Last Updated on January 21, 2022

Have you ever wondered how free apps make money? Are you an entrepreneur looking to create an app and make money or start a passive income by publishing a free app in the mobile app market? If yes, you are on the right platform to quench your thirst with the right knowledge of app monetization strategies.

In the app market, it’s the free apps that have always outnumbered paid apps when it comes to profits & download numbers, and this has always made people wonder how free apps make money.

However, before we address this question, you first need to know that the app boom has not ended and there is still massive room for growth.

app market growth techcrunch
Source: AppAnnie

Even though the percentage of paid app revenue has slid down to 37.8% from a whopping 75.9%, the mobile app market is still worth billions of dollars.

So, what exactly is the free app business model? Let’s find out!

What Is Free App Business Model?

For as long as we can remember, businesses have always worked on this model of offering a commodity for free to earn a profit, like give a free shoe-shiner with shoe polish, or give a free smartwatch or earbuds with a high-end smartphone. And for virtual products such as mobile apps, they make the free business models very viable than the physical ones. As otherwise, it can be costly to produce material products for many users. It is a lot feasible to create a digital product and provide that for free on a large scale. And entrepreneurs understand this very well, and they adopted this for apps. They give the mobile apps for free and then upsell & monetize the offering. Win, Win situation.

What Are The Benefits Of A Free App Business Model?

Among its many benefits, one is it reduces the friction during user acquisition, which is a huge and expensive task. It is tough enough to make users install the app and ask them to spend money, so it might not be ideal. So, offering the app for free is an effective step in removing some barriers.

With free apps, you also get the possibility of mass adoption as they enjoy a larger user base compared to paid apps. And investors find this metric very important, as having a large user base can be crucial for monetization and higher return on investment. Also, this large user base that comes with free apps can be crucial in funds acquisition.

In essence, in the free app model, the businesses offer free app installation, and they later upsell the app’s premium services/features or monetize them using various strategies.

What Is The Difference Between Free & Paid Apps?

First, starting Free apps, they are less expensive as they are less complex than paid apps. They attract more target users and increase visibility & downloads, which also work great in optimizing your app on the app store. With free apps, there are multiple possibilities for monetization in the future, and they help build brand image in the online sphere.

Then there are Paid apps, which have fewer downloads, and here the businesses automatically lose the potential clients not willing to pay right away. There are higher user expectations, so it should be ensured that the app performs flawlessly at all times and offer a great set of features. A lot of money is spent on the development & design of paid apps. There are limited monetization options here – such as a monthly or yearly fee. Even when the app has great reviews, there are fewer chances of purchasing it if they cannot try it first.

So there are many ways to make money with mobile apps, but the best option seems to be free apps. And then, free apps can make money by using several app monetization strategies, which will be discussed in the latter part of this blog. But first, let’s shed some light on the market statistics of Free and Paid mobile apps.

What Is The Market Trend  Of Free & Paid Apps?

Today people use smartphones to execute day-to-day aspects of their life. As literally, there is an app for everything, be it to get in touch with long-distance friends, place an online food order, or book a cab to commute. The number of apps in the app market is constantly increasing, resulting in harsh app market competition among app developers. In 2018, there were 3.8 million apps on Google Play and two million in the Apple App Store. And this market grew further by 2020 and reached $190 billion.

Distribution of free and paid Android apps in the Google Play Store as of July 2021
Distribution of free and paid Android apps in the Google Play Store as of July 2021: Statista

As per stats, most of the top-grossing apps are free of charge. Today, the users are very picky, and they choose to have only 4-9 daily active apps. On average, only 5 to 10% of users are willing to pay for an app, and that too with high-quality performance and unique functionality. Hence, the major number of downloads & profits (98%) come from the free app segment.

mobile-app-spend
App spend for InApp vs Paid for downloads: Gartner

Gartner Research Group suggests that 24% of the app users choose to interact more via the in-app purchase instead of paid apps.

And once the app has proved its value to the users, they whole-heartedly like to conduct more in-app purchases and transactions to access the premium features. Here we are stating some of the key takeaways from the recently conducted researches:

It’s been found that Gaming mobile apps tend to generate more revenue; in fact, eight apps out of ten top-grossing apps in the Google Play Stores are gaming apps, like Clash of Clans, Crush Saga, etc.

