Nearly two-thirds of small businesses with more than 50 employees charge for their app, which demonstrates the potential for apps to become a standard revenue stream for small businesses. Our survey of 529 small businesses found that small businesses are monetizing their apps through in-app purchases, download fees, and consumer data.
Apps allow businesses to have complete access to customers at all times.
Small businesses recognize the potential apps have to generate revenue and engage new users. Still, sometimes it can be difficult to choose the correct way to monetize an app.
Small businesses are looking for new methods of generating revenue through their app. Many companies choose to monetize either directly or indirectly, depending on their customers and size.
We surveyed over 529 small businesses across the U.S. about their mobile app use. We define small businesses as having limited revenue and between 1 and 500 employees, which corresponds to the Small Business Administration’s definition of small business.
We found that small businesses monetize their app through in-app purchases and app download fees, while also collecting data from users to improve their services. Use this article to determine how your small business can achieve the best ROI from its mobile app.
- With only 32% of small businesses having a mobile app in 2019, it seems small businesses fail to recognize the benefits of developing an app.
- Small businesses charge customers for their apps through a fee to download (25%) or in-app perks, purchases, or subscriptions (34%).
- Nearly double the number of small businesses with more than 50 employees charge for their app (63%) compared to companies with fewer than 50 employees (35%).
- Close to half of small businesses collect user data from apps including contact information (47%), location (46%), and payment details (35%), demonstrating the value of user data.
Only 32% of Small Businesses Have an App, Despite Value of Mobile Apps for Customer Engagement
Only a third of small businesses (32%) have a mobile app, despite the valuable role mobile apps play in generating revenue and attracting and retaining customers.
Apps provide an interactive platform for customers to engage with, which encourages them to spend more time viewing your business’s content.
By 2020, apps are predicted to make about $188.9 billion in revenue, demonstrating that consumers are willing to pay to use an app.
Still, it can be challenging to choose the right method to monetize your app successfully. Businesses should understand each monetization model to evaluate which plan best suits their goals.
Small Businesses With More Than 50 Employees Likely to Charge for Apps
Businesses with more than 50 employees can dedicate more money and resources to promote their app. This may be why almost two-thirds of companies (63%) with over 50 employees charge for their app, compared to only 35% of companies with fewer than 50 employees.
This finding seems to counter the logic that small businesses may need the initial ROI more than large businesses that can afford to wait a period of time before looking for gains.
To convince consumers to pay for an app, small businesses should ensure people know what their app does before launch with an effective app marketing campaign. Small businesses of any size should be thoughtful about which mobile app monetization model to choose.
Small Businesses Rely on In-App Purchases and Download Fees to Monetize Their Mobile App
Small businesses make money with their apps using two primary methods:
- Charging a fee to download the app (26%).
- Charging for in-app perks, purchases, or subscriptions (37%)
To pay for an app, consumers need to feel the service the app provides is valuable and worthy of a financial investment.
Paying upon download and buying in-app purchases are 2 of the 5 monetization models for apps that businesses typically use.
5 App Monetization Strategies
Small businesses should consider the following 5 strategies to make money with their mobile app:
- Free Model
- Freemium Model
- Subscription Model
- Paid Model
- Paymium Model
1. Free Apps Can Increase Brand Awareness
The free app monetization model means your business does not charge consumers for its app.
All features are free and customers have complete access to the app.
The free model attracts undecided customers who see no harm in downloading an app if they don’t have to pay for it.
“It’s really hard to get people to pay for apps,” said Joana Kelly, chief operating officer of Small Planet, a mobile app design and development company. “There’s something about being asked to pay a dollar for an app that is this big barrier. If it’s free to download, then people are more willing to try the app.”
To be successful using the free app monetization model, you need to ensure your app has a solid customer base first, before pursuing advertisers.
Many small businesses, especially those with fewer than 50 employees, however, may not be searching for a direct stream of revenue from their app. Retail or food companies, for example, may use apps to facilitate product sales.
In addition, your business can create an app solely as a promotional tool that helps to build an audience.
While the free app monetization model may be risky for small businesses interested in growing their revenue, small businesses still can use free apps to encourage sales or promote other services.
2. Freemium Apps Effective for Gaining Loyal Customers
The freemium app monetization model combines the free model with a premium upsell.
