2013-05-07

In-Depth: How To Pick The Right Revenue Model For Your App

It’s a common story these days: You have an awesome app idea, you raise a seed round, and your app gets a ton of loyal free users. Then you turn on pricing and everything comes crashing down. Now your app isn’t making money and your investors are pissed. What do you do?



We learned the value of a smart revenue model the hard way. After building the first version of Brainscape two years ago, we got so excited by our app’s early traction among teachers and students that we almost forgot that it was important to earn money.

We eventually realized that we needed to begin splitting our focus between both user growth and monetization. We needed to break through users' sense of entitlement that every mobile app should be free or $0.99, even while those same yuppies are happy to pay $5 for a venti latte at Starbucks twice a day. We needed to better communicate the value that our app was creating for users.

I'm now happy to say that Brainscape has tackled this problem by making it our personal mission to understand the new science of App Store Revenue Optimization. Over the past two years, we've had coffees and beers with dozens of mobile startup CEOs to discuss their revenue model strategies. We've made countless spreadsheets documenting our own revenue model experiments, keyword tests, and pricing tweaks. And we've even begun to teach classes about the topic and learn from our own students. The result of our revenue optimization has been a quadrupling of Brainscape's earnings per app download and an ability to constantly reinvest our revenues in ongoing product development.

We've learned that there are, in general, five key questions you need to ask yourself to determine the right app revenue model. Here they are.

Before someone pays for your app, do they know exactly what they are getting?

If your app is a straightforward utility app like a carpenter's level, a graphing calculator, or a well-known branded test prep app, then most potential users probably already understand the concept and might be willing to pay up front to download it. Otherwise, you will probably want to make your app free and find some other revenue model. Remember that the reason someone will pay $5 for the latte at Starbucks is that they know what they are getting, whereas $2.99 on an unknown app (even one with good reviews) feels like more of a gamble. (This is why more and more of today's highest grossing apps are actually free, and monetized inside the app via in-app purchase.)

Does your app have tens of millions of retained users who will use it regularly for years? Do you think it eventually will? (Be honest.)

If the answer is yes, then you might be a good candidate for an advertising revenue model. But keep in mind that ads, like cheap paid apps, are unlikely to make venture-scale returns unless you have ridiculous volume and an addictive app like Facebook. (Mobile ads generally earn developers less than $1.50 per thousand impressions.) A popular niche app without a gargantuan user base will need to consider other models with higher revenue per user, if it really wants to scale huge.

Is there a single moment in the usage of your free app where users have a massive amount of pain or desire?

If you have a solid base of recurring users who have come to depend on your app for something, then you may have a great opportunity for a freemium / in-app purchase revenue model. Users who have become dependent on an app (for either utility or for addictive entertainment) tend to have key moments of extreme curiosity where they are willing to pay what it takes to get to the next level of usage. This next level could manifest itself as Premium Content, Premium Features, Cheats, Hints, Weapons, Lives, Unlimited Usage, or whatever potion would solve a huge pain point at the exact moment the user experiences it. (Preferably at a high price or with multiple purchases.)

For example, I was once addicted to a difficult game called Flow where I would frequently spend $0.99 to purchase consumable "hints" every time I got frustratingly stuck on a level. By the time my addiction had run its course, I'd ended up spending over $20 on that freaking game!

Brainscape also uses the in-app purchase model in our app, in the form of Premium Content unlocks. We allow users to sample most of our premium subjects (e.g., foreign languages, bartending, or GRE prep) and then ask them to purchase the full version just after we've shown them how well they've been learning with our starter content. Due to the high quality of our content and the often high-stakes learning needs of our users, we are able to charge prices of over $20 for many of our subjects.

However, I should caution that if you do use an in-app purchase revenue model in your app, be sure that you don't give away too much for free, or that your users don't feel "bait & switched." We once tried using the "free trial" option for some of Brainscape's test prep subjects, but we found two problems.

  1. Since many users don't download a test prep app until 3-4 days before an exam (sad but true), giving a 5-day free trial meant that we never earned anything from some of these crammers; and...
  2. Shortening the free trial to just 1-2 days ended up pissing people off to the point that they would feel cheated (even though we were up front about it) and thus compelled to write us a 1-star review. For Brainscape, it was better to use the Content Unlock method for in-app purchases.

The right type of in-app purchase model for your company is highly dependent on your particular offering. Remember that in-app purchase revenue models tend to be very sensitive to user behavior and therefore the most ripe for in-app experimentation—perhaps even your own custom A/B test system.

Is there a specific (non-app) company with a very high-value product, who would find your users particularly important to their business?

If your app has high traffic and appeals not just to a whole swath of generic advertisers but rather to customers of a very specific company(ies), then you might be a candidate for a lead-generation revenue model. The idea is that you would negotiate a contract with such a company (or multiple companies) and that they would pay you a fixed fee for each "qualified lead" that you send them.

Frankly, however, I don’t really know that many apps that have been super successful with lead generation revenue models. I suppose Foursquare uses a version of this model but even they don't seem to be killing it revenue-wise. If you do know of any massively revenue-earning lead-gen apps then please mention them in the comments.

Is your app providing constant new content, or a file storage service of any kind?

If you are releasing original new content on at least a monthly basis, then you might be a candidate for a subscription revenue model. Startups like Voxy and FarFaria have been very successful getting users to subscribe to language-learning news content and children's book services, respectively, by guaranteeing that users will receive a consistent stream of new content each week. Although Apple tends to be quite strict about what apps can qualify for such automatic recurring payments, securing such a recurring revenue source can be the holy grail for app revenue. (Many users even forget, or are too lazy, to disable the recurring payments for long after they have stopped using the app.)

In some cases Apple also allows developers to enable automatically recurring subscriptions for services other than just consistently new content. But I don't know anyone who is killing it with this model either. (Please mention them in the comments if you know them!) Most non-magazine apps whose companies do thrive on a recurring subscription model tend to handle their subscriptions outside the app (e.g., on their website or via a follow-up email to registered users), much to Apple's chagrin. Examples include Dropbox, Netflix, and Audible.com.

Whatever your app's answers to the questions above, it is critical that you try a few different models to see which works best for your app, then optimize to see how good you can get it. Brainscape actually developed our own complex A/B test system where the app would determine its revenue model at launch and then send us sales conversion data remotely. But you could also just try releasing an app with one revenue model for a few weeks, then submit an update with an alternative model, and see which version yields better revenue/user.

The important thing is that you're constantly iterating. The "perfect" revenue model could be earning you 10x more money per user than you're earning now, but the only way to know that is to be relentlessly experimenting. Tell us what's worked best for your app in the comments below!


Want to know more about how to price your app? We're tracking developer opinions from around the web on how to make money on your software product.


Andrew Cohen is the founder & CEO of Brainscape, a mobile education platform that helps people learn things more efficiently using cognitive science. Since its founding in 2010, Brainscape's apps have been installed on over 5 million iOS devices and have been used by high school students, college students, medical students, lifelong learners, and foreign language junkies all over the world. Brainscape's appeal to both learners and educators alike has led to its emergence as a leading education platform on the App Store. Before founding Brainscape, Andrew worked as an international development economist with the World Bank and the U.S. Bureau of Labor Statistics. He created the first version of Brainscape in Microsoft Excel in order to study Spanish and French more efficiently while living abroad, and he further developed the project during his Masters degree in Education Technology from Columbia University. Andrew has dedicated his career toward optimizing the way people learn.

[Image: Flickr user Neal Fowler]






Add New Comment

1 Comments

  • Marcon Zanin

    Cohen, how do you create the content to the apps? Do you have some partnership with schools or something like that?
    Tks