An Introduction to App Revenue & Value

Releasing your app into the App Store is like being a parent sending your kid off on their first day of school. You’re nervous. You wonder how the others will treat them. But you also know it’s the day that you’ve been waiting on for such a long time. Unlike school though, you have the chance as an app developer to fix any bugs or issues, and send your kid off for a second time. But it does take time and money. If you have no monetization strategy in place, you’ll be left with a subpar product that users will never accept into their app family.

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As sad as a story like this may sound, it’s not all that uncommon. Developers pour their heart and soul into building an app that they are proud to call their own. But while focusing so intently on the purpose and functionality of the app, they forget that their app still needs to generate revenue one way or another.

 

Developing an app monetization strategy takes time and some serious reflection on the overall goals for your app. But it all begins with learning the underlying concepts (and those are fairly simple).

 

Before we dive into the nitty gritty of app monetization, we’d like to get one common misconception out of the way: just because an app is popular doesn’t mean it’s profitable. A killer gaming app without a low-barrier monetization strategy will never turn users into dollars.

 

The Big Three in Monetizing Your App

It all boils down to three primary ways to monetize your app: paid downloads, in-app purchases and in-app advertising.

 

In-App Advertising

One of the most frequent questions we hear about free apps is, “How do they even make any money?” It’s a valid question, and although we can’t speak for individual circumstances, in-app advertising likely is the monetization method.

 

This is a way for third-party apps to advertise to your users. Any borrowed real estate on that tiny smartphone screen is a valuable piece of property. Because of this, these third-party apps will pay good money for their ads to show up to your users. They typically manifest themselves in three ways:

 

 

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Just like the web, there are different pricing structures, and each has its benefits and drawbacks. We’ll go more into detail in the “User Acquisition” portion of this lesson.

 

The best part about paid advertising is that it’s the only form of monetization that doesn’t require the user to purchase something. The cost is in the hands of the advertisers.


The most obvious drawback of paid ads in your app is that it can be annoying and feel intrusive to the user. You have to be mindful of the frequency and intensity of these ads, or you risk losing users and getting some not-so-friendly reviews in the App Store.
 

 

Paid Apps

Let’s go back in time for a second to 10 years ago when computer programs were king. And let’s say we offered you three programs: One for expense tracking, one for rich photo editing and one for recording music. You’d expect to pay anywhere between $100 - $300 for the whole bundle. But snap back to modern day, where apps on our phones and tablets do the same exact thing. Despite the fact that they are a fraction of the cost of computer programs, it seems users can be pretty reluctant to commit to that $0.99 app purchase before first testing the waters.


With that said, there is still an opportunity for earning revenue through paid downloads. There are a few ways of accomplishing this, and most of it revolves around proving your app’s value to the user.

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There are a few drawbacks to paid downloads. First, users have higher expectations for an app they paid for. There means you have to make sure you deliver. If not, you can expect some backlash in the reviews section. This doesn’t set a good foundation for future users looking to purchase your app.


Second, users tend to have resistance to any further monetization efforts. For example, a user that just paid $2.99 for your premium app expects an ad-free experience, as well as access to all the features. Because of this, the revenue ceiling is pretty fixed.


But what paid downloads don’t offer in scalability, they make up for in reliability. Though you can’t predict the amount of users who will download the paid version, you can predict how much revenue each user will generate. It’s a straightforward metric to report on. For example, if your premium app costs $2.99 and you had 10,000 downloads, your app has generated $29,900 in revenue.

 

In-App Purchases

We typically tend to think of in-app purchases in the eCommerce bubble. But in reality, they’re everywhere, no matter the vertical. Candy Crush limits their users to 34 levels before the user must pay for the premium app to continue (or get three Facebook friends to join the game). Evernote allows users to password protect their app with the purchase of their premium subscription. Sleep Time limits the user to five days of sleep history, unless they upgrade which allows them their entire history.

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The key here is to give your users just enough, but never too much. They need to see the value in purchasing the full app. This will most likely take some practice and tweaking after the initial release. Through the insights gained from your app analytics, you can measure which structure works best with your users.


Recap of the Big Three

 

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Paid Advertising

We talked about in-app advertising in the scope of earning revenue. But now, let’s reverse roles and take a look at it from the advertiser’s point-of-view. In-app advertising is an opportunity for app developers to discover new users who, by organic means, never would have found their app. Rather than an ad network made up of websites like the Internet, the mobile ad network uses other apps as its platform.


Of course, there are good and not-so-good ways to accomplish this. We’ve all had the ---- of the interruptive, noisy ad that completely ruined our app experience. Sometimes, it’s enough to make us leave or even uninstall it.


Imagine this real-world example of bad advertising: a trip to the music store. You’re searching for a Fender acoustic guitar in the $400-500 price range. While you’re asking one store associate for advice, another interrupts your conversation mid-sentence and asks if you might be interested in a $2,000 vintage, clarinet made with real bits of gold. You’re most likely to leave and never visit that store again. App developers - don’t be that guy!


In order to grab the user’s attention, you have to connect with the user’s interests or behaviors. Take the time to identify the right apps for your audience. If you’re a car shopping app, you could find spots in car shopping articles in magazine and newspaper articles, where you know users are already interested.


In-app advertising offers three different payment structures. Each has their advantages and disadvantages, here’s a chart to help you understand the basics:

 

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App marketers are attracted to paid advertising because of the amount of control they have over it. You can find generalized ad networks with massive inventories, or look for those that specialize by vertical like gaming or sports. From there you can find specific apps, stories and articles that are relevant to your app.


