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Does It Make Economic Sense To Release a Free App?

Posted on December 15, 2011
By Terence Eden

One question I often get asked is if a developer can make more money from selling an app than from using advertising. I thought I'd step you through why advertising may be financially advantageous. Let's assume that you sell your app at 99 cents - or 99 pence - or any "cheaper than a cup of coffee" price point. Most app stores charge you 30% for the privilege of selling your app. So, straight away, you're at 70c per user, per app. Still, 70c isn't bad, is it? One thing we're very keen to talk about at InMobi is the lifetime value of a customer. Imagine if you sold your app on the first day of the Apple App Store in 2008. A user downloads your app for 99c - she then upgrades her phone to the 3GS and downloads the app again. You don't see another penny. She upgrades to the 4GS - and again downloads your app - still no more money for you. In mid 2012 she upgrades to the iPhone 5G (she loves her phones!). You have been selling your app for four years. How much is that customer worth to you?

Customer Lifetime Value:  (99c * 0.7) / 4 years = 17.5c per year

After four years, your dollar app has earned you less than 20c per customer per year! For every year that your customers upgrade their phones and download the app again, it gets worse. After five years, it's down to 14c. Can you afford to support old customers who are barely bringing in the cost of a stick of chewing gum? Can you keep adding new customers to subsidise the old ones?

The Case For Advertising

How can giving your app away get you more money that charging 99 cents can? It's pretty simple when we look at the lifetime value of a customer. We aim pay to a developer - on average - 10 cents every time their customer clicks on an advert. So, over four years, you need each customer to click two adverts per year and you're already doing better than selling an app at 99 cents. We know - from years of experience - that the average clicks through rate is 1%. That's not a lot. But if your app is used every single day - and your customer sees just one advert during that time - you're showing over 300 adverts per customer. Statistically, we would expect you to get a little over 3 clicks. 10c per click. 3 clicks per year. It doesn't take a genius to work out that 30c per customer per year is better than the 20c / customer / year you would get from selling your app. If you can put two adverts in your app (say one on the splash screen and one when they exit)...

  2 adverts per day    * 365 days    * 1% Click Through Rate    * 10c per click   = 70c per customer per year

You could be earning the same amount every yearas you earn from a single sale. Worth thinking about, isn't it?

The Bonus

Ok... ok... 70c per customer per year probably isn't going to be enough to let swim around in your riches like Scrooge McDuck. Well - not if you've got the same number of free customers as paid customers. Here's the thing - free apps are downloaded around ten times more than paid apps. Ten times the customers. More revenue per customer. Continual income.... It's starting to look good, isn't it? If you're interested is working out what you could be earning, download our Developer Economic Toolkit.

InMobi Developer Economic Toolkit

\You can get started with InMobi by signing up at www.inmobi.com/promo and use promo-code Terence70. Or, take a read through our Developer Wiki.

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