There’s no question that it’s tough to create an app that really stands out and gains a significant following in today’s crowded marketplace. That’s why a solid monetization strategy is vital before you launch — an app that manages to catch lightning in a bottle but is saddled with a suboptimal monetization scheme is a squandered opportunity you might never get again.

The Big Decision: Sell The App, Or Sell Advertising?

To generalize as much as possible, the two basic ways to monetize an app are to sell it to people directly (either whole or in parts), or give it away for free but place advertising in it.

Advertising tends to be a bit more of a sure path to revenue, but also potentially a more limited one if the app really takes off. It’s also something that’s tough to cobble in after the fact if you didn’t plan for it during the initial app design, since you’re working with relatively little screen real estate. Certain types of ads, such as interstitial pages and banner overlays, are easier to add after the fact without prior planning. However, the advertiser you want to have a relationship with may not provide the particular ad types you are looking for, and you risk annoying users by hammering ads in awkwardly. Another important consideration with advertising is that people will generally have to be connected to the internet continually while using your app for this model to work.

Speaking of advertising relationships, you’ll also have to convince a company with suitable resources that you’re worth some of their marketing budget. You can approach a company you are interested in and pitch them directly to negotiate a deal, or you can sign up for an ad exchange. Ad exchanges function very similarly to the system that Google AdSense uses; advertisers who are looking for the demographics who use your app will bid for the right to display their ads with you. It’s easy for mobile publishers to find advertisers with an exchange, but generally the pay is lower and you have less control over what types of ads are displayed in your app.

Selling an app directly allows you to design it without any compromise, and the revenue potential is generally higher — IF it’s a hit with users. Naturally, fewer people will download it than will a free app. You’ll also have to consider the existing market carefully to determine if the features of your paid app aren’t already covered by existing free apps.

“Freemium”: Selling In Pieces

Usually, if you sell the app, you’re providing the user with its full functionality for the purchase price — the same way that purchasing software works on a desktop or laptop PC. There is a sort of middle ground between giving the app away for free and selling the whole thing up front, however, and that’s the “freemium” approach. Freemium apps consist of a basic version with limited functionality that’s totally free. Users can then upgrade to the full version, or add “a la carte” features, for an extra fee. Some of the world’s biggest apps use this model — Spotify, Tinder, Dropbox, and countless popular games.

This might initially seem like a tempting model with no serious flaws, but there is one major drawback. You’re going to have a large portion of customers that just use the basic app without paying for an upgrade, especially in the beginning. That’s an ongoing cost that you’re going to have to carry for an indefinite amount of time, until you get enough paying subscribers to offset it.

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