Building a business not just an app? Start with the revenue model

The number of app developers using business models that don’t rely on app store payments is increasing. In some cases this is sophisticated app developers adapting to the market. In many cases it’s simply a greater number of existing businesses starting to use apps as a channel to reach potential customers. We can use the data from our Q1 Developer Economics survey to examine which strategies carry the most risk and which have the greatest chances of success. Could you use one of the more successful models for your next app?

business models - mobile platforms

We asked developers to tell us all of the revenue models they use and also whether their business was loss making, breaking even, making a slight profit, or generating comfortable profits. Revenue model popularity and a sample of profit & loss distributions are shown below.

Build apps for other people

[tweetable]Contracting is the most popular revenue model and also the one associated with the second lowest probability of making a loss[/tweetable] and third highest probability of comfortable profits. Of course, contract work also has strictly limited upside – it’s not really possible to build a scalable business around contract work without becoming a global giant consulting company. That said, the [tweetable]majority of developers would be better off if they spent most of their time on contract work rather than their own apps[/tweetable].

App store payments and advertisers

The next most popular revenue models, in-app advertising, paid downloads, in-app purchases and freemium are all relying on directly monetising an app. Together they are the four most risky models with the lowest chances of profit. [tweetable]Paid downloads are the least successful revenue model[/tweetable]. Although easy to implement there are very few cases where offering a straight paid download will create a financial success. Even on iOS, despite a still growing user base, the paid download market appears to be contracting fairly rapidly in the face of free app alternatives with in-app purchases. Despite the advantages of the in-app purchase model, it’s still quite far behind other models.

Selling services

Subscriptions are the next most popular and also relatively low risk and successful. However, implementing subscription based services is usually more complex than selling apps or virtual goods. Many subscription based businesses are simply using an app to sell subscription content. Another interesting possibility for developers in this area is to resell generic cloud services by adding value on top. As very basic (and already well served) examples, re-sell storage by adding document collaboration or photo management features on top.

Providing services that app developers can resell is one model for those selling developer services. Others include tools or services that help developers design, build, market or monetise their apps. This is one of the lower risk models with a good probability of profit. It follows the classic advice that when there’s a gold rush, the best thing to do is sell picks and shovels. There are still plenty of opportunities in this space (where are all the tools that help me prototype animations?) but also others with too much competition (some BaaS providers are already shutting down).

Selling stuff

[tweetable]Apps that make money through e-Commerce are the most successful in terms of making comfortable profits [/tweetable]and have by far the lowest risk of making a loss. Most developers using this model had existing e-Commerce businesses and have just added mobile apps as another sales channel. There are some startups with mobile first commerce apps though. More than 50% of developers using this model make comfortable profits related to their apps, so the cost of building apps is more than paid for by sales through them.

Affiliate and CPI programs allow developers to sell other people’s stuff. Using an affiliate program could be selling products related to your app through Amazon. Alternatively, a travel guide app might integrate a flight search SDK that provides a native search experience within their app – the developer gets paid whenever anyone books a flight. Affiliate programs were very popular on the web and their native counterparts are likely to be as well. CPI programs are for selling other developers apps, or at least getting users to install them. The top free-to-play games have extremely high ARPU and as they try to grow rapidly it makes sense for them to pay almost anything less than their ARPU for a new user (since new users boost chart ranking and thus organic installs). Other apps are a good place to advertise apps, so this is likely to be quite a lucrative option until either there’s an oversupply of quality advertising inventory or a crackdown on free-to-play games.

Royalties or licensing

We skipped per-device royalties or licensing in the middle of those last two. Overall this doesn’t have much lower risk than relying on the app stores or ads. However, this is inherently a higher risk strategy with bigger rewards for success. It usually involves building a product for large companies or even OEMs. The downside is that the number of direct customers in the target market is usually quite small. This is usually a model for those with great connections, a lot of funding, or both.