Next are Advertising apps, where 36 percent of non-gaming ad revenue comes from these, and then 21% comes from mCommerce channels in 2017.

These facts clearly state that creating a free app for your business is a wise move, and next is correctly choosing the free app monetization strategy.

Implement Monetization Strategy Correctly & Know-How Do Free Apps Make Money

In March 2021, around 97 percent of the apps in the Google Play Store were free compared to 93 percent of the apps in the Apple App Store. Now the question is exactly how these large number of free apps name revenues? For instance, research shows that the top 200 mobile apps on the app store are roughly making $82,500/day. But how do they make money when the app is free? Well, it varies.

Different apps have different monetization strategies like advertising is the most used method to monetize the apps. It is said that mobile advertisements spend are going to top $290 billion in the year 2021. However, these days advertising is being outdone by in-app purchases. If you plan to launch a free app and look for effective app monetization strategies, we discuss the various app monetization methods.

1. Advertising

Advertising

Ads are considered the easiest mode to earn money from free apps. As of now, there are 7 out of 10 apps to have embedded commercials that are generating payments per its display, per click, or per install. Now five different ad variants can be utilized in a mobile app, they are:

Banner Ads

These are the ads positioned at the top or bottom of the mobile device screen. These are generally less intrusive as users can still normally use the mobile app. However, with banners, there are lower engagement rates (CTR – click-through-rate), and these advertisements are dependent on brand recognition.

Video Ads

In this type, a video ad that lasts 10-30 seconds is positioned within the app, where it automatically plays whenever there are natural pauses. A sub-category of Video Ad is a rewarded video advertisement.

Rewarded Video Advertisement

The consumers get some perks, like extra points, app currency, etc.) when they watch the video ad till the end.

Native Ads

These ads naturally integrate into an app. They can be sponsored content or video used for promoting a specific brand/product. Due to the natural integration, these apps are considered less irritating and tiresome, and hence they get more popular as the monetization model among the app providers.

Interstitial Ads

These advertisements are full-screen pop-ups displayed within the app at a particular moment. They are usually shown when the app is opened or closed. Here the users have two taps to pick – either they can close the ad or check promoted content.

Incentivized Ads

People usually hate advertisements; however, they love rewards. And a toolset allows providing users rewards for a particular in-app activity or engagement, such as Content Sharing or Filling out a poll, etc. App bonus is a great way to increase app loyalty and user engagement. The profit from this strategy is made via in-app currencies and sponsorships. Meanwhile, these rewards must be wisely positioned as part of the app’s involvement.

Advantages & Disadvantages Of Advertising

  • Advantages
    Through CTR, it adds up to the primary income of your app. Also, with in-app ads, the possibility of reaching your target audience is higher. These ads help measure user interaction, and video ads make higher traffic than social media networking, audio ads, or web browsing.
  • Disadvantages
    In-app ads tend to mainly work only with apps having a large pool of users. There could even be an issue of irrelevant ads as often the ads could be totally different from what your app category offers. If the ads are not appealing enough, they get easily ignored by online users. In-app can often create an interruption in the app with the user’s navigation.

2. Referral Marketing

Referral Marketing

This monetization model is closely connected with the Advertisement model. So, marketing also consists of Affiliate Marketing, where informational content regarding an affiliate company is positioned in the app, and based on clicks & installs; the rewards are received. These rewards are usually based on a cost-per-action (CPA) model or revenue share.

The Referral marketing model can be used in many ways, such as promoting another app, in-app advertisement, and advertising products/services via an in-app store. Also, several affiliate network firms, like Flurry, Admob specialized in finding a suitable affiliate for your app. There are various software tools & programs that can help integrate this model. The subsets used in Referral marketing consists of:

Cost-per-mile (CPM)

Here you receive payments based on several impressions. The advertiser is usually charged every 1000th time.

Cost-per-click (CPC)

Here you receive payment based on the number of clicks on the displayed app.

Cost-per-view (CPV)

Here you receive the payment based on several video views or other ad interactions.

Cost-per-install (CPI)

Here you receive the payment each time the promoted app is downloaded via its ad in your app.

