Guest Post: Monetizing Freemium Apps

By Thomas Sommer | July 9th, 2013
In-app purchases and display advertising are often perceived as two competing business models for freemium apps. However, if implemented the right way, they can be used in conjunction with each other. How should you manage the balance between them in order to optimize your in-app monetization strategy? Eric Seufert offers his insights.In-app purchases and display advertising are often perceived as two competing business models for freemium apps. However, if implemented the right way, they can be used in conjunction with each other. How should you manage the balance between them in order to optimize your in-app monetization strategy? Eric Seufert offers his insights.In-app purchases and display advertising are often perceived as two competing business models for freemium apps. However, if implemented the right way, they can be used in conjunction with each other. How should you manage the balance between them in order to optimize your in-app monetization strategy? Eric Seufert offers his insights.In-app purchases and display advertising are often perceived as two competing business models for freemium apps. However, if implemented the right way, they can be used in conjunction with each other. How should you manage the balance between them in order to optimize your in-app monetization strategy? Eric Seufert offers his insights. Looking at the Top Grossing charts on iOS, the commercial potential of freemium can’t be denied: with no initial fee for download, apps with large enough user bases – and primarily games – can generate millions of dollars per day through microtransactions. But microtransactions (otherwise known as in-app purchases, or IAPs) are not the only means a freemium app can avail itself of to monetize; freemium apps can also generate revenue through display advertising. Display advertising generally takes one of the following forms:
  • Banner ads at either the bottom or the top of an app that rotate at a particular speed. These advertisement placements are similar to those found on the web and pay out at similarly modest CPMs.
  • Video ads that launch a mobile device’s video player. These ads usually yield higher CPMs (or CPCs) but only do so upon completion or near-completion of the video, meaning the user must completely disengage from the source app for the duration of the media.
  • Interstitial ads that dominate the screen of the device. This ad type generally advertises another app, and, upon click, users are taken to the platform app store, where they can download the target app being advertised.
Given that freemium apps generally convert at a very low rate – usually less than 5% of total users directly contribute revenues through in-app purchases – placing advertising in an app may seem like an uncontroversial, complementary revenue stream which can be drawn upon to supplement low conversion rates. But, like most decisions in freemium, the ads vs. in-app purchases calculus is not so straightforward: the innate strategy of the freemium model is to provide the latitude for a small, enthusiastic minority of users to engage with the app to the greatest extent possible, and ads – by their very nature – are antithetical to engagement. Additionally, ad revenues scale linearly with engagement, and the underlying goal of freemium is to achieve long-tail monetization with the most engaged users. For extremely viral apps, linear monetization isn’t a problem, but for apps that require large-scale, strategic user acquisition campaigns for the development of a user base, the revenue delivered by ads may not cover initial marketing expenditure on a per-user basis. This isn’t to say that ads don’t have a place in freemium; advertising can be used to great effect in freemium apps in generating revenue. But ads cannot be placed in an app haphazardly. Ads should be considered a secondary form of monetization and implemented so as to augment the revenue delivered by IAPs without negating the potential for the app to monetize through microtransactions. Prudently implementing ads, then, requires an analytics infrastructure capable of informing such a decision. Some developers use non-conversion by a certain date – say, three days – as a rough proxy; that is, when a user hasn’t converted by day three, they are shown ads. Such an approach isn’t necessarily invalid, but it likely leaves money on the table by applying one conversion threshold across the entire user base. Averages in freemium are meaningless; applying the average time to conversion to the entire user base in deciding when to show ads neglects the fact that users in freemium products may fall across a broad range of diverse behaviorial profiles. Ads should be displayed in a freemium product when a developer can be sure that they won’t cannibalize in-app purchases for the individual user, not the average user. And some ads don’t cannibalize in-app purchases at all; in fact, video ads in some apps actually enhance engagement, increasing perceived investment on the part of the user and potentially improving the likelihood that a user may eventually convert. Ads that are deeply integrated into the content of the app can also potentially benefit from the same effect. Of course, the opposite is also true – certain ads can alienate users and increase the odds of churn. Like everything in freemium, the decision to display ads in an app should be made against the backdrop of the idiosyncratic behavior of the individual user. Ads and IAPs in freemium can exist in perfect symbiosis, but optimizing total revenue requires insight and automation. Applying broad monetization strategies in freemium – whether it be related to ads or in-app purchases -- not only recklessly disregards the significance of outliers, but it undermines the basic tenets of the business model. Eric Seufert is a quantitative marketer who blogs frequently at Mobile Dev Memo about mobile app monetization and user acquisition. His upcoming book about the freemium business model, Freemium Economics, will be published by Morgan Kaufmann in early 2014.Looking at the Top Grossing charts on iOS, the commercial potential of freemium can’t be denied: with no initial fee for download, apps with large enough user bases – and primarily games – can generate millions of dollars per day through microtransactions. But microtransactions (otherwise known as in-app purchases, or IAPs) are not the only means a freemium app can avail itself of to monetize; freemium apps can also generate revenue through display advertising. Display advertising generally takes one of the following forms:
