Which One Is Better At Making Money With Apps, Freemium or Paid? (appdevelopermagazine.com)

Recently, a startup company approached ComboApp to discuss the marketing strategy for their app portfolio. One of the most urgent questions they had was “Is 5% of the sales conversion the maximum I should expect to earn with a freemium model app?”

This is currently one of the hottest questions in the mobile app development ecosystem. Everyone is scratching their heads at the answer and asking “Are you f-ing serious?” And, as the paid app model is on its’ way to oblivion, this is a doozy of a question to consider: How exactly can freemium (free app with optional in-app purchases) expect to compete with getting cold, hard cash upfront for a one-time purchase upon download?

Kind of seems like this is the demise of profitable app development, right?

Well, when you take a closer look the switch from paid to freemium isn’t actually that catastrophic:

The first thing to realize is that app stores - for the most part the iTunes App Store and Google Play - have changed software end user expectations. The freemium model is a damping one, which was well adopted by app developers due to the high competition in the marketplace. The majority of app developers don't want to have to do serious marketing and build a sales team in order to see a profit from their app. They want to be in the business of creating apps, which will sell themselves somehow without any added work. 

Unrealistic, but true.

Whereas, the paid model only works when the app publisher builds a sales department and deploys a solid marketing strategy designed to sell the app. In an ecosystem where there are over 1 million apps available on iOS alone, it is impossible for an app to experience “organic” sales.

Which means, the freemium model works for the “lazy” app developer who doesn’t have the time or budget for sales and marketing. With freemium these developers and owners can create and launch lots of different apps and inevitably one or two of them will gain traction and bring in a profit of some kind. 

A recent study by Statista shows that the majority of iOS and Android apps are currently built using the freemium model. The app end user expects to be able to download and use an app for free, but then be bombarded by prompts to pay $ .99 -to- $2 extra for added features (like a fire extinguisher on levels 61-85 in TwoDots) or to get rid of in-app advertising (which frequently prevents us from leveling up in Candy Crush.)

While it is true that freemium is the best choice for mass market apps (like games and music), it is not the best choice for some other categories like medicine and finance. It is possible to make up to $200 in profits for each app install in these categories. Though, the price tag for developing and marketing these types of apps is high and usually only undertaken by large corporations who can afford to outlay a large sum of money to develop a mobile app.

What you have to remember with high ticket apps is that neither iTunes nor Google Play are capable of generating app installs. You’ll only be able to sell as many copies of your app as you are able to invest -via time and capital- into marketing said app. With high ticket apps, you must think of the app store as a “payment solution” for your product’s end user rather than a marketplace in which to sell it to passers by.

Let’s go back to the original question of the conversion ratio on freemium apps: 5% profit in a freemium app is considered successful sales with this type of product. The way you find your conversion (profit) percentage is by dividing the amount of in-app purchases by the total number of downloads. But, once an app finds its niche in the market, it begins to bring in a profit and the conversion ratio doesn’t matter.  

Because this is the exact type of self-sustaining app that developers dream of, with no investments or extra time required, the actual conversion number eventually becomes completely irrelevant. BECAUSE: The profit from the first app goes to develop another app and the profit for that app builds a third app, all while the first two apps are continuing to bring in money. MEANING: Constant self generating cash and no need to bother with building a sales team to sell enough apps so we can develop another one. Score!

Though there are companies that create huge apps portfolios, (like Chillingo, Zynga and other gaming developers), they have their own sales team because they have a huge amount of cheap mobile traffic at their disposal within their own app portfolio.

The bottom line is if you decide to build your app with a paid model strategy, you need to have a clear understanding of what your source of getting profit will be. Incentivized mobile traffic isn’t effective for this model. You're going to  need to focus on long term PR campaigns, app reviews on high profile media outlets, community building and paying attention to every single customer your app has. Only then will all those actions as a whole will bring you success and a real profit.

Really, the only alternative to this is if you - the app developer - bring a real innovation to the market. Something that’s never been seen before and is a game changer. Only then will you get “organic” attention which will drive downloads via media inclusions, like press interviews. 

But, even in that situation there is a warning you should heed: Your innovative app will make you money until the first quality imitation app is built on the freemium model and smashes your innovative paid app to pieces, much like you will smash the candy in Candy Crush as soon as you finish reading this article (face it, we’re all addicted to those dumb games! And, thank goodness or most of us would be out of jobs!)