The App Business Model Explained
Apps are synonymous with smartphones, tablets and wearables.
They can be anything, from incredibly addictive games to incredibly useful productivity tools. Our smartphones each hold a store with almost endless possibilities we can download. Whether we shop in the iTunes, Android, or Windows store, there are more apps than any of us will ever be able to download.
When apps first came out, it was a gold rush of innovations and cheap apps that continued to rake in money. Today’s environment is very different from that time, but there is still a ton of money to be made.
After all, by 2017, the app business is predicted to be a $77 billion dollar industry.
Despite all the changes going on, there are still three main monetization strategies for apps.
- Paid downloads
- Free downloads, app is monetized by in-app advertising (similar to how Adsense might appear on a website; banner ads etc)
- Free downloads, app is monetized by in-app purchases (most prominently shown with mobile gaming pay-to-win style games)
These can be mixed and matched. Some apps might be paid apps, for instance, that still have in-app upgrade purchasing opportunities including premium features.
Examples of Successful Apps
This game is known to everyone. It uses the freemium model to allow users to download the game for free. The simple premise, comical graphics, and quick releases were an overnight sensation that grew to 12 million downloads in less than a year. Angry Birds just became a cartoon movie for kids and is a beloved mobile app for people of all ages.
Words with Friends
Words with Friends is a great example of a mixed app monetization strategy. Technically, there are two apps for this business. They have a free app download that is monetized through different mobile ad networks, and there is a paid version that is free of any ads.
While not strictly an app, as many people access it via web browsers on their computers or tablets, it is a great example of how an app can complement an already existing product. The app is more intuitive for those using it on their smartphone versus a browser version, plus it allows Gmail to harness more data from their user to offer even better performance in the future for the consumer.
The Pros of an App Business Model
An app product is similar to a mini-Software-as-a-Service (SaaS) product (read up on SaaS here) in that there is a membership aspect and potential for a large community. Just a single app can be wildly lucrative if it is for the right market at the right time. Apps have sold for hundreds, sometimes millions, of dollars after they were created.
While these huge sales are unusual, they show the potential of what apps can do. Many apps create revenue month after month, for years. These could be compared to niche sites, as there is very little work that needs to be done outside of updating the apps for each new version of the iPhone ios or Android OS.
In addition to potential profits and the owner’s ability to remain somewhat passive once the app is live, an app has the simple advantage of being on mobile devices. You have consumers right where they spend the vast majority of their time. You can use that space for all kinds of marketing advantage.
For example, many apps will run Facebook ads targeted at mobile users. The mobile user can click on the ad and instantly download the app to their phone.
The Cons of an App Business Model
One thing that has changed dramatically in the years since apps came on the scene is how competitive the market has become.
In January of 2016 alone, there were 19,130 gaming apps introduced to the iTunes store. That is pretty heavy competition. Which means if you are going to succeed with an app business model, you need to make sure you have a quality product — combined with a quality marketing plan — to get the app off the ground and running.
Developing an App
Additionally, the development costs can be very high for apps. With the level of quality you need to be successful, you will need to pay for good app developers, rather than just fly by night ones. Most often, cheap developers create expensive woes down the road once your app is live. Even if you do hire good developers that create an amazing app from scratch the first go around, you will still need coders who can tweak the app to enhance the user experience.
Considering that very few people ever open an app again after they download it, this is an important step. You need your user experience to be solid gold to keep driving user engagement. If your user interface is awful, it is going to just another thing that makes users never open up your app again.
Freemium apps can be a daunting prospect, the idea of giving something away for free is somewhat counter-intuitive to most entrepreneurs. That’s why when you’re developing an app idea try to think about the app revenue models you’re going to be using to make money. Pricing is also an important aspect as getting your pricing right can determine whether a user chooses you or a competitor. A free version and a premium version is one development feature to keep in mind.
If you have the capital, these initial costs can be very minor in comparison to the potential earnings of the app. Still, it is worthwhile to take startup costs into account before diving deep into an app business model.
What Buyers Need to Know
The biggest mistake a buyer can make when purchasing an app is buying it right after its launch.
Launch numbers are usually highly inflated because of the large marketing push that goes into putting it up on the market place. Because of that userbase engagement, downloads, and other metrics are not going to be accurate. Instead, it is better to prepare for the long haul and make sure the app has staying power by purchasing after the numbers have leveled off.
Some of the best numbers to check out are the placement of the app in the actual app store for the targeted keywords, and especially how many downloads the app is getting.
Downloads are a moderately good metric to measure an apps success, but don’t be fooled, as the most important metric is user engagement. If you have millions of new user downloads but zero user engagement, you’re never going make money. Ultimately, all those downloads will peter out as people realize that the app isn’t that useful or entertaining for their lives.
Again, the key to a good app is evidence of very strong user engagement.
Typically, though, user engagement has a fairly steady downward trajectory. The average app retains just 25% of its users after 90 days of app install. As more apps are created, there’s more noise in the marketplace, and you are going to have to make sure the app stands out from the competition. You can do this by focusing on high quality user engagement strategies to keep people actually opening the app.
The last thing you want to do, but certainly not the least important, is download the app yourself. Play around with it and test the functionality. See if you can break it by doing weird things. Spot where you might be able to improve user engagement, or perhaps even upsell the user via in-app purchases or some other monetization model.
