How the Best Apps Thrive by Asking Loyal Users to Pay

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These starry-eyed entrepreneurs have visions of taking the mobile app industry by storm with products that will transform—or at least improve—people’s lives. But before they quit their day job, prospective app developers need to consider how their creations are going to make money.

On app usage, research shows that seniors spend on average, 3.3 billion hours on social media. According to App Annie, there was a 60 percent increase in the number of app downloads worldwide from 2015 to 2017, and the average smartphone user has 80 apps on their phone and uses 40 of them a month. 

Whilst, Statista reports that in 2015, global mobile app revenue was $69.7 billion, and that number is projected to rise to $188.9 billion in 2020. Clearly, this is a growing, lucrative market rife with possibilities. But it’s also a rapidly evolving industry, wherein traditional ways of earning revenue are losing steam.

New Modes of Distribution and Monetization

The paid app or direct sales model asks users to pay an upfront fee to download and then the app is theirs to use forever. This was the pricing model chosen by Day One founder and CEO Paul Mayne, who launched the journaling app in 2011. Mac users paid $10 and iOS users paid $5, and for the next six and a half years they benefitted from free usage and regular updates.

Mayne and his team knew that the only way Day One could continue improving its product and adding new features was to come up with a more regular and significant revenue stream. So when Apple allowed App Store developers to take advantage of the subscription model that was previously reserved only for certain types of apps, like audio and video streaming, they pounced.

“I realized early on that the paid-once model was an older method for software, going back to the boxed software days,” said Mayne. Back then, customers would buy an application to use on their desktop computer, and a year later there would be a new version they could upgrade to.

“That didn’t translate very well into the app store model with mobile devices,” said Mayne, noting that with the explosion of apps being given away for free or 99 cents, the value of software in the eye of the consumer had plummeted. Day One was perfect for the freemium model, which offers the app free to download and then asks for an annual subscription for more advanced features.

That’s because Day One had a large cadre of passionate customers who regularly use the app 10 times a day to record their personal thoughts, ideas, memories, photos, and more. Not only did they appreciate the app’s many features and ease of use, but they also placed a high value on the security and trust that Day One provided.

“It’s not the kind of thing where you’d say, ‘Oh, I can lose it, that’s fine,’” said Mayne, explaining that his customers put their most private and precious information in the app. They want to be sure it’s not going anywhere.

“Users are becoming more aware of privacy and the storage of their personal data and how that can be harvested and used.” He pointed out that while social networks can give everything away for free and offer attractive features, users are still paying—not with money, but with their data.

Now that consumers better understand those tradeoffs, they’re more apt to put a higher value on the preservation of privacy.

In–App Advertising Works, but Not Always

Free apps getting their revenue from paid advertising is still the most popular model out there. According to Statista, 49 percent of non-gaming mobile apps had in-app advertising in 2017, and that percentage jumped to 79 percent when gaming apps were included. IHS Markit predicts that by 2020, in-app advertising revenue will amount to $53.4 billion.

The problem is that the bulk of this revenue is going to the biggest players. Facebook had a 44.3-percent share of all mobile ads in 2015 according to Klick Health, followed by other giants such as Google, Twitter, Pandora, and Yahoo. That means smaller apps are having a tough time competing for ad dollars. And with Facebook’s share likely to grow to as much as 75.9 percent in 2020, things are only going to get worse.

Photo-editing app Instasize launched with a freemium model, wherein people downloaded the app for free with ads but then could choose to make in-app purchases to delete the ads. Recognizing that this model was not going to provide enough revenue over the long term, the company decided to expand its freemium model by adding a subscription option in June 2017.

“The freemium model allows us a constant stream of new users, giving us a larger funnel to convert to subscription,” said Instasize COO Omar Arambula. “We feel that if, given the opportunity, we can really showcase the value of what Instasize has to offer.”

If You Build Something Great, People Will Pay

One Instasize customer who has enthusiastically embraced the new model is Natasha Church, a fashion and make-up influencer who goes by the name of “Tashie Tinks.” As social media marketing has grown and surpassed traditional advertising, brands are increasingly utilizing influencers like Church to reach consumers in new ways. On Instagram alone, influencer marketing reached more than $1 billion in 2017 and is expected to more than double in 2019, according to Mediakix.

The influencer game is crowded and competitive, so Church is always looking for ways to capture eyeballs. “I think originality is key,” said Church. “There are so many influencers out there right now, all trying to land the same opportunities.”

For Church, an app like Instasize is essential to her success in establishing her brand voice because it offers a wide variety of easy-to-use photo editing tools as well as new filters and features added every month. “You have to keep the content fresh and super creative—think outside the box,” noted Church. “Try and have your own unique way of doing things, whether that’s the way you edit your imagery or the way you pose in photos. Anything to make you stand out.”

Church spends the majority of her time creating content for Instagram and YouTube, mostly photos and videos. So if she finds an app that works for her and contributes to her bottom line, she’ll pay for it. “When editing on the go on my phone, I look for apps and tools that are super quick and easy to use—to the point and simple, just get the job done without interference,” said Church. And if she can avoid the bother of in-app ads distracting her and slowing her down, she’ll happily pay the added cost.

Instasize COO Arambula believes the overall trend in the app industry is definitely going toward the paid subscription model. “Any app that is providing new features and utility on a continued basis is moving to this,” he said, noting that it’s the only way for app companies to accrue enough capital to fund their expansion and fuel growth. “Going paid allowed us to focus on developing better tools and product for our audience and extending our runway to do so.”