Another big upside to paid advertising is that it offers virtually limitless opportunities for user acquisition. But it’s a double-edged sword, because paid advertising means the opportunity is really only as big as your budget. So if you’re a startup in the process of developing your acquisition strategy, you may find it’s not the most cost-effective.


Another disadvantage is one that hits all advertisers, regardless of budget: typically, paid leads don’t convert as well as organic leads. We sometimes refer to them as “cold” leads. They haven’t discovered your app naturally, they needed to be convinced through an ad that it was worth downloading. So despite the new users you’re bringing in through your paid channel, it can be a challenge converting those downloads to app launches, nevermind valuable interactions like purchases or subscriptions.

 

Organic

We want to let you in on a little secret. In five years, you’ll look back to this moment and feel like Brian Epstein did when The Beatles found their fame. OK, maybe that’s a little overboard, but you can still brag to your friends when app store optimization (ASO) becomes the new SEO and your marketing friends are just catching on.


It’s on the same trajectory as SEO was five years ago: a term that only people in the industry know. But before you know it, your aunts and uncles will be throwing it into your Thanksgiving dinner conversations like kids trying to use big words at the adult table. According to Google, in the entire US, there are only 590 searches every month for “app store optimization,” compared to over 22,000 for “search engine optimization.”

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This might suggest that it’s not important to focus on yet, but that’s not the chart to look at. This Google Trends graph about search interest over time gives us some better insight:

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Until February of 2012, app store optimization didn’t even have enough search data for Google to track it as a trend. Since then, in less than three years, interest in app store optimization has been at a steady climb. That means people are starting to realize its place in app marketing. By jumping on this opportunity now, before it becomes the new SEO, it will pay huge app marketing dividends in the future.

 

So What is App Store Optimization?

Your goal is to drive more users to your app. We’ve already discussed how to accomplish this through paid advertising. But there is also an organic way to drive users through the App Store. Forrester and Nielson conducted two separate studies, and both found that the majority of users, 63%, use App Store search to find their apps.1 And app store optimization is the art of optimizing your app to get it in front of as many of these users as you can.


The two biggest App Stores, Google Play and Apple App Store do have their search algorithm nuances. But for the most part, optimizing for one will help you in the other. Similar to web search, app store search algorithms take into account on-page factors like title, description and keywords. They also place a high value on off-page factors like CTR, usage rates and reviews.


The key to driving organic traffic is optimizing for these factors and improving your app’s spot in the App Store. Here are some suggestions:

  1. Naturally incorporate the most relevant keywords into your app title and description

  2. Run targeted in-app and push marketing campaigns to engage and re-engage your users

  3. Drive positive App Store reviews through in-app surveys

Why Go Organic?

Isaac Newton discovered gravity. Columbus discovered America (allegedly). Users discovered your app. These are considered your organic, or natural users. They tend to have a deeper interest in the actual app, which results in higher conversion rates (warmer leads) than those users acquired from paid campaigns. This could also result in higher retention rates and more revenue over time.

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Another advantage of organic acquisition is its cost. It wouldn’t be accurate to call it “free,” because someone has to put in time to develop an ASO strategy, and another to execute it. But it’s much cheaper than paid advertising in that you don’t have to pay to play. You’re dealing with the App Stores directly, without needing to purchase inventory from a third party.


While natural is great, it also has its limitations. Through organic acquisition, your app can only be found by those people who really want to find it.

 

A Healthy Mix

Building a healthy, organic App Store profile is the foundation of a strong user acquisition campaign. Paid advertising can boost downloads, but it tends to work better as a supplement to your organic efforts. Focusing on a consistent presence in the App Store will help keep a constant flow of new users, while your paid campaigns tap into new markets for a comprehensive approach to user acquisition. With that said, your strategy will be unique to your app. After spending some time acquiring users from both channels, compare users from both sources to measure which one works the best for you.

 

App User Lifetime Value

It’s not all about the Benjamins, it’s about how many Benjamins each user gives you! What we’re really talking about here is app user lifetime value (LTV) in terms of revenue. But it can also refer to any metric that’s important to your app, like articles read, levels completed (gaming app) or calories burned (health app).


If we could only pick one metric to focus on as an app marketer, app user lifetime value would be it. It’s the magic number in app analytics. Metrics like total revenue and average session length are useful for making decisions, but improving those numbers only matters if you’re also seeing an improvement in lifetime value.


Let’s take a look at how tracking LTV can help you get ahead of previously unforeseen problems in your revenue flow:


A breaking news app is seeing steady growth in month-over-month revenue for the past year. After diving deeper into their analytics, they realize that most of this revenue is generated through new user acquisition, rather than by retaining users who continue to spend. They know they’re putting themselves at risk of experiencing a revenue bubble that will burst as soon as new user acquisition slows.


By enlisting their app data scientists to find the customer LTV, the app developers realize that despite overall revenue growth, their fears have been confirmed: LTV is slowly declining. But because of their proactive research, they identified the problem far before they would’ve noticed by purely measuring revenue.

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What is Value?

How you define value is specific to you, your app and your business model. What is crucial to the success of one app could be insignificant to another. And while we can’t tell you how to determine what’s most valuable to your brand, you now have the tools you need to identify your high-value users so you can find ways to keep them engaged, while using that information to target new users in your acquisition strategy.

 

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