What Sellers Need to Know
There are several things you can do to prepare your app for sale and to make it as attractive to buyers as possible.
We have already talked about the hyper competitive nature of apps, so your number one goal should be to increasing user engagement as much as possible. Become a student of user engagement, get that 25% average up to make your app an attractive outlier.
Expand your marketing channels outside of just organic traffic from the app store as well.
If you are building an active email list, your app will look more attractive to a buyer. An email list can remind users who have deleted your app to redownload when you add a new feature. It can be used as a way to launch an in-app purchasing strategy, or even a brand new app that users of the old app might love. Either way, it is a great asset that not many app owners actively do.
Outside of marketing and user engagement, you should be focusing on having excellent processes for your team to follow. Having these clearly written, or available in video format, will make the handoff seamless and will greatly increase the confidence of a potential buyer.
In addition to the processes, you should have an app development team of coders in place and waiting for the buyer. Unless the buyer is already very familiar with coding and has a development team of her own, it’s unlikely that she will have the experience necessary for making updates or tweaking the app.
If you are able to do these four things effectively, your app will be far more attractive and competitive. Ultimately, you’ll be able to sell your app a lot more easily, as it will be the exception among a multitude of other apps sinking into obscurity.
What Buyer Persona Best Fits the App Business Model?
An app business is great for someone who has a do-it-yourself kind of attitude. Someone that is actively learning programming and coding, who loves the idea of tweaking lines of Ruby-on-Rails (the programming language many apps use), might find buying an app business to be an extremely attractive proposition. Since these kind of buyers are very hands on, they are able to manage a team of developers directly and very successfully.
As we mentioned with the Gmail app example, an app doesn’t need to be a stand alone business for it to be incredibly effective. In fact, it can be a way to compliment an already existing business. For someone looking to add yet another block to their empire to dominate a single niche, an app can make a lot of sense. Perhaps it is an app for their niche website, or perhaps the app has some kind of benefit for their niche audience that they have already built. Either way, the app business is complimentary to their core offerings, so it makes sense to purchase and leverage an app.
Apps can be capital intensive in the development phase, and even in the tweaking phase when you’re balancing the app to better serve the end users. Because of this, attracting investors for apps can be fairly easy. Investors realize that a successful app can be wildly lucrative, or become a strong passive earner for years to come. Thus, it makes sense for investors to be the “money player” among a team of developers, or with a DIY Dave who is managing the team or creation of the app.
There are several routes that can be taken with apps, each should be considered when looking to expand an app business to the next level.
Building an Email List
We touched on this briefly before, but building an email list is absolutely an essential part of building an app business. The email list is another channel where you can communicate with your users. It is a perfect platform to re-engage users that have churned and get them to redownload the app to experience its new features. In addition, a strong email list can help you launch your next app, promotion, or even create joint venture opportunities that can bring in new revenue streams.
Create a Brand for Several Apps
If you are serious about creating an app empire, you might want to build an overall brand for all your apps that are in the same niche — like gaming, for instance. This way users will come to associate a certain quality with your brand and when they hear you have a new app, it will intrigue them and get them to download immediately by virtue of brand familiarity. Plus, you will be able to market your other relevant apps in your most successful apps to get users to download multiple apps from you at the same time.
Use Facebook Ads
Facebook ads can be a great way to get people to download your apps. You can fine tune your target audience, and scale once you find a campaign that is converting. However, it is important to understand what kind of ROI you have per user before you do this, as you don’t want to sink money into Facebook ads without knowing the average lifetime value for a customer.
Create a CPA Offer
This is especially popular in the gaming niche. The owners of these apps will put up a cost-per-action offer on an affiliate network (read our article on affiliate marketing). Since the owners already know what their lifetime value per customer is, they know what they are willing to pay per download. Every time an affiliate has a visitor successfully download the app, the app owner pays the affiliate network, which pays the individual affiliate. This can be a very successful route and much more hands off than running ads yourself. Just make sure you have a strong converting funnel first.
Use SensorTower for Organic Search
SensorTower is a great software tool that helps you optimize your app’s listings in an organic search, such as in the iTunes and Android app stores. It is an analytics program that allows you to see which keywords people are typing into the iTunes store to find your app. It can seriously boost your rankings by informing you of search volumes for various keywords that you might not be using effectively. Organic search is still the main driver of how apps are found, so you should be maximizing this channel even as you explore other channels.
Use Crittercism for User Engagement
Crittercism is a great tool by Apteligent. While this tool won’t help you directly get new downloads/app users, it will help with user retention. How Crittercism works is that you can see where / when your app crashes while being used by real users. This allows you to know where the bugs and glitches are with your app. You want to get rid of these as soon as possible to increase user experience and hence user engagement. The more you can get rid of these glitches, the better your app is going to do, and the more likely people will refer others to that app.
Resources to Learn More
When it comes to learning about apps, there is none better than the owner of App Empire. The website teaches practical methods for building out apps, and creating a viable business that cuts through the competitive noise that drowns so many other apps. I highly recommend checking it out.
I recently wrote an article about whether or not apps are risky businesses. Check it out here to learn even more about apps.
Did this article get you pumped to buy apps? If so, check out our marketplace for our current listings!
Or perhaps you are an active app builder yourself and you are ready to exit your app for a large payday? If so, click here to learn how to sell your app with us today
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