Build a business, not just an app

The app stores made it really easy for developers to sell software to a very large audience for the first time. With over a million apps each for iOS and Android, that is no longer the case. Discovery is hard and larger, more sophisticated organisations are dominating the top charts. If you have a great idea for an app, see if you can find a great revenue model to fit it. If not, try to come up with another idea. Outside of the VC-funded startups, developers that succeed will be the ones that think about where their revenue will come from before they’ve started building the app.

For more information of the success recipe of mobile apps, check out our App Economy Profits report.


A guide to building your app business

So you want to start a business developing apps? Or maybe you have an app business but want some advice on how to grow or improve it? [tweetable]Simply building an app and publishing it on app store as a paid download is extremely likely to result in disappointment[/tweetable]. This shouldn’t be news to you if you’ve been following the industry in the last few years but what should you do instead? In this article we’ll look at some strategies to increase your chances of building a successful app business.


Risk versus reward

Building a product to sell is exciting and full of creative possibilities but it’s also always a risky approach. If your primary interest is in designing and building apps and solving problems then a far lower risk app business is a software services business. Developers who make most of their revenue from contract development work have the highest median wages by far, in other words, very few of them can’t pay their bills! That said, if you’re planning a software services company it makes sense to use any downtime from client work to build your own products. It can not only generate some additional income but also gives you something you can show potential clients publically (a lot of clients won’t let you publish the fact that you built their app). In our previous surveys, developers who’ve earned a small fraction of their revenue from app stores and the rest from contract work have done significantly better than those doing 100% contract work.

Of course the trade-off with a services business is that the upside is very limited. Global competition makes it hard to charge significantly in excess of typical developer wages. On the other hand, there are several examples of small teams with a hit app that has made them millions of dollars. Our survey data consistently shows that these successes are very much the exceptions. [tweetable]Only a small minority of app development projects are significantly profitable[/tweetable]. Even if you think you’ve got a great idea and a great team then, unless you’re spending your investors money, seriously consider balancing your product development work with some contract development.

Businesses versus consumers

If you’re building products, consider your audience carefully. [tweetable]Who you build your apps for has a massive influence on how successful you’re like to be[/tweetable]. In general businesses are much more willing to pay for software than consumers. As I’ve written before, developers targeting enterprises make four times as much as those targeting consumers on average and yet the latter face much greater competition. Don’t think that targeting organisations rather than individuals means you’re limited to automating business processes. There’s lots of complex and interesting software that businesses need, for example visualization tools to help sell product and projects, or even to help construct things in the real world. There are also extremely simple but valuable pieces of software that can make a positive difference in the lives of lots of people; I’ve met one entrepreneur who’s made a small fortune selling eye-testing software. Additionally, you may be able to target your product idea to an enterprise rather than consumers and have significantly greater success. There have been some relatively small scale successes for developers selling educational software on Apple’s App Store but most of the big successes in educational apps are selling to schools instead of or as well as direct to consumers.

If you’re determined to build consumer apps or your category of choice leaves you with little option (e.g. games) then go big or go home. [tweetable]The app stores only consistently reward the best[/tweetable]; an occasional viral hit may do very well for a short while but they’re impossible to create reliably and they rarely last. If you don’t truly believe you can make an app worthy of the top ten in your category of choice then you should probably relegate this particular passion to a side project or hobby. You don’t really need to make the top ten to earn a decent living (although doing so isn’t sufficient, you’ve got to stay somewhere near the top) but it’s best to allow for some overconfidence!

Be creative with business models

Whether you’re building games for consumers or productivity apps for businesses, design your business model along with your app or service. If you design and build the product first then try to bolt a monetization scheme on top, you may find yourself with relatively few options. A large fraction of developers are still using paid downloads or advertising as their primary revenue model despite the fact that these are the least successful options. There are exceptions where other models are not suitable (e.g most kids apps really ought to be paid download only) but [tweetable]much less than 10% of all revenue paid out by app stores comes from paid downloads[/tweetable]. Developers relying entirely on advertising rarely do much better either.

