The mobile app industry has been steadily growing over the last decade or so. In 2020, mobile app revenues globally exceeded $100 billion. If you or your business have an app there are a number of ways you can monetize, or make money from, your app.

What is app monetization?

App monetization is simply the process of making money from your mobile app and its users. There are a number of different ways that apps can make money, from paid installs to in-app ads.

What is Customer Lifetime Value (LTV)?

Customer LTV is simply the average revenue gained from a single customer. In other words, LTV is the “value” of a customer over their entire “lifetime” of using a product.

Let’s say, for example, an app makes $1 per month on average from a user and users leave the app installed for an average of 20 months. $1 per month for 20 months means that the customer lifetime value (LTV) for that app is $20.

How do you monetize an app?

We describe the most common ways that companies monetize apps below, but these strategies fall into a few categories: collecting payment, advertising, and sponsorships.

Collecting Payment

The most obvious and direct method of making money from an app is paid downloads or in-app purchases. This method involves collecting money from users rather than from advertisers paying for those users’ attention. Apps collecting payments can increase revenue by raising the app’s price, driving more app installs, or increasing the regularity of user purchases.

Ad Revenue

Ad revenue is the most widely used method for monetizing apps and other content. This method involves companies and other advertisers paying you for the attention of your apps users.

Sponsors and Partnerships

This method gets overlooked because it is less prevalent, but it can still be lucrative for certain types of apps. This involves companies paying you in exchange for advertising or “sponsored” content. Partnerships can also involve a branded app that a company pays you to manage and maintain.

App Monetization Strategies

Freemium Apps

In a “Freemium” business model, users can download your app for free, but can make optional in-app purchases or upgrade to a paid version of an app with additional features. One benefit to using the freemium model is that people will be more willing to install your app if they don’t have to pay for it. This allows you to get more “leads” trying your app out without making a purchase.

“From their first session with the app, we’re trying to develop trust with users. And we do that by demonstrating value without asking anything from them first.”

JP Chookaszian, Director of Revenue at VSCO

Examples of Freemium Apps

• Spotify
• Dropbox
• VSCO

In-App Purchases

In-App purchases are included in both free and paid apps. These could be buying certain “premium” content that free users don’t have access to, or purchasing coins or lives in a game app.

Premium Apps & Paid Downloads

Paid apps require users to pay to install the app or pay to use the apps services. The installation conversion rate on these paid apps is much lower, but this model can still make sense for certain types of apps. For example, many apps with business or enterprise-level application use paid downloads.

Using paid installs allows you to focus on delivering maximum value to users because you have already made money from them at the moment they installed your app.

Examples of Paid Apps:

• Procreate Pocket
• Facetune
• HotSchedules

In-App Advertising

In-App advertising is similar to monetizing a blog or website with banner ads. Advertisers will pay you for the attention that your app generates. You can get paid by the number of times users view an ad or for when they interact with or click on an ad. There is a low barrier to entry with ad supported applications because all you have to do is insert the ad code within your app and you can start earning money.

One of the downfalls of in-app advertisements is that they diminish user experiences. Ads distract users from the key functionality and content in your app and can be annoying. However, despite these downfalls in-app advertising is attractive because users don’t have to pay to use your app, so it’s easier to acquire users.

Examples of Apps with In-App Advertising:

• Instagram
• Snapchat
• Spotify

Subscriptions

Subscription-based monetization requires users to opt-in to paying a fee to access certain content within your app, or to remove ads. Apps like Spotify and Pandora are supported by ads unless a user pays for a premium subscription which removes ads from the services.

Subscriptions are a good strategy for monetizing an app if you don’t want to clutter up your interface with banner ads or annoy users with native ads within your app’s content.

Examples of Subscription-based Apps:

• Headspace
• Spotify
• The New York Times
• Pandora

Sponsored Content

Sponsored content is similar to advertising, but offers a better user experience. For example, if you have a cocktail recipe app sponsored content may be a recipe for a cocktail featuring a certain brand of whiskey. The brands would pay for (sponsor) the content to be posted in your app or on your website.

Top Grossing Apps in 2020

1. Tinder: Tinder is a dating app, that uses the freemium model with ads and subscriptions to monetize its app.
2. TikTok: TikTok is a video-sharing app that uses in-app ads that play between user-created videos to monetize.
3. YouTube: YouTube is a video hosting site and one of the most visited websites in the world. It monetizes its site and mobile app with advertisements that play during videos.