Freemium apps offer a free basic version of the app upon download. Users then can pay for a premium version of the app if they want more features or advanced services.
The freemium model relies on users becoming hooked on the platform and wanting a more comprehensive version of the app. If your app is successful as a free app, there is potential for your app to succeed with the freemium model.
The freemium model works according to the “5 Percent Rule”, which states that 5% of premium users will support the 95% of people who don’t pay.
This model has proven to be quite successful for companies such as Spotify, LinkedIn, Skype, and Dropbox.
Small businesses need to convince their users that the paid version of their apps provide an enhanced experience that’s significantly better than the basic version.
DropBox, for example, charges users after they reach the storage limit that the free version offers. Many users do not want to find a new method of storing their content so are willing to pay an extra price to expand their storage space.
DropBox anticipates user need and assumes that consumers will want more storage space. The company groomed users to rely on its service and then offered an even larger service for a price.
The freemium model works better with an established user base. You cannot support an app that only has a thousand free users and 50 paying users. The company will never gain enough revenue to support the rest of the business.
Homebase, an online employee scheduling software, offers a free version of its platform but creates incentives for managers to upgrade their service.
“We've been careful not to overwhelm people with too many calls to upgrade, and we want to make sure the experience is still phenomenal when they're on our free plan,” said Ravi Dehar, head of growth for Homebase.
Dehar wants users to enjoy the free plan and become loyal consumers. Then, the goal is to demonstrate how users can have an even better experience with extra features.
Small businesses can use the freemium mobile app monetization model to capture revenue from both initial downloads and perks and upgrades later.
3. Subscription App Monetization Model Offers Reliable Revenue Stream
Using a subscription model to monetize your app is a direct way to ensure a return on your app investment.
Subscriptions are common with entertainment apps such as Netflix, Hulu, and HBO. The subscription model provides a steady revenue stream for an app since every user pays a certain amount per month or year.
Netflix, for example, offers a multi-tiered subscription plan:
Small businesses can create a tiered subscription model where additional features are offered through a higher-price tier.
For example, Hulu offers a basic purchasing package that renews once a month and allows users to stream content, but they have to watch commercials. The premium version of Hulu offers users any content to watch without commercials, but the cost is higher.
Hulu also offers “add-on” subscription for specific channel shows. For example, users have to pay for an “add-on” Starz subscription if they want to watch original shows from that channel.
Another example is Wave, a small business accounting app, which supports small businesses by organizing their invoices and tracking receipts to help businesses better analyze their finances. Wave uses a subscription-based model where consumers pay per month for payroll tax filing and tax payments.
This subscription model enables users to access uninterrupted services month-after-month without worrying about unexpected costs or additional fees.
Subscriptions can also motivate hesitant buyers to test out a service for a month before deciding whether to continue for the rest of the year.
Subscription-based apps generate a reliable stream of revenue, but users also expect unique and high caliber content and experiences for the recurring price.
4. Paid Apps Provide Immediate ROI
A paid app is the app monetization model that requires users to pay to download your app. This one-time payment provides users access to all of the app’s services.
Since the user only pays once, your company must calculate the value of your app and market it successfully. If your price is too expensive, users may never download the app. If too cheap, however, then your app may not turn a profit.
Charging for an app upfront can be difficult to execute. Your business must create a distinct marketing campaign that promotes the value of the app to convince people to pay for it immediately.
Dedicating a marketing team solely to promote an app, however, can be difficult for companies with fewer than 50 people.
Many gaming apps use the paid app monetization model because its value is simple and recognizable.
“I think people expect to pay for gaming apps,” said Kelly of Small Planet. “They have a certain amount of entertainment value where you’re going to spend a certain number of hours doing this thing and playing the game. I would say people expect a gaming app to have an upfront cost.”
Paid apps usually require users to know what the app does. People are less likely to pay money for an app that they don’t understand.
Life, the board game app, charges $2.99 to download. Most people are familiar with Life, so the company has to do very little to convince the user to download the app. The user either wants to play Life or does not.
To maximize success with the paid app monetization model, make sure to market the following elements of your app:
Paid apps immediately provide your business with financial return, which means it may seem like there is little risk. Still, there are challenges with determining the right price point for your app, educating potential users, and converting them into downloads.