The ideal business model is some kind of subscription or annual license that produces recurring revenue. This is relatively common with services aimed at businesses but certainly won’t fit every consumer app. Most apps that are aimed at consumers need to be free to download.
There’s simply too much competition. Whether you then get paid through in-app purchases or selling some related product or service is still an area open for experimentation. We’re seeing some games developers experiment with physical toys that unlock content. Amazon wants developers to sell their products and earn a commission. There are plenty of unexplored possibilities and new technologies create new ones all the time. You’re not limited to one revenue source either, mix and match! Whatever you do, don’t copy the strategies that aren’t working for most other developers unless you have a very good reason to believe you’ve got a special case. Either copy strategies that are working or try new ones.

First balance your risks according to your finances. Select your audience carefully. Then design the business model to maximise your chances of getting the audience to part with their cash then. Do all three and you’ll have a much greater chance of success than the vast majority of your peers. Now all you need is excellent execution and a bit of luck.


6 tough questions on app business models and strategies

[VisionMobile’s Andreas Pappas was recently quizzed on app business models, best practices and strategies for developers and entrepreneurs. In this post we’re presenting the most interesting questions and answers from this interview. These are tough questions that all developers and entrepreneurs are faced with in the early stages of their ventures.]


Q1: I am thinking of developing my own mobile app: What are the main business models I can use to make money and how do I select the right one for my idea?

There are numerous factors to take into account when developing your business model but the two key questions you have to ask are:

  1. What problem am I trying to solve?

  2. How am I solving this problem?

Once you have answered these two questions, you will be in a much better position to develop a business model. A good place to start from is the Business Model Canvas, a simple tool that outlines the key areas that a business model needs to address.

A number of areas within your business model are interdependent. For example, your target market will initially be defined by the problem you are solving. Once you have identified your target market you can start thinking about revenue models, marketing, partnerships, distribution etc.

While it helps to get everything right the first time, it is most likely that you will need to adapt both your product and your business model several times along the way.

From an economics perspective, a large number of successful business models these days are built on two-sided networks and even multi-sided networks. These are usually services that connect businesses to consumers or consumers to consumers, such as, for example AirBnB and eBay type services. These models exhibit powerful network effects if they manage to scale up and allow owners to monetise either one side of the network (e.g. consumers or businesses) or both (e.g. commission-based) depending on the application.

[tweetable]When it comes to making money, there is a variety of revenue models available[/tweetable] and the selection is to some extent dependant on your business model, competition, target market, and exit strategy. There is no one-size-fits-all solution here.

Free services can scale up quickly but monetisation may be problematic. So if your business plan requires scale, think about indirect income sources such as advertising or even VC funding, to get you through the growth phase. Once you’ve achieved scale, an exit is an option you should consider: user acquisition is expensive and larger businesses will frequently opt for acquisitions rather than organic growth.

[tweetable]Advertising may be profitable but requires massive scale and even then, getting it right is tricky[/tweetable]. Advertising is more popular on Android and WP than on iOS, due to the fact that Android users are not as heavy spenders as iOS users.

Obviously app-stores allow developers to monetise their apps directly, via paid downloads or in-app purchases. The latter has become increasingly popular, particularly on iOS and competes favourably against paid-downloads.

Beyond these obvious ones there is a range of options that have to do with the type of app/service that one is providing. For example, apps offering content or services (e.g. news apps or some fitness apps) may utilise a subscription model. This app business model is not easy to pull off though – even popular newspapers are struggling to make money off subscriptions.

 Advertising most popular revenue model

Q2: I am a mobile developer. Which sectors have the most potential in my country?

The good thing about mobile apps is the fact that the market is global and the costs and barriers to reach international markets are very low compared to other, more traditional businesses. So mobile app development should not be seen in the traditional way of “what works in my local market” but instead, from the viewpoint of “what works in the markets that I want/I am well placed to reach”. In short, any sector has potential in your country if your focus is international and it should be international-first.

While this change in mindset is critical, that is not to say that there are no opportunities locally. If one is developing apps that rely on local content or services (e.g. transport services) then highly localised content is required. So it may be easier for local developers to source and access this content, although this is not always the case.

One would think, for example, that local travel/tourism apps would be more successful since they’re optimised for each region. However, the most successful apps in this sector are global because they have scale. [tweetable]For most apps, scale is critical and thinking locally can only get you so far[/tweetable].

