forbes.com
It is a question that has been plaguing the industry for years – What is the best business model for monetization: In-App purchasing or In-App advertising? Could the two coexist to maximize revenues?
In-App Advertising
Let’s first have a look at In-App advertising. In its current form, the cost-barrier for purchasing the app is removed and customers get free downloads. The goal is to accumulate a sizeable user base and gather information on the users interacting with the app (e.g., Facebook). The aggregated data is sorted and used to help drive sales for the advertisers.
This model is far from new; it started roughly 20 years ago with banner ads. Since then, In-App advertising has come a long way in targeting and engaging customers. Let’s have a quick look at the evolution of In-App ads.
As mentioned before, it all started with banner ads. In the early days, online publishers wanted a consistent stream of ad revenues. Banner ads, with their standardized size, did just that. However, that uniformity also became their downfall. At the top of their popularity, Internet users were exposed to more than 1,500 ads a month resulting in “banner blindness”. Furthermore, many banner ads had a lot of accidental clicks, making them ineffective.
Publishers tried unsuccessfully to fix the “banner blindness” by making their banners more unique (e.g., by using animation, expanded sizes, pop-ups and pop-unders). As far as the format goes, Adobe’s Flash banners are quickly becoming a thing of the past, being replaced with HTML5 which is better suited for mobile devices in the digital era.
With the move to mobile advertising, banners or display ads are still around, since they are cost-effective and easy to create for developers. However, apart from being intrusive, they also have notoriously low engagement rates, estimated at 0.1% CTR.
A better option is the use of interstitials. These grown-up versions of the banner ads consist of full-screen ads that block out the app’s other content. They often freeze the screen for a few seconds until the “x” out button is pressed. They are effective when appearing during the natural breaks in mobile app, at launch, or between game levels. Interstitials are therefore visible but non-intrusive, since they don’t impact the user experience. Ideally, interstitial ads should be at the beginning and the end of the game for maximum impact. Interstitials are a favorite ad format among game developers.
The popularity of video ads is rapidly rising. According to an IAB study, mobile video ad revenue in the U.S. is forecasted to surpass $4.4 billion in 2018. Unsurprisingly, the rate of engagement with video ads is high. They are also a great way to give users an overview of what to expect once they install a particular app.
Video ads often occur during natural pauses in apps, such as between levels in a mobile game. The ads are usually between 15 and 30 seconds long for maximum impact. With the rise of mobile advertising, in-app videos are also used as incentives, introducing the concept of a rewarded video ad format, as opposed to the incentivized installs ad format of the past. Once users watch the short clips to the end, they can claim perks or get free currency or items within the game as incentives. Many brands are also creating specific video ads for native mobile environments such as Facebook and Instagram feeds.
Native ads
Native advertising is digital content that blends seamlessly into an app or website. Native ads are popular in many mainstream publishing apps since they do not disrupt user experience. As a format, it can be highly effective. An additional benefit for publishers is, that they are not required to ensure that the ad content is compatible with its environment.
Paid App and In-App Purchase
The paid app business model entails that users must first purchase the app from the app store, which means that the app developer makes money upfront with each new user. To be successful, the developer needs to showcase the perceived value of the app with an app listing that includes screenshots, five star reviews, etc. to stand out among other (free) apps.
In-app purchases are exactly what they sound like, a strategy to sell physical or virtual goods (e.g., in-game perks or currency) within the app. The app developer retains the profits.
Freemium (Gated Features)
Similar to in-app advertising, under the freemium model the basic functionality is offered for free, but certain features are gated and cost money to be unlocked. The goal is to accumulate and engage app users and have them pay for additional in-app tools. An example of a brand that uses the Freemium model is Angry Birds. Under the freemium model, the initial price barrier for users to join is eliminated.
Paywalls (Subscriptions)
The paywall app business model is similar to the freemium model except that the content is gated (and not the features). Paywalls allow the app users to view a predetermined amount of content for free and then prompts them to sign up for a paid subscription to get more (e.g., the rest of an article or more articles). This model is best suited for services such as online newspapers and companies such as Netflix. A paywall enables brands to earn revenue on a recurring basis.
Sponsorship
The latest entry into the mobile ad world is sponsorship, which entails that an app developer partners with advertisers. Those advertisers (e.g., Runkeeper) reward the app users for completing certain in-app actions. In this model, brands and agencies pay to be part of an incentive system. The app developer makes money by taking a share of the revenue from redeemed rewards. The goal is to incorporate ads into the app that actually enhances the app’s ability to engage users.
Conclusion
So what is the best strategy? In-App purchasing or In-App advertising? Like ebony and ivory, they can also live together in perfect harmony. As the app landscape becomes more sophisticated, blended models are the way to go. To illustrate, an app developer can start by offering the app for free and with ads. In-app purchase as part of the freemium model has become a firm favorite for many mobile apps. It is easier to engage new users by offering a free version of the app up-front and then charge for value added features or content through an in-app purchase.
The secret sauce for monetization success of an app is analyzing, understanding and segmenting user behavior, and running experiments and tests. By including a mix of e.g., advertisements, gated features, and virtual goods that can be purchased in the app, the reaction and engagement of the users can be measured for follow up. This will enable app developers to formulate and execute the optimal approach for each and every one of their app users for maximum monetization.
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