How Do Free Apps Make Money? [Methods and Tips]

An overwhelming amount of the apps on Google Play and App Store are free, but neither Google nor Apple pays the creators of these apps for downloads.

That begs the question — how do free apps make money? As you may have assumed, mainly through advertisements, however, there are many other free app monetization strategies, and we explore all of them below.

Usage of Android and iOS Apps

Whether free or paid, mobile apps are an indispensable part of our daily lives. According to app usage statistics, people downloaded 218 billion apps from Google Play and the App Store in 2020 alone.

Unsurprisingly, free apps far outnumber paid apps on both of these platforms. The latest numbers show that around 97% of all apps on the Google Play Store and around 93.9% of all apps on the App Store can be downloaded free of charge.

Needless to say, users are also much more drawn to free apps. Namely, research conducted by Google and Ipsos showed that one in two smartphone users in the US has never even downloaded a paid app.

How Do Free Apps Make Money?

Freemium apps don’t just dominate over paid apps in terms of downloads but also profit numbers. In fact, according to app revenue statistics, free apps account for roughly 98% of Google Play’s revenue.

But where is that revenue coming from? Advertising, in-app purchases, affiliate marketing, and sponsorships are some of the most common ways to monetize free apps.

So let’s take a closer look at some of the digital marketing strategies of how free apps make money.

1. Advertising

Although often frowned upon by users, mobile ads are the primary source of revenue for free apps. In fact, studies show that seven out of ten free apps use ads to generate revenue.

The advertising model is the most effective marketing campaign for businesses looking to make a quick income. However, this strategy works best when your app already has a large user base.

With that in mind, here are the main ways that an ad can be displayed within a mobile app:

• Native Ads

Native ads differ from standard ads in that they integrate seamlessly into an app and match its look and style. They most frequently manifest as advertisements for a brand or a mobile application. Native ads are considered the least intrusive, as they fit in with the surrounding content. Therefore, this advertising method is getting more popular among app developers.

• Video Ads

Video ads are short promotional clips that play automatically during natural pauses of app usage. They typically last 10–30 seconds. A good example of video ads is the rewarded video ads that are frequently featured in games. These videos give players certain perks, such as extra points or moves, after being played.

• Banner Ads

Banner ads are rectangular-shaped ad units anchored at the top or bottom of the mobile screen. They can also be in line with the content as you scroll. Banners stay on the screen for the entirety of the user session, but they are not considered too intrusive as they typically occupy a small portion of the screen.

Despite that, banner ads aren’t considered particularly effective, as they have a relatively low engagement rate and depend on brand recognition.

• Interstitial Ads

Interstitial Ads are full-screen pop-ups that appear at specific moments within an app, such as when you open or close the app or between game levels. When an interstitial ad appears, the user can either close it or tap on it to learn more about the advertised product.

That is one of the most popular and effective monetization strategies among developers. Still, they can also be counter-productive and create a disdain for the advertised product if they appear too often.

2. Selling Merchandise

Highly popular apps monetize their popularity by selling merchandise — branded items like T-shirts, accessories, phone cases, stickers, and so on. This method is best suited for top-rated apps with a dedicated fan base willing to pay for their merch.

If you want to sell branded merchandise through your free app, you can use Amazon’s Merch platform. Merch allows users to create and sell their branded items, while Amazon takes care of all the logistics, such as production and shipping.

3. In-App Purchases

Although they can be downloaded free of charge, almost all free apps include in-app purchases — extra content you buy inside an app to gain access to certain features.

In app-purchases are especially common in live service games, where players frequently buy power-ups to upgrade their abilities or exchange money for virtual currencies. Think of games like Roblox or Pokémon Go, for example.

There are two categories of in-game purchases — consumable and non-consumable items.

Consumable Items

Consumable items give users one-time benefits. Items purchased in free games usually belong to this category, such as buying Robux, the virtual currency in Roblox. Another good example is the ability to purchase a Super Like in the dating app Tinder, which allows users to catch another user’s attention.

Non-consumable Items

A non-consumable item does not disappear after you’ve used it once. Therefore, when you buy a non-consumable item in-app, you can enjoy its benefits permanently.