Q3: What is more difficult? Coding or marketing the app?

The consensus among developers says marketing. While adopting new languages, frameworks, SDKs and APIs may pose challenges, it is usually a straightforward matter of learning to use new technology. For most developers, marketing has been uncharted territory until the very first app-store appeared. Mobile marketing is quite a different beast to anything that was available before iPhone-era smartphones. Even digital marketing specialists may find the landscape too perplexing since the strategies, practices and even the KPIs are in constant flux. Constant experimentation (in other words trial-and-error) is one of the strategies most frequently used in order to find out what works best in your case.

Q4: What are the best ways to do marketing for my app and acquire users/downloads etc?

😉 See above. The best advice is to try several options and see how they work for your particular case. Before you pay for any advertising or promotion network, try some textbook marketing methods that are still of great value:

#1 Cross-promotion

If you have several apps, make sure you promote your other apps through them. Of course this must be done in a way that will not annoy your users. If you can promote your app through other apps, that’s also a good idea.

#2 Become part of an ecosystem/platform

Make your app work with other apps if this is an option. For example, if you’ve developed a fitness app that could work with Withings or Runkeeper, why not make it work with these and gain more visibility through their own ecosystem?

#3 Do some PR

Let people know about your app. Send emails or press releases to popular websites, newspapers and anyone with a sizeable reach. Most of them may not respond but it’s definitely worth a try and there are several success stories that started this way.

After you’ve done the above, there are plenty of options to try, depending on your marketing budget. If you have determined how valuable each customer is to you, then you can hire a mobile marketing expert to handle all your marketing activities and pay them per customer acquired.

Q5: What are the most common mistakes that mobile app developers do and how can I avoid them?

#1 Failing to see app development as a business

[tweetable]The best technology solution is not good enough without the right business models and execution[/tweetable]. This is one of the best known principles in the area of technology strategy. Developers that lack business experience often fail on the commercial side of the business.

#2 Failing to prepare for success

The nature, scale and pace of the app economy is such that in a matter of days your user based may grow from tens to tens of thousand users. Will your back-end cope? Will you be able to pay for third-party API calls utilised in your app? If not, what may have been initially a great service, will fail due to poor customer experience or you may run out of money. A proper business case should anticipate success.

#3 Failing to pivot/adapt

A common advice in the startup world is “pivot till you die”. If your idea is not working try applying it on a different market, adapt it to the current market, flip it on its head or scrap it altogether and go for something else.

#4 Failing to know and listen to your users

In a market where consumer switching costs are so low and a user can easily replace your app with the competitor’s app, user experience and customer support are critical success factors. Your app will be deleted if it crashes repeatedly, if it is poorly designed, or does not deliver what it says on the tin. Test your app, test it again, use crash-reporting and user-analytics services and keep it up to date, implementing new features and listening to user feedback.

Q6: Is it better to try to innovate with a never-seen app, or is it better to be a follower?

Neither is easy and both can work. The advantage of being a follower is that you learn from others’ mistakes and failures. You may for example see what is not so good or what is missing from an app and fill the gap, or extend it into another market. The downside is that by the time you do it, others will probably be trying to do it too, so there will be more competition. You don’t just need a better app, you also need better execution, i.e. a better business model and marketing, in order to topple the leader.

On the other hand, a new, innovative idea can take you a long way before the competition catches up (although never at a safe distance) but it is more difficult to create a niche and then expand it.

[tweetable]While most developers develop apps they want to use themselves, this should not be the only criterion for developing your ideas[/tweetable]. At the very least, discussing with users, friends or researching the market can get you a long way.

Those developers that extend tried and tested ideas into new markets are usually more successful. That doesn’t mean that you can just copy an app; you have to adapt the business model to the new market at the very least. In the app economy innovation is not limited to technology but extends to business models too.

Successful developers grow by extending to new verticals

Comments? More advice? Feel free to start the conversation.

Andreas Pappas

Follow me on twitter @PappasAndreas