There are two basic models: PAID, where a customer pays upfront for the app, and FREE, where the app is free at the start and makes money with ads, in-app purchases (IAP) or via some form of premium/subscription option (Spotify, for example – also referred to as “freemium”).
We looked at these two pricing models and their pros and cons for developers and for app enthusiasts.
Paid model
There’s a lot of chatter about how the paid app market is dead, but frankly that just isn’t true. About 30% of the App Store still charges for apps. This amounts to some 362,000-odd products. And given what appears to be a bit of a dev backlash against a freemium business model, they might just be due for a comeback.
The pros
First, a paid model is a safer cash model for the app producer. It means cash, straight away. And this is huge – if a developer or business spends, say, two months building an app, they need money, now. It’s also more stable and predictable, and you usually need fewer downloads to recoup your losses.
Also, with more and more apps opting for free or freemium, the ‘paid’ section of the app store is emptying out. It’s easier to claw your way to the top if you’re only competing against a mere 320,000 apps instead of 840,000.
Finally, a paid model opens the door to specials and limited time free offer marketing tools, like free app of the day websites. The more channels you can market your new product on, the better.
The cons
A paid app is going to be downloaded less. That’s really all there is to it. People like free stuff more than they like paying for stuff. Something else to consider is that most of the revenue generated from app stores comes from freemium models.
Who should charge?
When the value is in the network, and not in the app, a paid model is a terrible idea. Think about something like Snapchat. If only two people are on it, then it’s really no use to anyone. BUT! If 2,000,000 are on it, then it’s a huge success. However, when the value’s in the app itself, then a paid model is absolutely a viable option.
- Games do well as a paid app (for example, Minecraft – Pocket Edition sells for $7.99 from the Play Store).
- Business apps, like organizational apps, calendar apps, and project management apps are excellent candidates for a paid app (for example, OfficeSuite 8 Pro + PDF sells for $11.94)
Free model
The freemium model for apps can work a couple different ways but the basic idea is that some core of the product is free (often with ads), and then additional content, or additional services, cost money.
Our previous example, Spotify, has a premium version that removes the ads that run periodically and gives users access to new features, like playing songs on demand (rather than being limited to ’shuffle’) and offline listening.
Another model is Plants vs. Zombies 2, where additional game content (new plants to kill zombies with) costs real life money.
A third model is Tinder, whose paid version of their free app adds features and functionality like an ‘un-swipe’ option (apparently it’s going to retail for $6.99).
The pros
The benefit of a free model is that the threshold for download is literally zero. There is nothing standing between you and the user. People will go out on a limb to give your app a go. This is a major plus, especially for indie developers who don’t have a huge name behind them.
For example, if Google creates a new app for businesses and they charge for it, people will probably download it because they know Google is generally pretty good. But if Frank&Joe Apps Co. were to create the exact same product, they might find any price point about zero too high for wary app users.
The second major benefit for a free model is that it’s comparatively easy to get lots and lots of users. If you’re a network based product this is an obvious must. But for a lot of apps beyond the obvious social media-y/network-based ones, having a lot of users is a good thing.
For example, part of the fun of Candy Crush 2 is that everyone plays, so you can compare scores and best your friends. That only really works because the app is free to get started.
The cons
Unfortunately, freemium isn’t all rainbows and sunshine. First off, most (the huge, HUGE majority) of freemium apps make only a pittance and fail to recoup losses for the businesses. So going into an app development project, you know that it’s likely to fail. It’s worth taking a close look to understand why the freemium apps don’t make any money.
Let's say you’re a business looking to develop a music playing app with a free model and a premium model. Your conversion to premium is going to be somewhere underneath 5%. So if your premium model costs $0.99, you’ll have to get 10,000 downloads a month to make $500. That is a terribly high number for a new app. One way to mitigate this is through advertising, so while free, the developer is still making at least some money.
Second, apps that are free have no investment from the user – your app is more likely to be used once and discarded, so the downloads, while maybe more numerous, will likely have worse engagement than paid apps.
Finally, apps that are free tend to get worse reviews. Let’s say your app automatically dispenses life advice every hour. Someone downloads it on a whim only to discover they don’t like life advice every hour. So they give the app a poor rating, even though it’s not really the app’s fault that they don’t like the service that they signed up to.
Who should be free?
Apps that should be free are apps that require a network to succeed, apps that can offer a freemium model with ads, or apps that are going to be capable of capturing thousands and thousands of users. Some previous successful models include:
- Candy Crush 2, that uses IAP to make money
- Spotify, that has both ads in freemium (thus revenue) and a premium option
- Tinder, that is free without ads (for now), but will soon have the option for users to go premium for added features
Wrap up
Pricing is a huge decision for any development company. There are benefits to both, but really it comes down to what kind of app you have and what you want it to become.
Business apps and games can generally charge for their apps, and exchange massive download numbers for excellent engagement and better reviews and returns.
Freemium apps work well with some games, if IAP and having lots and lots of users are part of the equation, as well as for social media-esque apps or apps that gel well with advertising.
