How do apps make money ?
I consider myself a value conscious buyer. Especially in the case of digital apps and services. Something got me thinking on how much did I pay for digital apps last year ? If some app can make me pay, I reckoned, it must have real good revenue potential.
Just as a fun exercise, take a pause and think how much did you pay for digital apps last year and what were those apps. Ignore e-commerce or related apps where you are paying for a physical good or service but are just buying it online. Think of only digital goods and services.
I realised the following. I am paying for Netflix subscription monthly, which I use heavily. I am also paying for Amazon Prime, which is much cheaper and has the dual benefit of content and prime privileges in Amazon. I am also a subscriber of a meditation app called calm. Finally I paid for one month subscription of Deep learning specialisation in Coursera.
I then looked at the distribution of worldwide mobile app revenues in the Apple App Store to validate if my spending represents more or less what the world is spending. Please note that this is consumer spending and does not include the case where we give our time and personal data to trustworthy companies and let them manipulate us and make money in the process.
I realised that games almost always takes the major chunk of consumer spending on app stores.(including Android) I was never a gamer. If someone had asked this estimation question in an interview, I would have missed gaming. (estimations tend to be affected by availability bias )
Excluding games, if we look at the top grossing apps, we see video streaming, music, dating and some chat/social networking apps with in-app purchases. I guess the only exception is Google One which is selling storage. (Not exactly. It is selling a premium service level for a lot of google products combined)
Then I asked myself, how did I convince myself to pay for these apps. (or rather how did these apps convince me to pay)
- Netflix: I had cable subscription and used to regularly go to cinemas. Netflix content quality was too good not to subscribe. The subscription payment felt painful for the first month but later I grew accustomed to the automatic card payment. Moreover my usage was so heavy that stopping the subscription was difficult.
- Amazon Prime: This was introduced at a very low price point in India. There was some interesting content and it was bundled with prime benefits. This was a no-brainer. Moreover I was used to watching and paying for Netflix by then.
Netflix wins because of the content. They don’t even have to try the “freemium strategy” and just give one month free trial for users to try out. As long as users are hooked to the content, their revenue is assured. Subscribing to Netflix is like taking an infrastructure connection. You can’t do away with broadband or electricity or Netflix. Their cost structure, content strategy, technology stack etc. should be a different discussion. Their stock price movement from the time they moved to streaming is a testament to the strong consumer demand.
Now to the other two apps that I paid for
- Calm: I used this app for almost 2 years as a free user. Meditation has its benefits and this app was a convenient way to do guided meditation while you are commuting. They had certain interesting guided meditations locked under premium subscription. I don’t remember exactly, but I think almost after 2 years I wanted to try the locked content and subscribed. Calm was slated to hit 100M $ revenue in 2019
- Coursera: I have used Coursera for free, on and off, for a long time (almost 7–8 years). But recently due to the pandemic, I had lot of time at hand. I was interested in Deep Learning specialisation by Prof. Andrew Ng. Even now I could have sampled the entire course for free. But the specialisation certificate with Prof. Andrew’s signature, the ability to add it to my LinkedIn profile, the opportunity to submit the programming assignments — all were available only under premium subscription. Coursera is worth more than a billion $ now.
Majority of apps use freemium model to monetise. The idea is to get a very large number of people use the app for free. Gradually get them hooked. During the user journey, at some specific moments, the app asks users to pay for unlocking some features or content that is behind the premium paywall. Identifying these specific features and deciding when, how much, and how to ask for payment is an art and science.
Features under premium subscription:
- In the case of Coursera, the entire content is free to sample. It feels like a fair world. Knowledge is free. But if you want a certificate, want to add it to your CV and feel proud gloating about it, then pay a small fee.
- In the case of Netflix, nothing is free. There are other OTT players who have some limited free content.
When to ask for payment:
- For a particular specialisation, Coursera gives a 7-day full access free trial. You can easily complete a course in that week, but it is very hard to complete the specialisation.
- As you get hooked, you realise that the free trial is over and to submit assignments for the next course you have to pay. You go through videos for a week, take a quiz, answer all questions and realise that you can’t submit. That was the moment for me.
- Once I paid for that month, it was also a motivation for me to complete the specialisation before the end of the month.
- For Netflix, all you get is one month free. After that you either pay or you stop. Netflix is confident that you will not get similar collection of content elsewhere for free, legally.
While I am not a gamer myself, I assume the psychology to be similar. The gamer gets hooked to the game and somewhere it offers a cheat code or a weapon or an avatar for a fee.
In short, digital apps make money in three steps:
- The first step is to provide users with enough value that is not available elsewhere for free and get users hooked on to your app.
- The second step is to make sure that some of this value is locked under a paywall.
- The third step is to ask for payment at the right moment and make the payment process frictionless.
How much to ask (pricing) is a different discussion again.
