As you learn more about the world of apps, you begin to understand that different types of apps require different business models. Most amateur appreneurs think that the only way an application can generate revenue is with the paid model (pay a flat, one-time fee to download the application; $0.99, $1.99, $2.99, and so on). This is the simplest strategy, but it doesn’t always produce the results you desire. Recently, I have noticed that free apps with in-app purchases, or “freemiums,” have dominated the market. Here is why: people do not hesitate to download free apps. You will generally get between 50 and 100 free downloads per paid download. That means (at the high end), if fifty people downloaded your app for free, one would have paid outright for it. Now, if this sounds like a very low number, that’s because it is. The freemium model changes this up in your favor substantially. Please note, however, for the freemium model to work, you need to have an application that is enticing and entertaining. If your application is not something of value, why would a user buy premium upgrades? Let’s go on a quick tangent to illustrate this point. When you think of the apps that generate the most money, which ones come to mind? Possibly, you thought of Angry Birds, Words with Friends, or Cut the Rope? You might be surprised to learn that of the top-5-grossing apps, all are freemiums.

One of my freemium favorites, Zynga Poker , serves as an excellent case study. This app is free for anyone to download. As you begin to play, you are given a limited number of chips (virtual currency) with which to bet. Each day you play, you are awarded a few more chips. But, if you lose your entire daily chip allowance, how can you continue to play? In “App Purchases” the game allows you to buy chips and keep playing. The game designers draw players in with the free app. This allows you to play and get hooked. When you run out of chips, you have two choices: wait until the next day to play or pay a small fee to continue playing. Two personality traits that seem to be shared among app users are impulsivity and impatience; users hate waiting! A wise appreneur can use this knowledge to his or her business advantage. Surely, you are wondering who would pay for virtual currency that has no real value. I’ll answer that for you: millions of people! Don’t just take my word for it. Research the top-25-grossing apps (top-grossing apps are the apps that produce the most revenue, not downloads), and see how many are freemiums with virtual currency or upgrades.

Another example, Temple Run , also took the App Store by storm. I downloaded it and played for a while, all the time wondering, “How does this app make any money?” My first couple of exposures only showed it as a freemium. Then, I saw it; as you progress through the levels, you earn coins to use on upgrades and unlocks. The game’s design includes an in-app purchase to acquire more coins. Once again, I thought to myself, “Who would buy this? It has no purpose.” By the next day, I could answer my own question because I was hooked on the game and wanted to upgrade my character. My decision was a simple one: I could play for a few hours and earn the coins or spend a buck and buy them. I bought them and was actually quite happy with my purchase.

Making Money from Free Apps

Just because an app is free doesn’t mean it cannot make any money. The preceding case studies, Temple Run and Zynga Poker, serve as excellent examples for disproving the notion that free apps are not profitable. Freemium apps are still one of the best ways to generate a large number of downloads and then translate those downloads into good, stable revenue. Remember, you will likely get between a 1to 50 and a 1 to 100 paid-to-free download ratio. By being able to convert this massive number of free downloads into sales, you will likely make more money than with a paid-only version. When I am creating a freemium app, I like to include ads and in-app purchases. If you have a paid version of the game, do not feel guilty about adding ad banners to it. Ideally, you want to annoy users with the ads in the hopes that they will buy the paid version to remove them. Furthermore, I also try to provide an array of in-app purchases. The more you can think of, the better. You can have in-app purchases to add features, upgrade in-app features, remove ads, and much more. As mentioned earlier, you will be surprised by the things people will buy. Just because you find the idea of purchasing virtual items ridiculous does not mean a user will share your perspective.

We have discussed both paid versions and freemium versions, so what is left? Free with ads is a business model that I would suggest only if there are no applicable inapp purchases and if a paid version doesn’t make sense. This model allows you to have a completely free application, with ads. These ads are your sole source of revenue.The more users you have, the more money you will make on ads. In reality, appreneurs will not likely become millionaires from only ad revenue, but there is still money to be had.

The final business model is known as user base. A user base is essentially a collection of users who are engaged with the app. Most user bases contain a database with e-mail addresses. In today’s online world, user bases are worth their weight in gold. I am sure you have heard of the free app Instagram. It seems unbelievable but true that Instagram has made more than one billion dollars without offering a single ad or in-app purchase. In a famous business transaction, Facebook purchased Instagram, primarily for its user base. This has happened more times than you would think in the App Store. Apps that require users to register will give appreneurs access to users’ names and e-mail addresses. This can be an invaluable business tool. If you build a good e-mail list of your app’s users, you can then market to them directly, via e-mail, when you release a new app.

Choosing the Right Business Model

After considering all the business model possibilities, which one will you choose for your apps? That answer should be fairly straightforward: all of them. Many of the top apps have both a paid version and a free version with ads and in-app purchases. For what business reasons would they offer two choices? Exposure. Offering two versions doubles the chances that a user will find the app. The free with ads and in-app-purchase-backed versions typically generate a greater number of downloads. Moreover, the more downloads you have, the more users you have; the more users you have, the more people are talking; the more people are talking, the more downloads you will get. See the cycle here? To generate revenue, your app has to be downloaded. Your goal is to get users who downloaded the free version to upgrade to the paid version. Unfortunately, there is no guarantee that this transfer from free to paid will happen. Keep in mind that there are users who will never pay for an app; you will probably not influence their mind-set, regardless of what your app is or does. So, how do you reach the users who are willing to pay? How do you convince them to download the paid version? If your app is a free game, I would use the following model: After each turn, show users a full-screen ad asking them to buy the full version. If they click the ad, it should take them directly to the App Store to make the purchase. It will likely require multiple exposures to the adt to generate a sale, but if they play the game often, soon it will annoy them enough to purchase it. This method of advertisement is a tactic commonly used by large companies. I actually saw this work with my girlfriend. She was playing one of the online games such as Scrabble, and she was getting annoyed seeing the ad appear after each turn. Finally, I saw her digging in her purse for her credit card. I highly doubt she stopped playing to pay some bills.

Briefly, I want to cover how users in niche markets will pay more for apps. For this example, I will use an app I made that I will call App X (I leave my apps out of this book because I am not selling you a product; I am teaching you to make one). App X was a paid app ($2.99) that included premium features. I had thought long and hard about what model I should use. The paid-only version was generating good revenue. The users who bought the app absolutely loved it. I added the new premium features as a nonconsumable in-app purchase (nonconsumables, in app purchases, are bought one time and unlock new features or content). I really didn’t expect the results I saw the next morning, when I downloaded my sales report. I had a 78 percent conversion rate. That meant that 78 percent of the people who bought the app also bought the in-app purchase. The lesson learned from this scenario is not to underestimate the power of premium features in a niche market. Just because users have already purchased your paid version, that does not mean they are unwilling to pay again. The opposite is actually true, for one simple reason: people who are willing to pay for apps are exactly that, willing to pay! Make sure you take advantage of this, or you will be passing up a ton of potential revenue.

Now that you have gained insight into the variety of business models available, let’s consider the importance of managing your users. This is the focus of Chapter 5.