KEY POINTS

  • The app ecosystem is expanding quickly, and it's becoming increasingly challenging for app developers to compete in a crowded market. Overall, gross global app revenue will double to reach $102 billion by 2020, according to recent projections by App Annie. 
  • To capture a piece of the growing market, app developers must adapt their strategies at least as quickly as consumer trends and preferences change. When deciding how to monetize an app, it’s important that developers consider their target audience, or they risk pushing users away.
  • Developers can choose a user-paid or an advertising-paid approach to monetizing their apps. User-paid apps — which either cost money to download or feature in-app purchases — rely on the app user as the primary source of revenue. In an advertising-paid approach, developers rely on advertisers to drive the bulk, if not all, revenue. This segment primarily consists of in-app advertising, which can take on multiple forms within an app.
  • Different monetization strategies work best with different apps. For instance, a productivity app targeting enterprise users would be best served with a pay-once or subscription approach, rather than with in-app advertising. For a workplace that uses the team-based messaging app Slack, for example, in-app ads could be distracting or annoying.
  • There are a number of widespread challenges that developers must contend with both before and after they enter the app market. These include market saturation, app attrition, the high cost of gaining users, and the fact that in-app spending doesn't generate meaningful revenue for most developers. 

Introduction

App developers long considered the "pay once and play" model — in which users pay up front an app and aren't prompted to make in-app purchases — the best way to generate revenue. But as more "free-to-download" apps entered the market, users increasingly opted for these experiences. These apps offer microtransactions for in-app goods and services, and in-app ads.

Now, data connections are stronger and faster, and devices are more powerful, enabling developers to deliver more in-app ads with richer media, including videos, native advertising, and app demos — interactive ads that give users a taste of the app experience. Most recently, subscription apps have been gaining steam — think Netflix — as this strategy gets users to pay in regular intervals to continue using an app, ensuring a consistent revenue stream regardless of user engagement.

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