Paid vs Free: What’s Best for Your Mobile App Idea

Fact: making your dream app costs money.

Another fact: over 90% of mobile apps cost exactly zero dollars for users to download.

So, if most apps are free, where did 2015’s approximately 60 billion dollars in mobile app developer revenue come from? And more importantly, what price is best for your app: 99 cents? 4.99? Free?

Given all the money on the table, It’s no surprise that monetization is a top issue for iPhone app developers and startups of all sizes. Deciding how to price and monetize your app is among the more important decisions you’ll make as an entrepreneur. Unfortunately, it’s also one of the most confusing topics in mobile development.

In this post we’ll be deciphering the terminology of paid vs. free app pricing systems to give you a clear picture of which price tags are dominating the mobile economy today, and how to position your app to take advantage of the trends.

Let’s get started.

The categories of app monetization

Mobile app developers generally launch with one of these four monetization categories:

• Free: no upfront cost.
• Paid: upfront cost.
• Freemium: no upfront cost, in-app purchases and membership options.
• Paymium: upfront cost, in-app purchases and membership options.

Free apps: free doesn’t mean unprofitable

Free mobile app developers rule the marketplace; or at least, it appears that way when you look at the top of the charts. Big names in tech like Twitter, Instagram, Tinder, and the like all have a zero-dollar price tag in common.

Free apps have one big thing going for them: a low barrier to user acquisition. In a crowded app marketplace where users are frequently presented with ten options that do more or less the same thing, and app that’s free often wins out — even if the 99 cent alternative is far more polished and useful. While frustrating for mobile app development companies, the industry has developed a number of ways to work around it.

The danger with free apps comes into the picture when it’s necessary to monetize. How can you monetize an existing free app without disrupting UI and driving user churn?

Monetization strategies for free apps

The lion’s share of free app revenue comes from the regular tried-and-true strategies: in-app purchases, premium membership fees, and advertising.

While some NYC mobile app developers find alternative ways to monetize while keeping their app truly “free” (for example, language-learning app Duolingo selling user-generated translations behind the scenes), the statistics don’t lie: almost 80 percent of all revenue from the Apple App Store comes from monthly membership schemes and in-app purchases. This isn’t anything new: the revenue share of “freemium” apps has been creeping up for years.

The other big option NYC mobile app developers have for monetizing free apps is advertising. Unfortunately, implementing in-app advertising is much easier said than done. Even subtle ad content tends to drive user churn, which is already high in free apps. (In fact, there are now ad-blocking apps for native content available “over the counter” in the Apple App Store and Google Play, signaling that advertising may become a less viable revenue source in years to come.)

Paid apps: why, when, and where to charge download fees

Paid apps are the underdog in the modern app environment. There are fewer of them every year, and the risk of failure is all the higher with the download fee curbing user acquisition. So why are mobile app developers still putting out paid apps, and when is it appropriate to do so?

The big trade-off to worry about with paid apps is that having a price tag drags download numbers, especially if you’re competing with similar service — which, honestly, you almost certainly are. Therefore, paid apps tend to do well when they’re tapping into a pre-existing audience, or selling a niche service to a tech-savvy demographic that values clean UI. Medical app developers, for example, frequently launch paid apps and do quite well. Around half of the top-rated medical apps are free. The same ratio skew is true for productivity, business and lifestyle apps, where the user demographic is likely to include tech-savvy users with disposable income.

This is a huge jump from categories like social media (almost always 100% free) and gaming apps (less than seven percent of the top-grossing apps on google play are paid).

As a side note, the huge effort it takes to build an audience for a paid app does come with some side benefits: statistically, users review paid mobile app developers more favorably, likely because of the “premium” psychology associated with purchased products.

Okay, that’s insightful… but what do you recommend for my app?

Over 95 percent of the apps we’ve put out at Dogtown Media launch as completely free apps, with freemium apps being the second biggest category. We almost always encourage our clients to consider going free — at least for the first stage of their product — for one simple reason: apps can’t grow without a userbase, and earning loyal users becomes much harder when there’s a price tag.

Especially for relatively unknown startups without pre-existing audiences, going paid usually doesn’t pay.

Unless there’s a compelling reason to charge upfront, going free offers the most benefits for the most mobile app developers.

Users are worth their weight in gold

In the short term, offering an app for free can look unsustainable; especially if there isn’t a premium membership option, advertising, or other monetization efforts involved in the first stage.

The reason so many startups launch free apps is simple economics: 500,000 users willing to pay a penny in the long run are worth much more than 100 users willing to pay a dollar in the short term.

Everyone remembers that scene in the Facebook movie where Zuckerburg and his co-founder go head to head over making advertising deals. Which of them was correct in the end? You guessed it — Zuckerburg’s vision for a no-cost ad-free UI laid the foundations for what would become a multi-billion dollar enterprise.

Now, while Facebook isn’t strictly native, the lessons to be learned from their model are still on-point for mobile app developers, and in part responsible for the venture capital model prevalent in the mobile tech industry today.

The strategy: build a strong user base with venture capital, and only monetize once you’ve gained traction with your audience. This is the strategy that kept Facebook from becoming another MySpace. Free apps are all about playing the long game, and almost all the top-rated app developers apply the same strategy.

PS: Don’t forget about “freemium”: While each category has pros and cons, the category that has been seeing the most growth for small-to-medium sized mobile app developers the past three years is the “freemium” model.

Freemium pricing structures are particularly complicated and come in several flavors. (We’ll update this post with a link to our analysis of freemium models in the next couple weeks.)