Choosing The Right Business Model For Your App

4/15/11Follow @iljalaurs

Today nobody questions that the apps economy is going to be big. Very big. At least four different researchers predict the apps industry will bring in $30-40 billion dollars a year in just three to five years. Just to put this into perspective, the entire music industry is estimated to generate $25 billion a year. But which specific business model will capture this massive revenue?

There are today four major ways to make money with an app:

1) Paid. You simply sell your app. Depending on your distribution/billing partners, you’ll keep between 98 percent (e.g. sell from own website using credit cards paying 2 percent to your credit card billing partner) and 25 percent (e.g. using carrier distribution where carrier takes 75 percent revenue share). App stores like Apple’s will charge you a moderate 30 percent fee.

2) Ad supported. You distribute your application for free, but it contains ads. You partner with an ad network like AdMob, InMobi or BuzzCity, insert a small piece of their code into your app and wait for a paycheck, as ad networks will rotate ads in your app and pay you 60-70 percent of the money they collect from advertisers.

3) Virtual goods. Sometimes called “freemium,” but the concept is the same. You distribute a free copy of the application, but there are some paid “premium” services that you offer in addition to the basic free service. These may be anything from calling credits in the case of Skype to virtual items in games to “ego services” in social networks.

4) Subscriptions. Just as the name suggests, users subscribe to a service and pay a regular fee to continue accessing the service.

There are of course more business models out there (cross selling, data collection, and many others) as well as combinations of two and more models, but the above four are the major generic models. To give you a rough idea on how app revenue splits today, last year about 80 percent of all revenue came from paid apps, 12 percent from ad supported apps and 5 percent from virtual goods. In three years though, this will change, with paid apps making up only 50 percent of the revenue, ads growing to 30 percent and virtual goods, subscriptions and other models filling the rest.

Now, how do you decide which model will work best for you?

At GetJar we see thousands of apps and we’ve learned what does/doesn’t work for them. Analyzing best practices allowed to me come up with a pretty simple model, which I called the “US” model. By the way, this has nothing to do with the US centric view of the world; the abbreviation merely stands for Utility vs. Stickiness. Measuring only these two parameters for your app can tell you which model is the right one for you.

First, the Utility: This means how much entertainment or productivity value one engagement with the app brings the user. If you are playing the Tiny Wings game (my latest favorite), a game session gives you a lot of entertainment. On the other hand, if you post a status update (like “I’m in the bus now”) to some social network, this has relatively low Utility for you.

Second, the Stickiness: Games, despite high Utility, would generally have low stickiness. Most will be played a few times, some for a whole week. Only one out of a thousand will be as sticky as Angry Birds, which can keep you busy for weeks or even months. On the other hand, Facebook, Mail and many other apps will engage you for life.

Below is a usual 2×2 for Utility vs. Stickiness:

Now, if you’re in the 1st quadrant (high utility, low stickiness), the business model of choice is Paid. On the one hand, the user is willing to pay for the app, because it has high Utility (the user will generally not pay for an app with a low Utility). On the other hand, you cannot use other models because of the low stickiness. For example, if you were to … Next Page »

Ilja Laurs is the founder and CEO of GetJar, the world's largest open mobile application store. Follow @iljalaurs

Single Page Currently on Page: 1 2

By posting a comment, you agree to our terms and conditions.