In a world where applications have become a part of daily routine, one aspect remains unsolved: making a profit with them. Building a paid app may seem like the most obvious solution. However, paid apps may not be as viable as they seem when considering that almost 97% of mobile apps in Google Play and 94.2% of apps in Apple's App Store are free. So, how do free apps make money? Or do all those app developers work for free?
Of course, free apps are making money, and more importantly, their revenue increases every year. In 2022, worldwide app spending stood at $167 billion. While the figures don't indicate how much money free apps make on average, it is evident that they do rake in some revenue. Moreover, the top five apps in terms of consumer spend — TikTok, YouTube, Tinder, Disney+ and HBO Max — are all free to download.
In this article, we will elaborate on key app monetization strategies for free apps and share a guide on choosing the best monetization method for your solution.
9 app monetization models for free apps
There are many monetization strategies that allow free apps to generate revenue. Here are the nine most popular ones:
1. In-app advertising
In-app advertising is a popular app monetization model driven by increased smartphone penetration and engagement, especially in mature markets. In 2023, global mobile ad spend is set to reach $362 billion, translating into 7.5% of year-over-year growth compared to 2022. This upward trajectory is the direct result of the increasing number of hours spent on mobile — 4 trillion on Android phones alone in 2022.
In-app advertisement has already become a distinct niche with several choices for marketers. Today, there are six main types of ads to choose from:
Static banner ads
These ads are placed at the top or bottom of the mobile screen and do not change their content. This type of app monetization is relatively easy to produce as it needs less planning and setup.
Although this is the most popular type of ad, mobile banners are easily ignored; their average click-through rate (CTR) is lower than other ad types. According to Banner Flow, the current average CTR for feeded display ads (banners plus other ad formats) in 2022 was around 2.30%.
Rich media ads
These ads' primary purpose is to engage users rather than solely to appear in front of them. Typically, this ad type engages a customer with a video, audio, or other types of content to unveil the ad's full message and gain more attention.
According to Google, rich media ads usher in an engaging user experience resulting in a higher interaction rate, increased click-throughs, and better KPIs compared with traditional ads.
These static full-screen ads appear during natural breaks in the app experience. Users can close these ads using an exit button at the upper left or right corner of the screen. This, however, is a pain point as some users may get irritated.
These ads appear during natural pauses of app usage and last 10-30 seconds. Video ads format has the highest CTR of all formats. However, on-screen text is vital with this ad approach, as many users turn their sound off.
Offer wall or incentivized ads
These ads focus on exchanging users’ time or engagement for bonuses. The ads encourage consumers to take action — like watching a video or completing a survey — in order to get a reward — like a respawn in their game.
These are advertisements that are integrated into the app layout, pretending to be the content that users are already consuming. They are almost indistinguishable and, therefore, show a high level of engagement.
Millions of mobile apps, from giants like Instagram or LinkedIn to productivity and sports apps, use ads as the main app monetization strategy to generate income, which comes from clicks on advertisements, installs, and purchases. Some even get paid for displaying ads in their mobile apps.
Use cases for in-app advertising
Although it may seem that you can turn any kind of application into an advertised app, the trick here is to slip in the ads without interrupting the user experience. Here are the apps that can strike it big with advertising:
- apps that are free to download (especially those with lower rates of in-app purchases (IAP),
- gaming apps (rewarded video ads, offer walls, interstitials, and banner ads),
- audio and video streaming apps, social video platforms, OTT media services,
- dating apps (typically in the profile streams of non-premium users),
- social media platforms, and others.
For example, Netflix has recently rolled out its new ad-supported tier, Basic with Ads, that runs 15- and 30-second videos before and during programs. In Subway Surfers, users can opt into watching an ad in exchange for rewards like coins, power-ups, and extended running time after their player dies.
TikTok, an undisputed leader among non-gaming apps, allows advertisers to market their products and services in the form of sponsored videos, ads in the For You feed, hashtag challenges, or promoted trends.
2. Referral marketing
Referral marketing can be considered another type of in-app ads. The main principle here is that you share information about an affiliate product or service in your application and get paid for clicks, views, impressions, or downloads.
Here, you need to focus on attracting marketers interested in your audience to drive value. Moreover, the more engaged your users are, the more money you can make on your free apps.
