How apps make money: monetization models explained
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Decide how your app will earn money before you design it. It affects features, pricing, and how users feel about the product.
The main models
| Model | How it works | Works best for |
|---|---|---|
| Subscription | Recurring payment for ongoing value | Content, fitness, productivity, SaaS |
| Freemium | Free core app, paid upgrade | Tools where free use proves value |
| In-app purchases | One-time buys of items or features | Games, digital goods, add-ons |
| Advertising | Show ads to a large free audience | High-volume, content or casual apps |
| Paid download | Pay once to install | Niche professional tools |
| Transaction fees | Take a cut of payments between users | Marketplaces, bookings, delivery |
| Physical goods and services | App supports a business that earns elsewhere | Retail, restaurants, services |
Choosing a model
- Where does the user get value? Ongoing value supports subscriptions; occasional value supports one-time purchases.
- How big is your audience? Ads need scale. Subscriptions can work with a smaller, engaged base.
- What does the competition do? Users have expectations in each category.
- What are the platform rules? Digital goods and subscriptions usually must use Apple’s and Google’s billing systems and pay their fees. Physical goods and real-world services generally use other payment methods.
Tips for freemium and subscriptions
- Make the free version genuinely useful.
- Show the paid benefits at the moment they matter.
- Offer a trial and clear pricing, with simple cancellation.
- Test price points and paywall placement with data.
Protect the user experience
Aggressive ads, confusing pricing, and surprise charges lead to bad reviews and uninstalls. Be transparent.
Comparing models with an example
Imagine a language-learning app with 10,000 monthly active users.
| Model | Assumption | Rough monthly revenue |
|---|---|---|
| Subscription | 4% subscribe at $8 per month | 10,000 x 4% x $8 = $3,200 |
| Freemium with one-time upgrade | 2% buy a $30 upgrade each month (new buyers) | 10,000 x 2% x $30 = $6,000 (but declines as the base saturates) |
| Ads | $3 revenue per 1,000 impressions, 20 impressions per user per month | 10,000 x 20 / 1,000 x $3 = $600 |
| Paid download | 300 new installs at $4 | $1,200, with less reach |
These are illustrations with made-up assumptions, not benchmarks. The lesson is to model your own numbers: conversion rate, price, active users, and churn. Small changes in conversion or price can change the result more than anything else.
Pricing and paywalls
- Anchor value. Show the benefit before the price. Offer monthly and yearly plans, and make the yearly plan clearly better value.
- Offer a free trial when the product needs time to prove itself.
- Place the paywall after a user has experienced value, but before the product gives away everything.
- Be transparent about price, renewal, and how to cancel. Surprise charges damage trust and reviews.
- Test prices, trial lengths, and copy with real traffic.
Store rules to know
| Topic | What it means |
|---|---|
| Digital goods and subscriptions | Usually must use Apple’s and Google’s in-app billing, which charges a commission |
| Physical goods and real-world services | Can use other payment providers |
| External links to pay | Rules are evolving by region and platform, so check current policies |
| Subscription disclosures | Price, term, and cancellation must be clear |
Policies change, and some regions have different rules, so confirm the current terms before you design checkout.
Metrics for revenue
Track conversion to paid, average revenue per user, monthly churn, and lifetime value, compared with the cost of acquiring each user. If acquiring a user costs more than they will ever pay, the model does not work. See analytics for beginners and how to promote your app.
Measure revenue the right way
Track conversion to paid, average revenue per user, churn, and lifetime value against acquisition cost. See analytics for beginners. For apps that sell products, see e-commerce app development.
Related reading: Specialized categories have their own revenue patterns, such as dating, streaming, and lending apps and travel apps.
Frequently asked questions
How do free apps make money?
Through ads, optional in-app purchases, subscriptions for premium features, or by supporting a business that earns elsewhere, such as selling products or services.
Are paid apps still viable?
Paid downloads are less common today. Subscriptions and freemium models are the main approach for most consumer apps, though niche professional tools may still sell one-time.
How much do the app stores take?
Apple and Google charge a commission on many digital purchases, with reduced rates for small businesses and subscriptions after a period. Rules and rates change, so check current policies.
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