5. The Paymium App Monetization Model May Be Difficult to Implement Effectively
The paymium mobile app business model assumes users are willing to pay to download the app and then continue to pay for additional features.
Paymium apps require users to value an app for both its standard services and extra perks.
Angry Birds is a popular example of a paymium app. Originally, users paid to download the game and then could purchase additional lives, hearts, or energy.
Heads Up, the popular party game invented by Ellen, also uses the paymium model where people have to pay to download the app but then only receive a certain number of cards before having to purchase more to continue playing.
Heads Up trusts that users are familiar with the game and willing to pay to continue playing.
Small businesses may steer clear of the paymium app monetization model because of its risk. Paymium usually succeeds with content-based apps that provide a steady flow of new entertainment for users.
Small Businesses Value App Data
App user data provides valuable insights into customer behavior such as how customers interact with a brand. Small businesses can use this data to promote their company and services.
Almost half of companies gather customer data through apps, including contact information (47%), location (46%), and payment details (35%).
Contact information allows small businesses to sell to users and notify them of any potential sales, updates, or discount.
Location services offer insights into where people live and frequent. This information also can indicate users’ socioeconomic status, which means advertisers can target people depending on their assumed wealth and lifestyle.
Small businesses can use app data to better understand their consumers and build buyer personas, which helps create more personalized experiences for the user.
Ajay Kumar, co-founder and CEO of TheHouseMonk, a property management solutions app, said he collects app data to evaluate what app features are worth keeping and updating.
“Data helps us to study what [people] are using within our app and what they are not using. This helps us build a better product by keeping useful features, removing others, and marketing upgrades or feature enhancements to our user base.”
Collecting user data creates a more accurate picture of how, when, and where people are using your app. As the app experience improves, users will be more likely to keep the app on their phone.
Businesses Monetize App Data Through App Advertising
Small businesses recognize they can profit from accessing user data.
Recently, companies such as Facebook and Google have been criticized for violating user privacy and sharing information with third parties.
“Users expect social media apps to be free with monetization implemented through ads,” said Igor Ishchenko, chief technology officer of Cruxlab, a web and mobile development company based in Los Angeles. “Yet, after the Facebook and Cambridge Analytica scandal, there is a growing demand for better privacy that can be achieved by replacing ads with paid features and less tracking.”
People expect some apps such as Facebook to be free. Given this expectation, those apps must capitalize on what users will give them — data. Facebook, however, has seen backlash for overreaching the data they collect and who they give it to for a large price.
Small Businesses Use Consumer Data to Improve Services
Not all small businesses believe in selling user data for profit.
Some small business owners believe ads interrupt the experience of the app, which discourages users from returning to their platform.
Selling information can conflict with the interest of the user, which goes against the missions of some companies.
“Offering ads inside the app puts us in a potential conflict of interest with our users,” said Omer Yarkowich, vice president of product and marketing at MyPrivacy, an Israeli-based privacy cleaner app. “In a way, to optimize the revenue from the ads, we would need to leverage what we know of our users, and that goes against our values and mission statement.”
App development companies can create a more optimized experience for their user if they know what people like and use.
Businesses understand the value of learning more about their consumers. People respond to personalized content and feel connected with a business that recognizes their interests.
Monetize Your App Effectively
Small businesses can use mobile apps to earn revenue through direct or indirect methods.
Over a third of small businesses (34%) charge for in-app purchases while 25% of small businesses charge a fee to download the app. Choosing the correct monetization model can be key to an app’s success.
Companies with more than 50 employees are likely to charge for their app. Businesses with even fewer employees still rely on the paid app monetization model, however, to generate immediate revenue.
Small businesses understand the value of app data for bettering the customer experience and showcasing the app’s value to advertisers.
Small businesses continue to invest in apps as they search for more ways to expand their audience and grow profits.
About the Survey
Visual Objects surveyed 529 small business owners and managers across the U.S. Small businesses are defined as having between 1 and 500 employees and limited revenue.
Over half of small businesses (54%) have between 1 and 10 employees and 46% have between 11 and 500 employees.
Most respondents are male (52%) and 48% of respondents are female.
Generation Xers make up 45% of respondents, 29% are millennials, and 27% are baby boomers.