- CPM (cost per mille). Here, payment is based on the number of impressions. The advertiser is usually charged for every 1,000 impressions.
- CPC (cost per click). With this campaign, you receive payment when app users click on display ads.
- CPV (cost per view). With CPV, payment is based on the number of video views or other ad interactions.
- CPI (cost per install). Using CPI means that you will receive a payment every time the promoted app is installed via the ad shown in your application.
A prominent example of referral marketing is Amazon, which promotes various products. On Amazon’s app, users can find various ads featuring other sellers’ goods.
You can also encourage your audience to buy from Amazon by sharing advertisements. This e-commerce giant will pay you for every redirected purchase.
Use cases for referral marketing
Your free mobile app can benefit from this monetization model, provided you have an established user base with high-intent customers for the promoted service or product. Here are the categories that seem to reap the greatest benefits from referral marketing:
- e-commerce apps (using the in-app-store to promote products or services),
- page builders designed specifically for eCommerce,
- fitness, wellness, and productivity applications,
- gaming apps,
- fintech applications,
- travel apps,
- social media apps,
- online education and training courses, tools for self-education,
- community apps that connect like-minded people based on their interests.
3. In-App purchases
In-app purchases are among the top monetization strategies. According to Sensor Tower, global consumer in-app spending will grow from $137 billion in 2022 to $233 billion in 2026. The App Store will account for $161 billion, while Google Play will reach $72 billion.
In-app purchases can be divided into two categories:
- Consumable. These are items that can be purchased multiple times. It could be used up during the life of the application. Examples are in-game currency and extras.
- Non-consumable. These are features used permanently, like ad-blocking or new game levels.
Typically, single features or consumables boost the user experience at a low price; that’s why the payment doesn’t seem significant for a user who is eager to spend a couple of dollars to enjoy their time spent in the app even more. For example, a popular game, Two Dots, grants a gamer a power-up and extra five moves only for $0.99.
When using in-app purchases, app developers aren’t responsible for managing their app’s transactions; it’s the app store’s responsibility. The developers have to embed all the necessary functionality, think through marketing, and enjoy the money from each in-app purchase. However, a known disadvantage of this model is the high commission fee taken by app stores.
Use cases for in-app purchases
An in-app purchases model is one of the most popular strategies for both free and paid apps. It can be easily combined with other models and is a great fit for a wide range of apps, including:
- gaming apps (virtual currency, extra moves, power-ups, skins, etc.),
- dating apps (virtual gifts, super likes, boosts, etc.),
- utility and productivity apps, including file management, project management systems, messengers, and others,
- applications with gated content (audiobooks, news apps),
- entertainment apps, including OTT, short video streaming apps, webtoon applications, and others,
- content creation apps, video and photo editors,
- sports and healthy lifestyle apps,
- travel guides and navigators,
- finance management apps, including wallets, neobanks, and money transfer apps where users can access add-ons like customization, multiple accounts on one log-in, data export, and unlimited savings,
- education and online learning apps,
- social media apps.
For example, Tinder offers an impressive number of a la carte packages, including Super Likes, Boosts, Read Receipts, Top Picks, and more. On DAZN, a livestreaming sports app, sports fans can buy select mega fights as a pay-for-view option.
A subscription is a way for a user to expand the functionality of the app or gain a new level of desired access for a specific period of time. This type of monetization is used by different app types, from productivity and graphic editors to cloud services and digital news providers.
Typically, with subscriptions, a user is first enticed by a free trial or limited functionality. For example, in a famous photo editor app, Lightroom, you can apply filters to your photos and see previews of premium tools' effects. To use them, however, users have to buy a subscription.
Developers often provide several subscription plans that differ in terms of:
- Duration. Commonly, monthly, quarterly, or yearly subscriptions are offered. Here, the longer the subscription time is, the cheaper it is.
- Features. Using this model, the package names will vary from app to app. Common names that you may see include basic/advanced, personal/corporate, or bronze/silver/gold. However, while the names vary, they all have a structure where the cheapest plan offers basic functionality or access that expands when the user upgrades to a more expensive plan.
Use cases for the subscription monetization strategy
According to data.ai, short video, OTT, and dating apps leave other competitors in the dust when it comes to in-app purchases and subscriptions.
