Notwithstanding, most apps that utilize this monetization approach ask for several permissions to exploit and access users’ personal data. Such app developers typically work with monetization partners willing to abide by all of the privacy and security laws. This is important as regulations pertaining to user data are stringent, with severe penalties for breaking them. For example, the GDPR in Europe which imposes a maximum fine of €20 million (approximately £18 million) for breaking data privacy rules.
Subscriptions
This model is similar to in-app purchases as it allows users to buy additional digital goods, content, and features. However, instead of availing them the option to buy whenever they wish, this monetization model institutes ‘subscription periods’.
These subscription periods come in two forms. Non-renewing subscriptions, where users pay for one subscription period at a time, and auto-renewing subscriptions, where subscriptions are automatically renewed after each subsequent subscription period.
Image Credit: apple.com
Free apps usually achieve success with this model by providing users with a constant stream of fresh and valuable content and services. This approach is typically adopted by service-oriented or very content-centric apps that encourage frequent and repeated usage.
An example is Headspace, a meditation app that teaches users how to breathe and meditate. Headspace gives users a two-week free trial, then consequently prompts users to subscribe to get access to a complete library with hundreds of guided meditations, mindfulness training, and breathing exercises.
Image Credit: Headspace.com
Sponsorships
With this approach, brands and agencies pay to have an exclusive spot within a free app. In practice, such brands can provide relevant rewards to the app’s users when they perform specific in-app activities. In turn, the app owner earns money by taking a share of the revenue from redeemed rewards.
This is an excellent way for free apps to generate revenue from advertising, however, without decreasing the application’s user experience. By directly collaborating with specific brands, app owners control the type of promotional content displayed within their application, ensuring it’s relevant to their target group. At the same time, they can also create brand activations that are creative, engaging, and interesting for their users while still making money.
For example, Runkeeper, a popular GPS fitness-tracking app with more than 50 million users, enables its users to join a running community, track exercises, set goals, and track their progress. As an early adopter of the sponsorship model, Runkeeper keeps providing its users with exclusive rewards from health and fitness brands if they complete predetermined in-app actions and activities.
The Runkeeper Mobile application interface. Image Credit: Runkeeper.com
Affiliate or Referral Marketing
Linked to in-app advertising, many free app developers also exploit referral/affiliate to promote third-party products or services. Thus, making cumulative commissions from the third parties. For example, Amazon Associates affiliate marketing program allows app developers to monetize apps. In practice, app owners can advertise any Amazon product by placing links to them. And if a user clicks the link and makes a purchase, the app owner receives a reward.
Micro-transactions
Related to in-app purchases and widely popular in video game apps, micro-transactions allow free app developers to enable users to purchase virtual items for small sums of money. For example, players can purchase premium items like in-game items, character costumes, weapons, etc.
For instance, the mobile game “League of Legends” benefits a lot from microtransactions. Played by millions of people worldwide, League of legends generated $1.75 Billion in 2020, with most of the revenue from microtransactions. For example, the mobile game allows for the purchase of Riot Points, an in-game currency that can be utilized to buy skins (different aesthetic choices for in-game characters), to unlock characters, or for extended gameplay.
Where you can purchase riot points on League of Legends. Image Credit: leagueoflegends.com
Honorable Mentions
Some free app developers charge transaction fees to make money if their mobile app belongs to a marketplace segment where users transact money. This approach is common with e-commerce apps, meal ordering apps, flight, and hotel booking apps, and Dog walking apps.
What Do Users Seek for in Free Apps?
- Convenience: Free Apps that simplify daily life by providing comforts like alarms, maps, restaurant searching, and weather-checking tend to make more money.
- Communication: Free apps that facilitate communication between friends and family, such as instant messaging apps, always make money somehow.
- Social networking: Humans desire a sense of belonging and acceptance within their social groups. That being said, free apps for social and business networking tend to generate more business opportunities for the owners, especially if traffic soars. As such, app owners can easily apply data licensing, advertising, or affiliate models.
Image Credit: theappsolutions.com
- Value expression: Free apps that allow consumers to express their personal values and enhance their self-concepts are also profitable. Such apps provide value-expression benefits by tapping into users seeking to earn social recognition through, for example, photo and video-sharing apps.
- Entertainment: Lastly, free apps that provide entertainment will always be bankable. For instance, gaming and music-streaming apps.
Final Remarks
All things considered, the process of making money from free apps revolves around user engagement and building trust while providing value and quality without actually requiring users to spend money. That’s the basic principle, in all honesty.
Most free app developers aim to find the sweet spot between giving users too many or too few features, with a goal to incentivize them to spend later. That being said, most free apps that are highly profitable combine different monetization strategies – for example, in-app purchases and subscriptions, or affiliate marketing and subscriptions.