  • Banner ads at either the bottom or the top of an app that rotate at a particular speed. These advertisement placements are similar to those found on the web and pay out at similarly modest CPMs.
  • Video ads that launch a mobile device’s video player. These ads usually yield higher CPMs (or CPCs) but only do so upon completion or near-completion of the video, meaning the user must completely disengage from the source app for the duration of the media.
  • Interstitial ads that dominate the screen of the device. This ad type generally advertises another app, and, upon click, users are taken to the platform app store, where they can download the target app being advertised.
Given that freemium apps generally convert at a very low rate – usually less than 5% of total users directly contribute revenues through in-app purchases – placing advertising in an app may seem like an uncontroversial, complementary revenue stream which can be drawn upon to supplement low conversion rates. But, like most decisions in freemium, the ads vs. in-app purchases calculus is not so straightforward: the innate strategy of the freemium model is to provide the latitude for a small, enthusiastic minority of users to engage with the app to the greatest extent possible, and ads – by their very nature – are antithetical to engagement. Additionally, ad revenues scale linearly with engagement, and the underlying goal of freemium is to achieve long-tail monetization with the most engaged users. For extremely viral apps, linear monetization isn’t a problem, but for apps that require large-scale, strategic user acquisition campaigns for the development of a user base, the revenue delivered by ads may not cover initial marketing expenditure on a per-user basis. This isn’t to say that ads don’t have a place in freemium; advertising can be used to great effect in freemium apps in generating revenue. But ads cannot be placed in an app haphazardly. Ads should be considered a secondary form of monetization and implemented so as to augment the revenue delivered by IAPs without negating the potential for the app to monetize through microtransactions. Prudently implementing ads, then, requires an analytics infrastructure capable of informing such a decision. Some developers use non-conversion by a certain date – say, three days – as a rough proxy; that is, when a user hasn’t converted by day three, they are shown ads. Such an approach isn’t necessarily invalid, but it likely leaves money on the table by applying one conversion threshold across the entire user base. Averages in freemium are meaningless; applying the average time to conversion to the entire user base in deciding when to show ads neglects the fact that users in freemium products may fall across a broad range of diverse behaviorial profiles. Ads should be displayed in a freemium product when a developer can be sure that they won’t cannibalize in-app purchases for the individual user, not the average user. And some ads don’t cannibalize in-app purchases at all; in fact, video ads in some apps actually enhance engagement, increasing perceived investment on the part of the user and potentially improving the likelihood that a user may eventually convert. Ads that are deeply integrated into the content of the app can also potentially benefit from the same effect. Of course, the opposite is also true – certain ads can alienate users and increase the odds of churn. Like everything in freemium, the decision to display ads in an app should be made against the backdrop of the idiosyncratic behavior of the individual user. Ads and IAPs in freemium can exist in perfect symbiosis, but optimizing total revenue requires insight and automation. Applying broad monetization strategies in freemium – whether it be related to ads or in-app purchases -- not only recklessly disregards the significance of outliers, but it undermines the basic tenets of the business model. Eric Seufert is a quantitative marketer who blogs frequently at www.mobiledevmemo.com/i> about mobile app monetization and user acquisition. His upcoming book about the freemium business model, Freemium Economics, will be published by Morgan Kaufmann in early 2014.Looking at the Top Grossing charts on iOS, the commercial potential of freemium can’t be denied: with no initial fee for download, apps with large enough user bases – and primarily games – can generate millions of dollars per day through microtransactions. But microtransactions (otherwise known as in-app purchases, or IAPs) are not the only means a freemium app can avail itself of to monetize; freemium apps can also generate revenue through display advertising. Display advertising generally takes one of the following forms:
  • Banner ads at either the bottom or the top of an app that rotate at a particular speed. These advertisement placements are similar to those found on the web and pay out at similarly modest CPMs.
