iPhone App Business Models 101: Paid Downloads, Advertising and In-app Purchases

We here at TriplePoint are frequently asked by developers, “What is the best way to monetize my iPhone app?” I thought it would be helpful to create a high level overview of some of the different business models that developers are utilizing to make money from their iPhone or iPod Touch applications and games. Below you’ll find an overview of several of the most popular business models, including paid downloads, mobile advertising and in-app purchases (otherwise known as microtransactions). Additionally, I’ve included an overview of the correlation between units sold and ranking in the App Store – essentially, a brief synopsis of what it takes to be in the Top 100 Paid Apps list on the App Store.

Option 1: Paid Downloads

The most popular way to monetize your iPhone application is through selling paid downloads of it at retail in the App Store. While Apple reported that the most common price point for iPhone apps is $0.99, according to an October 2009 report from analytics firm Distimo, the current average price of an application in the App Store is $3.42. In this free report, Distimo also provides a list of the top 15 highest ranked paid applications and their price points, which ranged from $0.99 up to $2.99. Although choosing a price point based on popularity and what appears to be working for the top 15 paid apps is certainly common, developers are also taking into consideration the value that their app provides and what it is potentially worth to customers. This perceived value may be based on uniqueness of functionality, depth of gameplay, quality of graphics, and other criteria.

Many developers are also testing their app’s price point post launch and finding that offering discounts or special offers can provide a boost in sales numbers. Additionally, some developers are offering “light” versions of their iPhone game for free and leveraging the user base to drive sales of the paid full version of the game. The flexibility to alter the price point is certainly helpful as developers test the waters with their first application.

Option 2: Mobile Advertising

As mentioned above, $0.99 is the most common price point and FREE is reportedly the second most popular price point. Currently, there are over 100,000 apps available in the App Store and thousands of them are free. Developers that offer their iPhone game or application for free may consider monetizing through mobile advertising. Leading mobile advertising networks include AdFonic, AdMob (recently acquired by Google), InMobi, Millennial Media and Quattro Wireless. Mobile ad networks make it simple for developers to begin serving advertisements directly within their iPhone application in order to start generating revenue, and advertisers are eager to reach the iPhone and iPod Touch using population, so the market is growing. Magna projects that mobile advertising revenues will grow 36% in 2009, in part, due to growth fueled by iPhones.

While some developers rely solely on generating revenue from free applications through mobile advertisements, others are testing multiple business models through their iPhone games and applications and seeing success. Backflip Studios recently reported that revenue generated by advertising sales on free applications has supplemented their income from paid downloads, and is currently driving 50% of their overall monthly revenues. As demonstrated in this instance, advertising revenue can be more than just incremental income, and can be a real substantial revenue stream for developers.

Option 3: In-app Purchases

For iPhone games or applications that lend themselves well to selling virtual goods and downloadable content (such as additional levels and expansion packs), the microtransaction-based business model is a good fit. Ever since Apple launched the iPhone OS 3.0 in June 2009, which offers the microtransaction system, developers have been exploring ways to leverage this platform for in-app purchases. Although, since this is a relatively new business model for consumers to adopt, some developers are erring on the side of caution about adding micro payments to their apps while others like Bolt Creative are embracing it. In October, Bolt Creative launched Episode 26: Good Will Haunting from their hit iPhone title Pocket God and included in-app purchases via downloadable content. The company reported positive revenue results as well as positive feedback from the community, and plans to continue including in-app purchases plans to continue including in-app purchases as a part of their applications going forward.

Additionally, iPhone applications that sell real-world goods are also a natural fit for the microtransaction-based business model as demonstrated by JamBase, an iPhone and iPod touch application that enables consumers to purchase local concert tickets on the go from their mobile phone.

As paying for incremental content and virtual goods, or even making mobile purchases of real-world items via microtransactions become more familiar with consumers, it becomes a more viable business model for developers to adopt.

What does the Top 100 Paid Apps list mean?

Constantly a moving target, the iPhone apps featured in the Top 100 Paid Apps list correlates to the total number of unit sales per day. At this time, to break into the top 100, an iPhone application is typically selling over 400 per day, and apps at the top of the charts are estimably selling over 10,000 units per day.

Earlier this year, Bolt Creative released a chart that shows Pocket God’s weekly ranking in the App Store along with its daily units sold. As illustrated in the graph, the game entered the top 100 list when the game broke about 500 units sold per day, and reached the number one rank in the list while selling over 10,000 units per day.

Final Thoughts

In addition to the abovementioned business models to monetize iPhone games and applications, developers can also monetize through other means such as lead generation, subscriptions, data sales, and more. The possibilities are practically limitless. While there are many different ways to monetize mobile games or applications and they’ve demonstrated success for many developers, in the end, it’s important to select a business model that integrates naturally with the functionality of the game or application and that suits the target audience.