How to Run a Business In Apple's App Store

The early days of Apple's App Store are sometimes referred to as the gold rush. Paid applications were the norm and prices were much higher than they are now. What options do you have as a developer or entrepreneur in today's App Store? Is it possible to make a living as an independent mobile developer? In this article, I list the options you have to make money from your applications in Apple's App Store.

The most common approach to make money on Apple's App Store used to be asking users for money. Really. It sounds too crazy to be true. Asking for money in exchange for a product is crazy. Joking aside, from a business perspective, this makes perfect sense and it comes with virtually no overhead from the developer's perspective.

To make money on the App Store, paid applications were the norm for the first few years. This period ended with what is now known as the race to the bottom, developers competing with each other by reducing the prices of their applications. The race to the bottom forced developers and businesses to find other ways to make money in the App Store.

While I have played with Samsara's pricing, it has always been paid and it has done pretty well compared to the majority of applications on the App Store. While paid applications still have a future, it is a less popular option these days.

Freemium

The freemium model predates the mobile era. Desktop and web applications used the freemium model long before the iPhone was introduced. The idea is simple. You offer a product for free, getting it in the hands of as many people as possible. To generate revenue, you try to convince a subset of your users to pay for a premium experience.

Offering the product for free has two important benefits:

  • your product spreads faster and more easily
  • you have a foothold in the customer's life

How you define a premium experience depends on the product. Evernote is a fine example of a company that has successfully applied the freemium model. Evernote has tens of millions of customers. A fraction of those customers pays for the company's premium services. The company would have had a harder time gaining market share if it had offered its suite of products paid up front or with a monthly subscription.

Freemium isn't without risk, though. For years, Rob Walling has been warning developers and entrepreneurs that freemium is difficult to pull off, especially for small, bootstrapped companies.

If your product has a backend, for example, then keep in mind that customers that don't pay for your product also make use of that backend. Hosting costs can skyrocket if your product gains traction. In that case, the conversion rate of free to paid customers will determine whether your business is viable in the long run.

Advertising

Another common approach is advertising. You offer your application for free and display ads to your customers. This business model only works if:

  • your application has lots and lots of users
  • your users frequently use your application

Games are a good fit for ads. Flappy Bird showed that developers could potentially make millions of dollars through advertising as long as your application has enough users that frequently play your game. Flappy Bird was incredibly addictive and that was the key to its success.

David Smith is a successful, independent developer and he recently published a very interesting article about how his business has evolved over the years. In the early days of the App Store, the majority of David's revenue came from paid applications. Nowadays, advertising brings in most of the revenue.

"The market has been pulling me along towards advertising based apps, and I’ve found that the less I fight back with anachronistic ideas about how software “should” be sold, the more sustainable a business I have." — David Smith

For Overcast, Marco Arment has experimented with several business models and Marco recently announced that Overcast now includes advertising. It is interesting to see this change and I am even more interested to hear about the results on Under the Radar.

In-App Purchases

Selling virtual items is a very common monetization strategy in mobile games. Most of the games that top the charts of the App Store make money through in-app purchases. It is a bit ironic to see a free game at the top of the Top Grossing chart, but that is the reality.

You can use in-app purchases for many purposes. Some applications are free to download and offer premium features through in-app purchases. This approach is very similar to the freemium model we discussed earlier. Other applications display advertising, offering the option to remove the advertising through an in-app purchase.

Subscriptions

Few mobile applications make money through subscriptions. If your application offers a service that continues to be of value to the customer, then offering a subscription makes sense.

Subscriptions are the holy grail in my opinion. They are great for building a sustainable business. Instead of starting from zero at the start of every month, you build up MRR or monthly recurring revenue. With a predictable, recurring revenue stream, building a business becomes a bit less risky.

If that is true, why aren't subscriptions more common in the App Store? Netflix offers subscriptions because its customers watch movies and shows on a daily or weekly basis. The company adds new movies and shows almost daily.

Most mobile applications don't offer their customers similar value. A camera application, for example, is not a good fit for a subscription model. Customers expect to buy a camera application once and use it as often as they want.

The landscape is changing, though. In June, Apple announced that auto-renewable subscriptions are now available for most applications in the App Store. In addition, after the first year, the revenue the developer receives from Apple increases from the usual 70% to 85%. It seems Apple is encouraging developers to experiment with new business models, including subscriptions.

Donations

A small group of applications generates revenue through donations. With the release of Overcast 2, Marco Arment made its popular podcast client free. He introduced a patronage model in Overcast 2 to generate revenue from his product. To the surprise of many skeptics, patronage seemed to work for Overcast. But Marco wasn't entirely happy with the low conversion rate and he recently started experimenting with advertising and auto-renewable subscriptions.

Marco's reasoning makes perfect sense. He wants to offer the best user experience to everyone using his podcast client. He doesn't want to offer an inferior user experience to people that don't pay for the premium features or, more importantly, to those that haven't decided yet whether Overcast is right for them. It makes sense, but I wonder how viable patronage or donations are for niche applications or applications with a smaller audience.

I have been contemplating this approach for quite some time and I may make the jump with the next major release of Samsara. A patronage model would be a good fit for Samsara, offering the best possible user experience to every user. From a developer's perspective, it is a compelling idea. Time will tell if it is also the best decision from a business perspective.

Finding the Right Business Model

Every application is different. Not every business model is a good fit for an application. If you are creating a camera application, then offering a subscription is probably not going to work. Using in-app purchases to unlock premium filters is a more viable business strategy.

It is worth spending time considering your options and experiment with different business models. It is fine and possible to make your application paid up front and switch to freemium down the road.

"It felt hopeless, but my initial thinking was restricted by trying to wedge traditional software business models into the realities of today’s App Store. It’s hard to make older revenue models work today because the market is completely different." — Marco Arment

Experimenting is fine, but make sure you don't burn the goodwill of your customers. If you switch from paid to freemium and force existing customers to unlock premium features they already paid for, then prepare yourself for a flood of angry customers.

What Have You Tried?

What strategies have you used to generate revenue from your applications? What worked and what didn't?