Advantages & Disadvantages Of Referral Marketing

  • Advantages
    Referral Marketing helps in promoting the most-loved or most-sold product in the mobile app. This is also the most trusted earning mode for mobile apps. Even the referred customers are profitable and loyal in the long term.
  • Disadvantages
    This is quite a time-consuming method. Often it is complex to track a referral campaign, and it requires the development of other tools.
Hire mobile app developers

3. In-app purchases

In-app purchases

This is a known strategy used in the freemium app model. It is integrated to sell virtual/physical items, offer premium features, block advertisements, or open new app content. The app store handles these transactions, and the owner receives a commission from each trade. This strategy has three sub-categories, they are:

Consumable

These are the items used once, mostly in mobile games, for instance: health points, digital currencies.

Non-consumable

These are the app features that are used permanently, for instance: Ad blocking, extension in-app functionality.

Subscription

This category is useful in unlocking additional content and app features for a set amount of time, for instance: a monthly/yearly service subscription.

Advantages & Disadvantages Of In-app purchases

  • Advantages
    There are higher chances of obtaining high profits from a low-monetization method. This model works best for gaming apps, as with games comes more than just one currency, like gold, coins, and gems. This model allows to provide more advanced services via the app, and also it safely secures the credit details for in-app purchases.
  • Disadvantages
    When implemented poorly, the in-app purchase could result in bad reviews and irritated users. The expectations of users are higher when buying in-app purchases. The development cost of the app is high when it designs advanced-level features & functionalities.

4. Paid Subscriptions

Paid Subscriptions

This model is useful in setting up the revenue streams as weekly, monthly, or annual fees for a particular service offered by the free app. Usually, this model is used in cloud services, or audio, video content providers (such as Google Music, Spotify), and in the digital news portals. Here the consumers receive access to content as per their preferred subscription package.

Advantages & Disadvantages Of Paid Subscriptions

  • Advantages
    To sell online enables you to reach more people anytime and anywhere. Subscription is an additional convenience feature that allows the users to browse inventory and accordingly order. The offerings are endless, so shoppers will always have a lot to choose from.
  • Disadvantages
    Often the software integration issues-eCommerce solutions might take time and increase the data errors. There is disjoined shopping experience and poor inventory visibility. With poor m-Commerce experience in the mobile app world, you require having a user-friendly smartphone for your business.

5. Email Marketing

Email Marketing

This has been a popular and profitable strategy in any industry and happens to be a successful practice in restaurant app development. This is an ancient way to collect user data, usually emails, and send corresponding marketing materials to increase subscribers’ interest in the products or services. This is a useful technique in case there is a drop in user retention indices or when it is used for notifying about new features, app news, rewards, etc.

There are several ways to collect email addresses, like asking for the email via a pop-up message by offering something in return, such as a bonus or app coins. Or it can be done via Facebook SDK for the user to sign-up where it collects emails. One other way to do it is also via third-party tools for easy email collection. However, it is crucial to inform, ask permission, and state the purpose of using personal user data. As per the GDPR (General Data Protection Policy), this is mainly important if your target audience is Europe.

6. Freemium or Freemium Upsell

Freemium or Freemium Upsell

As it comes to Freemium upsell, these apps are available for free to install; however, they consist of paid/premium features, which can be accessed via in-app purchases. In these freemium apps, the users install the apps without paying anything, and if they like the app content, they can then get complete access to the features by making a purchase. This technique allows the gaining of several new users because the premium functionalities are optional. This model is mostly used by businesses in health, sports, and education, enabling the users to get premium features at a certain cost.

Advantages & Disadvantages Of Freemium or Freemium Upsell

  • Advantages
    There are no intrusive ads with this low-maintenance app monetization technique, and the model is compatible with any other approaches. This mode of earning has wide-reached as it’s free for users.
  • Disadvantages
    There are revenue fluctuations in this mode. All the maintenance costs are needed to be bear by you as the app is free of cost. Also, it is easy for the users to quit your app as they haven’t spent anything on it.

