The secrets to making money with mobile apps

A couple years ago, it was clear a Gold Rush mentality was brewing as the iPhone proved that people really, really wanted mobile apps. Lots of developers jumped in to claim their fortune, as did many students and regular folks lured by the promise of easy money through cookie-cutter apps created for them by forms-based websites. The Gold Rush fever has cooled, but not the desire for mobile apps, nor have the opportunities for real developers to make real money from mobile.

Forrester Research estimates that $17.5 billion worth of mobile apps will be sold this year across all platforms. Subtracting the cut that Apple, Google, and others get for placement in their app stores, that’s at least $13 billion for developers to pocket. But how to ensure you get the biggest slice of the pie? Ilya Laurs, founder of the app store GetJar, believes he knows the answer to that key question, based on analyzing the sales and revenues of thousands of mobile apps.

[ Get the best apps for your mobile device: InfoWorld picks the best iPad office apps, the best iPad specialty business apps, the best Android office apps, and the best Android specialty apps. ]

Laurs presented his analysis recently at the CIO Global Forum, an invitation-only, off-the-record thought leadership event for CIOs. And he’s agreed to share it with you. Before I get into the details, note that the vast majority of apps analyzed are consumer apps, so sales through an enterprise app store, such as the one Apple provides for employee app distribution, may not fit these patterns. Also, Laurs could not analyze Apple App Store sales data, but believes from anecdotal evidence that the basic model for making money “generally holds true” for iOS apps as it is for apps on other platforms.

Laurs’ analysis boils down to what he calls the user engagement model. In a nutshell, it means what you charge for an app should be based largely on how users engage with it.

For example, if people use your apps just a few times, an ad-supported model makes no sense, as you’ll earn just pennies per user. Better to charge 99 cents or $3.99 or whatever up front. Even though sales at the paid price will be a fraction of the free, ad-supported version, the total revenues are likely to be larger.

Conversely, if the user engagement is expected to be high, such as for a news, sports scores, social feeds, or other information-stream-oriented app, the advertising model makes much more sense. You’ll make more money from the many more impressions — sales-speak for the ads actually presented to app users — over the app’s lifetime even at a few cents per impression than if you charged a one-time up-front fee. Just beware, Laurs notes, that it’s often difficult to get paid by the ad networks.

Which begs the question: What about high-engagement apps that aren’t about information streams, where ads would be a turnoff? I’m talking games such as Angry Birds Space and Draw Something. The secret there, Laurs says, is to combine a relatively low up-front price (perhaps 99 cents to $4.99) with app purchases for virtual goods (such as powers and hints in games) and additional functions (such as bookmarking of your favorite teams for a sports app or ad removal to convert a free trial app to a paid one). Another advantage of in-app purchases is that billing is usually easy, either through the app store’s own system or through an established provider such as PayPal that users likely already have a relationship with.

Then there are highly useful apps that don’t really support the notion of an in-app purchase or advertising. Those should cost more because they are more valuable. Examples in the iOS world are Quickoffice, iPhoto, Keynote, and GoodReader.

In some cases, a subscription model makes sense. Certainly, for a high-quality magazine like The Economist, which doesn’t repeat the same news everyone else has, a subscription is worth the reader’s money. Outside of media, I suspect the subscription model is a harder sell, though we’ll certainly see it with services such as the CloudOn Office virtual environment (currently offered for free as a teaser). We also see it with Quickoffice Connect, an attempt to get people to subscribe to the Quickoffice Office-editing suite rather than buying it just one time. However, Quickoffice Connect is a cautionary tale, as the subscription offering is a poor product that will hinder Quickoffice’s future attempts to convert users to ongoing payments — the same issue we see with Adobe’s attempt to convert its Creative Suite users into subscribers for a product that hasn’t justified its frequent upgrades for some time.

Laurs has created what he calls a user engagement model representing this app pricing strategy.

As you can see, it weighs three factors to steer you to the best pricing model:

• Utility, meaning how useful a person finds the app
• Engagement, meaning how often a person uses the app
• Value, meaning how much the person likes what the app provides, relative to the universe of other options

As the slide above shows, how those three facets combine indicates the way to make the most money from the apps.

There’s another factor to consider, Laurs says: marketability. Free apps, including “freemium” titles that allow the download for free but use ads or in-app purchases to make money, are the easiest to market. People like free, even if they know there’s money being made off them in some other way; thus, it’s easier to market a free app over a paid app. But the marketing cost shouldn’t be your primary criterion; attracting a lot of users who aren’t paying for an app or end up using it little, thus not getting you the ad or in-app revenues you counted on, doesn’t make you the money you sought in the first place.

No matter your pricing model, remember one more thing: The apps have to be good at what they do and how users engage with them. Quality still matters most to gain customer loyalty and referrals to their friends and colleagues.