  • Video ads that launch a mobile device’s video player. These ads usually yield higher CPMs (or CPCs) but only do so upon completion or near-completion of the video, meaning the user must completely disengage from the source app for the duration of the media.
  • Interstitial ads that dominate the screen of the device. This ad type generally advertises another app, and, upon click, users are taken to the platform app store, where they can download the target app being advertised.
Given that freemium apps generally convert at a very low rate – usually less than 5% of total users directly contribute revenues through in-app purchases – placing advertising in an app may seem like an uncontroversial, complementary revenue stream which can be drawn upon to supplement low conversion rates. But, like most decisions in freemium, the ads vs. in-app purchases calculus is not so straightforward: the innate strategy of the freemium model is to provide the latitude for a small, enthusiastic minority of users to engage with the app to the greatest extent possible, and ads – by their very nature – are antithetical to engagement. Additionally, ad revenues scale linearly with engagement, and the underlying goal of freemium is to achieve long-tail monetization with the most engaged users. For extremely viral apps, linear monetization isn’t a problem, but for apps that require large-scale, strategic user acquisition campaigns for the development of a user base, the revenue delivered by ads may not cover initial marketing expenditure on a per-user basis. This isn’t to say that ads don’t have a place in freemium; advertising can be used to great effect in freemium apps in generating revenue. But ads cannot be placed in an app haphazardly. Ads should be considered a secondary form of monetization and implemented so as to augment the revenue delivered by IAPs without negating the potential for the app to monetize through microtransactions. Prudently implementing ads, then, requires an analytics infrastructure capable of informing such a decision. Some developers use non-conversion by a certain date – say, three days – as a rough proxy; that is, when a user hasn’t converted by day three, they are shown ads. Such an approach isn’t necessarily invalid, but it likely leaves money on the table by applying one conversion threshold across the entire user base. Averages in freemium are meaningless; applying the average time to conversion to the entire user base in deciding when to show ads neglects the fact that users in freemium products may fall across a broad range of diverse behaviorial profiles. Ads should be displayed in a freemium product when a developer can be sure that they won’t cannibalize in-app purchases for the individual user, not the average user. And some ads don’t cannibalize in-app purchases at all; in fact, video ads in some apps actually enhance engagement, increasing perceived investment on the part of the user and potentially improving the likelihood that a user may eventually convert. Ads that are deeply integrated into the content of the app can also potentially benefit from the same effect. Of course, the opposite is also true – certain ads can alienate users and increase the odds of churn. Like everything in freemium, the decision to display ads in an app should be made against the backdrop of the idiosyncratic behavior of the individual user. Ads and IAPs in freemium can exist in perfect symbiosis, but optimizing total revenue requires insight and automation. Applying broad monetization strategies in freemium – whether it be related to ads or in-app purchases -- not only recklessly disregards the significance of outliers, but it undermines the basic tenets of the business model. Eric Seufert is a quantitative marketer who blogs frequently at www.mobiledevmemo.com about mobile app monetization and user acquisition. His upcoming book about the freemium business model, Freemium Economics, will be published by Morgan Kaufmann in early 2014.Looking at the Top Grossing charts on iOS, the commercial potential of freemium can’t be denied: with no initial fee for download, apps with large enough user bases – and primarily games – can generate millions of dollars per day through microtransactions. But microtransactions (otherwise known as in-app purchases, or IAPs) are not the only means a freemium app can avail itself of to monetize; freemium apps can also generate revenue through display advertising. Display advertising generally takes one of the following forms:
  • Banner ads at either the bottom or the top of an app that rotate at a particular speed. These advertisement placements are similar to those found on the web and pay out at similarly modest CPMs.
