My buddy Paul has been teaching himself how to code so he can develop smart phone apps. His plan is to develop a bunch of paid apps to create another stream of income, and his first app is set to be released soon. I can’t tell you what it is yet (he’s afraid someone will steal his idea) but he’s convinced it will be the first brick in an online empire that will support his family for years to come.
But according to eMarketer, in-app purchases within free apps produce the overwhelming majority of revenue in app sales. That suggests Paul may want to rethink his strategy to include some free apps that offer in-app purchases instead of focusing solely on paid apps.
According to the report, 98 percent of Google Play store revenues and 92 percent of Apple App store revenues in November 2013 came from purchases made inside “free” apps. That compares with 89 percent and 77 percent respectively at the start of 2013.
The chart above suggests that the “freemium” business model (free to download apps that offer in-app purchases for upgrades and power-ups) clearly produces more revenue than either paid apps or paid apps with in-app purchases. In fact, the most revenue generating app of 2013 was Supercell’s Clash of Clans, a free to download game that offers in-app purchases
Of course, if you dig a little deeper into the end of year report from app analytics firm Distimo you’ll see that user preference towards free or paid content varies depending on the category. Revenue from categories including Games, Social Networking, News, and Entertainment is mostly generated from free apps with in-app purchases. On the other hand, categories like Education, Navigation, and Productivity generate a majority of their revenue through paid apps and paid apps with in-app purchases.
Apparently, the freemium business model works best when users are looking for a diversion. They try out a free game, get hooked on it, and make in-app purchases to buy coins, power-ups, or whatever upgrade the game offers. But when they have a real problem to solve, they are more willing to pay for an app that can give them what they need.
Since the vast majority of mobile app revenue comes from the Games category, this seems like a good place for app developers like Paul to concentrate their efforts. But it is also an incredibly competitive category and you need a creative monetization plan because the majority of users aren’t willing to pay for a game when there are so many “free” options available.
Meanwhile, productivity and navigation apps aren’t quite as popular in the app store but they have a more targeted audience that is willing to pay for a quality app that helps them. Either way, there are plenty of opportunities for app developers to carve out a piece of the pie for themselves.
Have you ever thought about developing apps? Which do you think is better for small-time developers to focus on…paid apps or free apps that offer in-app purchases?