But it doesn't mean that the app monetization success is reserved exclusively for those app categories. In general, subscriptions are a popular app monetization strategy for the majority of freemium apps, including:
- online learning apps, training courses, language apps,
- news apps, digital journal apps,
- fitness, healthy lifestyle, and wellness apps,
- customer-focused health tech apps (general health, health management apps, telemedicine apps),
- services for listening to music or watching movies,
- workforce optimization apps, services for team management, and time tracking,
- online community platforms,
- social networking apps,
- photo and video editing services,
- applications-as-a-service apps, including cloud storage services and more.
Netflix, for example, has generated more revenue than the company bargained for from its subscriptions. The platform grew its paid membership to 231 million paid subscribers in 2022.
If you find a company with a similar audience and a sufficient marketing budget, you can establish a mutually beneficial partnership. It will sponsor your free app while you will promote its goods or services.
Promotions come in various forms, including in-app advertisements, content distribution, and branding of the app design to the sponsor's brand. The main point of any promotion is to spread the word about the sponsor so that your users start using the promoted brand.
For example, PlayerUnknown's Battlegrounds (PUBG), a popular battle royal game, partnered with Tesla to add thematic locations and electric vehicles into the game.
In terms of generated revenue, it can be gained in several ways. You can either split the revenue with the sponsor or set a monthly sponsorship fee.
Use cases for a sponsorship monetization model
Once you're able to baseline your usage metrics, you can draw in some sponsors for your app. Sponsorships can go a long way for applications such as:
- popular event applications,
- fitness, lifestyle, and wellness applications,
- social media and social discovery services,
- on-demand delivery applications,
- gaming apps,
- super-apps, especially those in the finance and travel sectors,
- online learning and education applications, and more.
If you don’t want to have users make payments or can’t gather a sufficient audience to promote advertisements, crowdfunding is another solution to help generate money for app development. With crowdfunding, you can either find support on popular crowdfunding platforms like Indiegogo, Kickstarter, Fundable and GoFundMe or try to find funding among friends, relatives, or on social media.
Although it’s not an easy way to get millions, and the majority of ideas find little to no support, you can still get lucky. For instance, the Near-Mage game collected five times their requested amount. The project’s crowdfunding campaign aimed to earn $29,000 and has already received more than $134,000 from backers as of May 2023, and the amount pledged is still growing.
7. Email marketing
This is an older strategy where you collect user emails and send corresponding marketing materials to raise the subscribers’ interest in a product or a service. Email marketing strategy is suitable for those app developers who managed to build a rapport with their audience.
There are several ways to build an email list. The two most powerful ones are pop-up forms asking for an email and Facebook SDK for users to sign up where it collects email.
To encourage users to share their contact information, you may want to offer a gift in exchange for their email. Don’t forget to adhere to the GDPR requirements and ask your users’ permission to use personal data, as many users are protective of their email addresses, personal information, and privacy.
Those that manage to accomplish this task can start sending emails that provoke interest and make users want to read a full piece of content or purchase specific products.
8. App merchandise
Although the digital world is dominating today, we all live in a physical one. That’s why selling products and branded merchandise is always a good idea. To earn a profit, however, you need to increase your brand awareness and get a lot of brand ambassadors to tell the world about their love for your app.
One of the top app categories to implement a merchandising strategy is games. Players who can’t stop admiring the adventure will eagerly spend money on branded t-shirts, stickers, cups, and other merch. For example, multiplayer online battle arena (MOBA) games like PUBG and DOTA sell their gear, while casual puzzle games like Angry Birds sell plush versions of their characters.
Use cases for offering app merchandise
This business strategy is usually employed as a supplementary revenue stream by established names in the industry. The app types that implement this model include:
- gaming apps,
- fitness and wellness applications,
- video and audio streaming services,
- social media and social networking apps,
- on-demand delivery apps.
9. Transaction fees
How do you make money from free apps if you don’t have ads and don’t sell merch, services, or features? Suppose you process online transactions by allowing users to buy products or even exchange money. Adding a couple of cents to the total sum won’t hurt the consumer, but for you, it can become a way to make a fortune.
