Comparing Mobile App Monetization and Payments Methods

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Just to set the stage for this blog post, according to BCG, Banks handled $410 Trillion (yes, with a T) dollars in non-cash payments in 2013.

These days, nearly all businesses are becoming software-defined, and much of that software business is increasingly becoming mobile business. According to a recent report by Akamai called the State of the Internet, “The volume of mobile data traffic jumped by 54 percent year over year, and grew 11 percent quarter over quarter”.

For mobile application developers, one of your key metrics to be concerned about is conversions. The whole reason you developed your app in the first place is to achieve a particular outcome. The conversion rate measures the number of customers/users that complete or accomplish a desired outcome. Of course, the desired outcome will vary greatly depending on the type of app you are developing. This typically means the desired outcome is trying to monetize your app in some fashion.

In this article, we’ll review the main monetization mechanism for mobile applications and the related options for payments. There are four types of monetization/payment strategies for mobile applications: direct, indirect, hybrid, and e-commerce payments. These options derive from the basic mechanics of how nearly all of the major mobile application stores operate.

Direct (Paid) App Monetization

When submitting your app to the App Store, you need to decide whether this will be a free, or paid app.

Now, if you choose the direct monetization mechanism, things are relatively simple and straight forward. The customer pays for your app, downloads it and you get paid directly by the App Store. Their cut of the fee is usually a 70/30 split between you and the App Store. In this case, you know your earnings are directly proportional to number of downloads you get. Your main task now is to try and drive as many downloads as you can by whatever means you can (usually marketing and promotion through any number of channels such as your website, paid search, Facebook App Install ads, etc.). How best to promote your app is a whole other topic in and of itself.

There are two main problems with the direct paid monetization model. The first problem is many users are reluctant or outright unwilling to pay for an app upfront just from the app store description and a few screen shots. This reluctance also varies depending on the platform. For example, iPhone users tend to be more willing to pay for apps upfront than Android users (regardless of the OEM of the device).

The second problem, especially for most enterprises, is selling mobile apps is not your core business. Rather, your company may be in any industry (Finance, Healthcare, Travel, Insurance, Automotive, Transportation, Services, Retail, etc.) and the mobile application is just a way for a customer to more easily and conveniently interact with or obtain your company’s services or products. Moreover, if you are in another industry, then the paid app store mechanism probably won’t even work for you because the margins on your products or services can probably not allow a 30% cut to be taken by the app store operator.

Indirect (Free) App Monetization

Given the resistance of consumers to pay for apps up front or your business is something other than selling mobile apps, the next monetization strategy if the indirect method of giving your app away for free and making money another way.

Obviously, it’s a lot easier to get a larger number of people to download your app if it is free. Although it is still incumbent upon you to market your app to build your audience. The most common monetization strategy for free apps is either to monetize the audience itself or to provide some other mechanism to make money from your customers.

If you do have a large audience of consumers, the most natural way to monetize that audience is to sell ads.

The mobile app advertising ecosystem has become increasingly sophisticated. All of the major platform providers have their own ad systems that app developers can integrate, and there are any number of third-party advertising networks that you can use. Many of these networks have advanced algorithms to try and match the availability of supply of ad opportunities with demand for ad placements through a process called real-time bidding and programmatic buying that seek to optimize revenue for the app developer and costs/exposure for the advertiser.

The trick for the app developer is to balance the need to make money from ads against the perceived annoyance of having to see ads by the user. The problem is even though mobile phone screens have been getting bigger, it is still a relatively very small piece of real estate through which they can interact with your content. Too many ads and you may cause users to abandon or even delete your app, or simply interact with your app less frequently. Which will be fewer opportunities for you to earn money from ads for that user.

In order to try and address these issues, there has been a lot of innovation in the mobile app ad industry to try and find ways to make mobile ads more amenable to app users. For example, the use of video ads had seen large increases because video tends to be more interesting to users than other types of banner type ads. However, you still have the same problem if the content of the video is irrelevant to a particular user, it could be even more annoying to them. Abandoning a video jeopardizes your monetization since some require their ad to be fully watched. Another option growing in popularity is “rewarded” ads where, by watching an ad or performing some sort of an action, the user is rewarded with some value that can be used within a game such as credits or virtual goods or currency.

Hybrid (Freemium) App Monetization

Perhaps one of the most popular monetization strategies is the hybrid, most often referred to as the freemium, model. In this approach, the app itself is free to download and use, making it much easier to build a larger audience. So how does the app developer make money? Well, only certain functionality is available for free. The basic functionality may be all that is needed for many users, but for some smaller percentage of users, they will want the additional features that can only be purchased and unlocked from within the app. For game type apps, the paid content may unlock advanced levels or make it possible to play faster, or without the interruption of ads, or to get better weapons or goods such as clothing. For other types of applications, the advanced features may consist of “pro” capabilities, like larger storage, or file sizes, or speeds, etc.

While the conversion rates for the freemium model can vary widely depending on the type of app, it’s not uncommon for the percentage of users who pay for in-app content to be in the single digits. Regardless, if the audience is large, even that small rate of paid usage can produce excellent monetization for the savvy developer.

E-commerce App Monetization

The main challenge with the e-commerce monetization model is your business has to have some other billing relationship with the customer independent of the app store. The reason this can be a challenge is if you don’t already have a pre-existing relationship with the customer, then obtaining the customer’s billing information through the mobile app itself tends to have a much lower conversion rate than it does if the information is initially obtained through some other channel, usually a desktop/laptop web app/site.

The reason for this is the well-proven phenomenon it’s still relatively inconvenient to enter a significant amount of information via a smartphone interface. In fact the probability of them completing the task drops off exponentially with the amount of information the user has to enter.

The main vehicle for e-commerce payments is with credit or debit cards. This is one of the factors that explains why iOS users tend to monetize better than Android users, because Apple did a much better job of collecting users credit card information in iTunes long before it even introduced the iPhone. Once Apple already had a significant number of credit cards for iTunes, it was natural to extend the mechanism for the purchase of apps in the App Store.

Unfortunately, Google did not have an equivalent system when they launched Android, and they’ve never been able to make as much progress. Also, at some level, consumers had a psychological expectation, set with search on the web, that services from Google are free, so why should they pay for anything? One could also argue that Google’s main reason for promulgating Android was to protect its search business and more and more consumers were moving to mobile devices as their primary on-line activity, so it has been suggested that direct commerce was always a secondary priority for Android.

While customers are becoming increasingly comfortable with online commerce, there are still many who are afraid of fraud, identity theft, or hacking (especially given some of the recent well-publicized incidents). These people are unwilling to give their credentials inside mobile app or to have them stored in an account with the vendor. This means that they have to enter their information each time, so it isn’t stored, but that also means that they are less likely to complete a transaction.

Given these challenges, the technology industry has been working hard to come up with mechanisms to make all of these issues and concerns easier both for consumers and vendors.

Peter Kacandes

Peter Kacandes

Peter has over 16 years in the tech industry, focusing on mobile applications. He's worked for top tech companies including Actuate, Sony Ericsson, Adobe, and Sun Microsystems.