7. Sponsorship, Partnership, Influencer Marketing

Sponsorship, Partnership, Influencer Marketing

This is a profitable model for making money from a free app. This is a model generally used for a developed app that already has regular users. Here the maximum benefits can be gained by the apps with a particular market niche. Hence, it works better to contact the sponsors in the same industry to match their brand with advertisements and information in-app or adapt the app design. Here either they equally divide the revenue earned from the app or set a monthly subscription fee. The in-app sponsorship and partnership mainly offer the advertisers a more integrated presence by connecting them to the right audience having purchase intent.

At the same time, it helps advertisers associate their brand with a positive app experience-enhancing brand awareness & sales. But to allure these sponsors, the app must have a niche or a huge user-base that successfully exposes the brands to an ideal audience & drives results. Partnership with other apps & products not just works at making good revenue but also has the ability to expand your offering and provide a unique user experience and app offerings.

Advantages & Disadvantages Of Sponsorship, Partnership & Influencer Marketing

  • Advantages
    This model consists of offering advertising space within the app to brands having exclusive content or offering discounts. Also, it allows brands to outstand their app presence, and it gets the users exposed to several offers & discounts. It causes minimum disruption to the user experience.
  • Disadvantages
    In this model, your app must have a strong brand and have huge data and users. Also, here to track performance, it is required to create tools to measure success.

8. Crowdfunding

Crowdfunding

Mainly popular among startups, Crowdfunding is a proven way to raise money. In fact, alone in North America, this monetization model made more than $17.2 billion during 2018. If you require additional funding to develop the app or meet marketing requirements, more than 400 crowdfunding platforms are available where any platform users can donate money. Some of the known crowdfunding platforms to raise funds for mobile app projects are Indiegogo, AppsFunder, CrowdFunder
& Kickstarter.

For launching your crowdfunding campaign, take the following steps.

  • Start by creating fundraising goals for the campaign. The goals must be specific, relevant, attainable, time-based, and measurable.
  • Next, it is time to create a story to inform others about the app, the idea behind its development, and what problem it solves. This is the way to show the potential of your app.
  • As video content happens to be an engaging way of storytelling, so make a compelling video.
  • Then design a campaign page where the investors are given a comprehensive description of your app project.
  • Social media proves to be great to drive potential investors to the campaign.

Advantages & Disadvantages Of Crowdfunding

  • Advantages
    This model gives access to easy money and also easily pre-fund the next product. There are easier investor relations, so everything goes smooth with this model.
  • Disadvantages
    With this model, there is a risk of increased transparency, expensive fundraising, and it takes a lot of time to run a crowdfunding campaign, and even that might fail eventually.

9. Products & Merchandise Sales

Products & Merchandise Sales

Currently, the e-commerce market is booming, and the number of online buying users is increasing every day. Today most physical items are sold through free apps. With Amazon, you get the chance to earn money from this app model using its Merch tool, which is an easy program that allows the app owners to create & sell their branded items within the apps. Here, Amazon manages all logistics, starting from production, selling, payment, & delivery, as you get is a share of profit.

Also Read: How to develop an eCommerce Mobile App

Advantages & Disadvantages Of Products & Merchandise Sales

  • Advantages
    This monetization model works flexibly for all verticals and helps marketers to make easy profits with minimal risk. Also, this model can be adapted to include the affiliate programs & partnerships driving referral revenue.
  • Disadvantages
    This model is hard to compete with and, in this model, the app will need increased transparency of the app store listing page if they include the physical purchases. Here it is difficult to predict user behavior, and resultantly the income is also unpredictable.

10. Sell API of mobile app

Sell API of mobile app

This is an entirely different model that allows you to make money with your mobile app. Rather than monetizing the app, this helps to sell the mobile app API as a product. Known examples of the apps offering APIs are Google Maps to navigate, Skyscanner for hotels & flights, Vimeo for video, and MusiXmatch for the lyrics & album database. Also, Whatsapp, a free app with no advertisements and charges, makes its money by offering API to businesses. Hence, if your app offers something unique, you can try selling the API to other apps & products.

11. Collecting & Selling Data

Collecting & Selling Data

This is not a popular and ethical mode of app monetization, but it is still an effective approach to making profits. A few companies are offering free apps to sell their databases to the third-parties. This information might consist of the user’s personal preferences, email address, and social media accounts.