Such a non-obvious monetization strategy is a possible way to earn a living without excessive investments. Just make sure your fee is insignificant, and you have at least several thousand users. Then, you can start making money without significant investments. This is how many fintech apps work.
Use cases for charging transaction fees
Service fees are mainly relevant for applications that act as intermediaries between users and other organizations. Prominent examples of such applications include:
- on-demand apps (delivery, ride-hailing services),
- freelance and professional networking apps,
- second-hand eCommerce apps,
- financial services and banking applications (payment apps, stock trading apps, and others),
- eCommerce platforms, marketplace apps,
- travel marketplaces and booking apps.
Thus, travel marketplaces like Booking.com charge hotels 10-30% from each of their hotel visits.
Free apps that make money
Non-games accounted for roughly $220 billion (65%) of the $336 billion mobile ad spend market in 2022. Let's take a look at three top-grossing non-game apps worldwide:
TikTok has rapidly increased its revenue generation in the past few years. In 2022, it generated $9.4 billion in revenue. The app also became the most downloaded app in the non-game category nabbing over 3.5 billion downloads over the past ten years.
Like any social media, TikTok has started its monetization strategy with advertising and later introduced in-app gifts as an additional revenue source. Less than 1% of TikTok's in-app purchases have a $250 price tag, yet those purchases make up about 25% of what US users pay on the iOS version of the app. The ability of TikTok to sell IAPs at these high price points accounts for its quick rise to the top-grossing app in the globe.
YouTube ranked as the #2 app by app store revenue in the US in 2022 (well ahead of TikTok, looking only at iOS).
On YouTube, while about 90% of revenue comes from advertising, 10% comes from premium subscriptions to remove these ads from YouTube and YouTube Music.
Tinder wrapped up the year on a high note, being the most downloaded dating app on the planet. The year 2022 also marked a stellar period for this dating app. Its direct revenue grew 8% year-over-year, up to $1.8 billion.
The app monetization model is similar to other apps and includes advertising, subscriptions, and premium features. Tinder Plus represents about 41% of all the app’s in-app purchases.
Finding the best monetization strategy for your free app
Since we already know that free mobile apps make money, let’s explore how to choose the most profitable app monetization strategy. Here are five pieces of advice from Orangesoft’s consultants:
Consider your app type
The first and foremost thing that should influence your choice is the type or category of the mobile app you're building. For example, app owners can combine fitness applications with a subscription model. This allows them to offer premium features or additional content for a recurring fee. Streaming applications also tend to come with a subscription model where users can unlock unlimited skips or music downloads.
However, it doesn't mean that the freemium model is the only option when it comes to fitness and streaming apps. You can combine subscriptions with another free app monetization strategy, such as in-app purchases or thrive on ads only. The point here is to set aside irrelevant business strategies that are initially ineffective for your app category. How to do it? Let's have a look at the next pointer.
Analyze the core values of your app
Think about the main idea and concept of your app and tie it with app monetization strategies. Which one matches your values? Which one will find users’ support? Which one will fit the features? For example, if you have rich functionality, consider using in-app purchases or subscription models. For those who aim for a large audience, advertisement is a good choice.
Assess your resources
Some monetization strategies require additional development. For example, some in-app purchases can’t be implemented without building extra features. Therefore, this option might not be right for your app if you don’t have a budget for additional development.
Study your users
Before deciding on an income-generating plan, you need to know the spending habits of your customers. What are they eager to buy? How much can they pay? Are there going to be “whales” that drive larger-than-average revenue? If so, how do you increase the share? Analyze your audience by categorizing them by sex, age, region, and preferences to develop custom offers for each segment.
Watch your competitors
It helps to learn from other developers' mistakes and make a better value proposition. Check out what the competitors offer, how they adapt, what changes they introduce, and how their changes affect their revenue.
The bottom line
Choosing the right mobile app monetization strategy helps app owners meet their bottom line and generate revenue from the app's users. While there's a variety of business strategies, not all may work wonders for your mobile application.
If you need some help deciding what monetization strategy can deliver the most profit for your app, the Orangesoft team is ready to help you.
Our team can assist you throughout the whole development process using our vast experience in the app business. Don't dive into the ocean of mobile applications alone. Contact us, and we'll take care of it all.