Mobile apps: which Business Model is best?

One of the classic recommendations a startup receives when it starts operating is to generate revenue fast, but is such a recommendation still valid if the product we are talking about is an app? In this case, I personally believe a better suggestion would be: to generate a huge user base before revenue. So if the phrase “If you don’t make revenue you better sell your company or quit” were always true, what about Instagram, Waze, or Tumblr? In all of those cases, revenue and its growth plan were marginal. It was the same for Twitters’ IPO or Watsapp 19 billion dollars acquisition. All of these cases made me reflect about the importance of creating an app Business Plan.

 

SELLING THE USERS

Last July, WhatsApp CEO Jan Koum, wrote a Post entitled: Why We Don’t Sell Ads: “Nowadays, companies know basically everything about you, your friends, your interests, and they use those information to sell adverts.  We wanted to make something that wasn’t just another ad sorting point. We wanted to spend our time building a service people wanted to use because it worked, a service that could save them money and make their lives better even in a small way. We knew that we could have charged people if only we could do all those things. We knew we could do what most people aim to do every day: avoid ads”. Remember, when advertising is involved, you, the user, are the product”.

And yet, curiously enough, at the end of the day Koum sold to Facebook, which adopts exactly this “add model”: collecting user data to resell them to advertising companies. In other words, WhatsApp sold its user at a higher price than Instagram.

According to Gartner, within 2017, 94,5% of downloaded apps will be free for users. Us, the users, will pay only five apps on a hundred.

 

FREE, BUT WITH ADS

When Rovio released Angry Birds for Android, I remember something really interesting happening. People did not want ads, and many user reviews came from people wanting a new version, even a paid one, without banners. Relying on ads sales means to make a bet on the fact that you’ll reach millions of users in a short amount of time. This won’t work for a niche product aimed to serve important functions. In this case it is crucial to be able to offer something really unique with high quality standards and moderate but targeted advertising.

 

FREEMIUM COMPLEXITY

Many startups do embrace the freemium strategy so that they can avoid having to make revenue fast and having to acquire too many users too soon. However, this is not easy. A classic example is Dropbox that, besides having more than 200 Million users, has a conversion ratio between 4% and 5%. On one hand, this Business Model makes it easier to build up a users base; however, on the other hand, convincing the user to donate for an upgrade becomes pretty complex. Another example is Instapper offering a free “read later” service with ads but asks for payment in order to use the mobile version of the app. When Marco Arment sold it to Betaworks six months ago, the app made him one Million Dollars a year by selling subscriptions and mobile apps. Subscription is not, in fact, the rule in the freemium model, even if it is the one more often adopted. Following the lead of the “in-app purchase” many apps have decided to point on the “one-time purchase” to unlock new product features. Examples of this model are: Hipstamatic filters, Alien Blue features, or even a remove the ads “in-app purchase”. This last option can however complicate things because it brings us back to the dilemma: “Revenue or users”?

 

PAY AND ENJOY

Selling an app is becoming more difficult every day; this is because the market is getting really overcrowded.  Selling apps is a difficult mission but it can also be very productive for a small team. According to Gartner data, 90% of paid apps do not reach 500 daily download and generates less than 1.250 Dollars per day. Beside the app cost, furthermore, one cannot forget the implicit cost that the user will have to pay to pass to the app we wish for him to use, when he was in fact using a similar one. Such a cost will be paid in money but also time. In these cases an important tool to use is product packaging; in fact, screenshots, logos, and app description are very important elements in order to successfully sell an app, just as much as reviews and comments. For those who wish to proceed with this model, it is fundamental to consider the perceived value the user has of the app, by identifying which are the key elements shaping the users’ purchase intentions and, consequently, focusing the promotion on those elements.

 

AN INNOVATIVE MODEL 

Obviously there are many different kinds of BM valid for those startups that create applications, but those that follow are certainly the most adopted.

Whatsapp started with a paid model on the Apple Store, only to pass later to something that reminds us of freemium on Android first and on its others platforms later. The aim was to generate revenue, but in order to do so, Koum and Brian Acton  decided to ask the users for money only after the app had become indispensable to them. It’s not not exactly a freemiun, nor a try first pay later. We could call it simply a 'pay later model': if you want to continue to use the app you must pay. However if you have already been using the app for one year you’ll probably do it. It's not certain how much money Whatsapp generates, but we know for sure it’s profitable.

 

A MAGIC NUMBER

Om Malik has analyzed some data which has not been well promoted on the news till now: WhatsApp has more than 8 million active users per employee. Facebook something like 200.000. Instagram 2,8 Million. Snapchat, for which Zuckerberg offered 3 Million Dollars, has 1,5 Million ones. YouTube a Million. Twitter 100.000. I think that WhatsApp acquisition by Facebook should open a debate on current Business Models present on the market, to find some original and innovative ones. According to the current strategy, if every person of the planet used WhatsApp, the app will be able to generate 6 or 7 Billion of Dollars tops. However, even before selling to Facebook, the 55 employees of the American startup did not have any salary problem.

By Silvio Gulizia, on Twitter as @silviogulizia