Usually, popular apps generate lots of data related to user behavior, which is desired by those in different research fields. Hence, the app developers can try selling this information to researchers and make good money. There are two ways of earning on selling data, i.e., by tracking what the users do and selling data to the outside companies, or by using the raw data for your own usage.

Meanwhile, this model has a downside as some apps can infiltrate call history & contact lists or access users’ social media accounts. But thankfully, there are anti-surveillance tools (Orbot, Onion Browser, Red Phone, Text Secure) available that help the users protect themselves from spying.

Advantages & Disadvantages Of Collecting & Selling Data

  • Advantages
    This model allows to easily avail the consumer segmentation and make buying procedure quite easy. The data provided here is useful for identifying and listening to consumer voices and easily making them available to the right enterprises. All in all, this model can result in a genuine revenue model.
  • Disadvantages
    In this model, there could be issues of disclosure of consumer’s data. Also, it is tough maintaining accountability with the customers, and also it is tough governing the customer data security.

How to pick the best app monetization strategy?

It can often get confusing for businesses to decide upon which monetization strategy will work best for them. Numerous factors must be considered while choosing the right revenue model for the app, like app category, business goals, pricing, app offerings, and audience. You might want your users to have the best experience, and thus minimizing ads and upselling premium might suit you well. Or, if your app is delivering frequent content making, then the subscription model could be the answer for you. And if your target audience prefers free rewards through the apps instead of purchasing, then rewarded ads could be ideal for you.

The important thing to consider here is that the app monetization models are pretty flexible, and you do not require sticking to one while ignoring the other. It works to mix models according to your offerings and audience, thus creating a good balance of creating value and generating revenue.

Here we have a checklist to help you find the best monetization model to suit your business needs.

1. Business Goals

All the mobile apps are created with a goal: to solve a problem faced by users. The app business goals directly impact the revenue model as users interact with the app for various reasons. Like, the performance of in-app purchases won’t be as good as a subscription for a music app. In the same way, a subscription mobile might not work well for educational apps having lots of custom content. This way, you generate the most profit by applying an in-app purchases model combined with advertisements.

2. Define your Target Audience

Having a good understanding of your target audience, mainly the paying users will better understand the right monetization model. Try creating a portrait of your app users, then think about the features they might benefit from, and try predicting the amount of time they will spend using your app.

3. Competitors Analysis

As a mentioned app, each app aims to solve a user problem, and hence it is wise to consider your competitors and other apps in your niche while selecting the right monetization model. After all, the monetization model that other apps from your category are using and receiving success with can work well for your app.

4. Define Value & Matrix

Here you require to define your product and the value that it brings to the customers. This way, you can analyze the future traffic for your app to understand if the app can benefit from ads in it. Sometimes it also works to combine two or even more monetization models. Then you will require defining the metrics to measure the success of that model. Decide on the target of your app and monitor it once it hits the market.

5. Go for the MVP model

It is often good to balance profitability, cost, and time-to-promote. When you build an MVP consisting of the basic functionalities in a skeleton frame, it allows you to attain that balance. So consider launching with an MVP and then gather user feedback on what is working and what is not working. Then make required revisions based on feedback and continue including the other useful functionalities. So consider the engagement factor and whether it results in higher conversion.

6. Enough Prototype & Testing

To have an easily monetizable app, you will require one which is accepted well by your users. You can ensure it by building a UI prototyping, and knowing what is app testing and its importance for the users. This can be in a mobile app with only a visual layout or even a sketch presented to a user group for their feedback. Here the users must understand what is being offered by the app and how it solves their problems.

Conclusion

With the availability of so many revenue models to earn money via apps, it is crucial to understand that each model has its own pros and cons. And it can really help to try out these tactics and consider what is being done by your competitors. Once you do that, it will be easier to make the right decision. Now you might have a better answer to your query that how do free apps make money. And if you have an app idea that could work then you should get in touch with an app development company to create an app.

Author

CTO at Emizentech and a member of the Forbes technology council, Amit Samsukha, is acknowledged by the Indian tech world as an innovator and community builder. He has a well-established vocation with 12+ years of progressive experience in the technology industry. He directs all product initiatives, worldwide sales and marketing, and business enablement. He has spearheaded the journey in the e-commerce landscape for various businesses in India and the U.S.