How to make profit off an application

Most entrepreneurs and application developers who turn to us for a business plan are rushed to present the market with their product before is has a set business model.

They have great enthusiasm and a strong will to enter the market with an innovative application that they have developed, and wish to examine exactly how the market reacts to it and continue developing it accordingly. This decision, taken by entrepreneurs and developers, is well described in a study that was conducted by Google, which found that out of 2,000-3,000 application developers in Israel, approximately 62% are professional developers, 38% have an entrepreneur background, 30% are from the business development field, 25% are from the marketing field, 12% are from the sales field, 7% are from the creative field and 12% are from various other fields. The study shows that there is a relatively small number of entrepreneurs that have a background in business, marketing and sales, this might be the reason why many of them disregard the importance of a set business model and rush to present the market with their application. Creating a business model, as part of a business plan, is the first and basic step after determining the idea of the venture and determining the strategic model. Unfortunately, skipping and disregarding this step, believing that a business model will simply “appear” in time, is a common mistake.

When creating an optimal business model for an application, as part of preparing a professional business plan, you must be familiar with the various relevant statistics and study the parameters involved which could possibly affect the application user when deciding upon whether or not to purchase the offered service. We have summarized the following crucial information regarding the three most popular business models:

Approximately 44% of the applications that have been downloaded over half a million of times, base their income on advertisements – this is a business model that depends on income from advertisements, as its main income source. In addition, statistics show that approximately 50% of banner clicking in applications by users is a result of error. Our recommendation is that during the writing process of the desired business plan, it is best to avoid creating a business model that is based on advertisements alone. The best option would be to combine this source of income with additional sources, such as creating a business model that includes purchases of memberships/transaction fees between both sides or promoting a business in search results, if the application serves as a business/purchase platform and promotes a business and/or various professionals, etc. The goal is to operate an advertising model alongside the additional, mentioned models (or one of them). This way, its relative part of the total income will be smaller.

Approximately 33% of the applications that have been downloaded over a half a million of times, operate under a Fremium model, which is a model that combines Free+ and Premium. This business model’s idea is to allow the user the opportunity to experience the application for no charge. During the users’ experience with the application, parts of its significant features will be unavailable to them. We recommend not requiring payment too soon, during the development process of the application in order to prevent potential users of being discouraged by it and objecting to it, but rather require a purchase at an appropriate time when the users understand why exactly they are being asked to pay and will choose to do so. For example, if it is a game application in which the user is required to buy “special powers” or pay for a game that is not limited in its levels, we recommend to allow the user to experience several free “open” games without any limitations and enjoy the advantages of those “special powers” or begin playing exciting levels that will be offered later on. Using “special powers” and experiencing advanced levels in a game will cause the users to purchase and continue playing, lowering their natural resistance to the payment issue, because they had the option to choose whether or not to pay after being exposed to the application’s special features.

Approximately 10% of applications that have been downloaded less than half a million of times are membership based and are dependent on temporary membership sales (monthly, six month, yearly membership etc) or memberships that are limited on the number of contents/games/services etc that they offer. We recommend that membership based applications usually require a sign up process. The number of users that quit a sign up process is high, between 50%-70%, in most applications! Try to require a minimum number of identification details, this will significantly decrease the number of users who quit the process during the process of signing up to your application (to approximately 15%). A requirement for a Facebook sign up (“Facebook Connect”), will probably cause a high quitting rate, such as a requirement for a date of birth a, address or picture upload. Obviously, the more information you have regarding your users will help you in the future, but we wish to emphasize that a great deal of details regarding only a small number of users will not assist you much, while partial information regarding a large number of users will most likely assist you more in the future.

There are additional business models other than the three mentioned above, such as: Micropayment – a purchase of virtual goods within an application, purchase of an application download, selling actual products, etc. During the writing process of the business plan, make sure to form an appropriate business model that will suit your service’s characteristics. A relevant business model for the service will be more successful than a general, unspecific one.

* The data was taken from a TheMarker article and is based on studies conducted by Google Israel.