  • Video ads that launch a mobile device’s video player. These ads usually yield higher CPMs (or CPCs) but only do so upon completion or near-completion of the video, meaning the user must completely disengage from the source app for the duration of the media.
  • Interstitial ads that dominate the screen of the device. This ad type generally advertises another app, and, upon click, users are taken to the platform app store, where they can download the target app being advertised.
Given that freemium apps generally convert at a very low rate – usually less than 5% of total users directly contribute revenues through in-app purchases – placing advertising in an app may seem like an uncontroversial, complementary revenue stream which can be drawn upon to supplement low conversion rates. But, like most decisions in freemium, the ads vs. in-app purchases calculus is not so straightforward: the innate strategy of the freemium model is to provide the latitude for a small, enthusiastic minority of users to engage with the app to the greatest extent possible, and ads – by their very nature – are antithetical to engagement. Additionally, ad revenues scale linearly with engagement, and the underlying goal of freemium is to achieve long-tail monetization with the most engaged users. For extremely viral apps, linear monetization isn’t a problem, but for apps that require large-scale, strategic user acquisition campaigns for the development of a user base, the revenue delivered by ads may not cover initial marketing expenditure on a per-user basis. This isn’t to say that ads don’t have a place in freemium; advertising can be used to great effect in freemium apps in generating revenue. But ads cannot be placed in an app haphazardly. Ads should be considered a secondary form of monetization and implemented so as to augment the revenue delivered by IAPs without negating the potential for the app to monetize through microtransactions. Prudently implementing ads, then, requires an analytics infrastructure capable of informing such a decision. Some developers use non-conversion by a certain date – say, three days – as a rough proxy; that is, when a user hasn’t converted by day three, they are shown ads. Such an approach isn’t necessarily invalid, but it likely leaves money on the table by applying one conversion threshold across the entire user base. Averages in freemium are meaningless; applying the average time to conversion to the entire user base in deciding when to show ads neglects the fact that users in freemium products may fall across a broad range of diverse behaviorial profiles. Ads should be displayed in a freemium product when a developer can be sure that they won’t cannibalize in-app purchases for the individual user, not the average user. And some ads don’t cannibalize in-app purchases at all; in fact, video ads in some apps actually enhance engagement, increasing perceived investment on the part of the user and potentially improving the likelihood that a user may eventually convert. Ads that are deeply integrated into the content of the app can also potentially benefit from the same effect. Of course, the opposite is also true – certain ads can alienate users and increase the odds of churn. Like everything in freemium, the decision to display ads in an app should be made against the backdrop of the idiosyncratic behavior of the individual user. Ads and IAPs in freemium can exist in perfect symbiosis, but optimizing total revenue requires insight and automation. Applying broad monetization strategies in freemium – whether it be related to ads or in-app purchases -- not only recklessly disregards the significance of outliers, but it undermines the basic tenets of the business model. Eric Seufert is a quantitative marketer who blogs frequently at www.mobiledevmemo.com/i> about mobile app monetization and user acquisition. His upcoming book about the freemium business model, Freemium Economics, will be published by Morgan Kaufmann in early 2014.

Thomas Sommer
Thomas heads up content marketing at AppLift. As such he’s in charge of sourcing, curating, creating and distributing insightful content to increase visibility and thought leadership for the company. Thomas loves to scrutinize the relentless and trilling developments of the mobile industry. You can follow him on Twitter and LinkedIn.

Thomas