Microsoft’s recent purchase of the game Minecraft for $2.5 billion reflects the changing landscape of the software industry.
While traditional software sales for PCs demanded infrastructure much like book publishing, online app marketplaces for the various platforms make it possible for the desktop programmer to enter the app space. Two-thirds of all Americans use smartphones, and spend nearly 40 hours per month using content on apps.
But how do apps make money? There are several business models that those aspiring to create the next blockbuster app should consider:
Pay to download: The simplest of business models where users pay a small upfront fee to get your app. If successful, the model can generate upfront cash flow, but once your market has downloaded the app, follow-on revenue becomes problematic. You will still need to maintain the app with upgrades and support as revenues dwindle. This model works best for apps with a continuing new market, or a time-sensitive app that will expire.
Advertising: As smartphones screens become bigger, the opportunity for banner advertising expands. Selling ad space or getting pay-per-click fees brings in a continual stream of revenue from advertisers. Advertising is the most common source of revenue for apps, but also brings in the lowest monthly revenues. This model works best for apps that target valued demographics or reach large audiences.
Subscription: As consumers move to reading publications virtually, selling monthly subscriptions to premium content moves to the app world. This model works best for apps with high demand content and an established audience. The benefits are that subscriptions provide a continual revenue stream, but the app must provide high-value content that users cannot get for free elsewhere.
Freemium: This model provides a “lite” version of an app for free and requires users to pay a fee to unlock additional features or content.
This business model is common for games, but some newspapers such as the New York Times have adopted the model. Freemium provides a no-risk proposition to consumers to try a service, and decide if the value provided is worth additional investment.
In-app purchases: The newest model for apps is charging for premium elements inside the app. This is most common in games where you can buy cheats, tools or upgrades to progress further in the game. While the model provides an ongoing stream of revenue, the royalties due to the app markets can be 30 percent or more. However, this is the fastest growing segment of the app market, generating more than 70 percent of iPhone app revenues in the past year.
So which model is best for your new app idea?
Carefully consider your value proposition, customer segments and customer relationships as you build your business plan. While most apps will never rise to the heights of Minecraft or Angry Birds, the market for innovative and creative mobile apps is there for the taking.
Ryan Davis is the dean of Business and Applied Technology at Everett Community College. Write him at rydavis@everettcc.edu.
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