For instance, removing ads from apps or extending an app’s functionality with additional features are considered non-consumable items.

Although very effective for making a profit, the in-app purchases strategy also has its drawbacks:

• It requires you to obtain special certifications to be able to accept payments online.
• It often involves extra coding effort during app development.
• You need to have a large user base to make any substantial profit.

4. Subscription Model

The subscription model is another form of in-app purchases. It is a popular way to monetize a free app, as it gives the app owner a regular revenue stream on a weekly, monthly, or annual basis.

This app monetization method is most frequently used by video and audio streaming platforms, such as Hulu, Amazon Prime Video, and Apple Music.

It works like this:

• After downloading an app for free, users have a limited period of time, typically 30 days, to use it for free and see if it fits their needs.
• After the trial period, users must buy a weekly, monthly, or annual plan to keep using the service.

That is a win-win scenario for both sides, as it allows users to spread the cost of their purchase while giving app owners a regular source of income.

However, monetizing your free app through in-app subscriptions can be tricky, as it requires you to offer consistently good content to keep users engaged.

5. Freemium Upsell

The freemium upsell strategy is similar to the subscription model with one key difference — the user can use the app indefinitely, but only with the most basic features. To unlock premium features, users must pay a monthly or annual fee.

Cloud storage services like Google Drive and Dropbox typically employ the freemium upsell model, where you get a limited amount of storage space for free but need to subscribe to get more storage and features.

6. Sponsorship

Getting sponsorship is another innovative way to bring more revenue to your free app, although it is less common. It involves the app owner finding a sponsor with the same target audience to corporate with. The app could display the sponsor’s brand or advertise its product in return for monetary compensation.

Apps with a specific market niche can benefit the most from this method. The two main sponsorship deals are:

• Split app revenue in half
• Set a monthly sponsorship fee

The main disadvantage of the sponsorship model is that the process of finding a sponsor can be really challenging.

7. Referral or Affiliate Marketing

Affiliate marketing is an app monetization strategy where app publishers promote third-party products or services on their apps. Affiliate marketing also includes apps selling said products and services in their online stores.

A good example of an affiliate program that is frequently used for app monetization is Amazon Associates. You advertise Amazon products on your app by sharing links to them, and, in exchange, any time a user clicks the link and buys the product, you receive a reward.

Here are the most popular payment models in affiliate marketing:

• CPM (cost-per-mile) — you generate revenue based on the number of impressions of the ad, and you usually get paid for every thousandth impression.
• CPC (cost-per-click) — you generate revenue based on the number of clicks an ad receives.
• CPV (cost-per-view) — you generate revenue based on how many times app users have viewed a video ad.
• CPI (cost-per-install) — you generate revenue based on how many times a promoted ad has been installed.

8. Collecting and Selling Data

Some free apps make money by collecting and selling user behavioral data to outside companies for research purposes. Not only does this method generate revenue for free apps, but it also improves user experience as it helps apps tailor their services to their users. In addition, most of the time, users can choose for themselves the amount and type of data they are willing to share.

9. Crowdfunding

Crowdfunding is a relatively new app monetization strategy. With it, app developers share their ideas on platforms like Patreon, Kickstarter, Fundable, and Crowd Supply, aiming to get donations for app development and promotion.

Crowdfunding can be an effective app monetization strategy, but it can be difficult for your application to get noticed among the thousands of applicants also looking to get crowdfunded.

Tips for Choosing the Best App Monetization Methods

While advertising is the most widely used app monetization strategy, it is only suitable for some. Sometimes, a less popular monetization method or a combination of different models can prove more profitable for your app.

Here are some tips on how to find the best app monetization method for your app.

Consider Your App Purpose

Before choosing an app monetization strategy, think about what you are trying to achieve. Is it brand recognition? As one would expect, in that case, the subscription model would not be the best idea, as people will rarely pay for a service they know nothing about. In this case, advertising or crowdfunding (or both) is your best approach.

However, if you are using your app to complement an existing brand or business with an already established user base, you should consider the freemium or subscription models.

Identify Your Target Audience

Knowing your target audience is key to finding the best app monetization method for your app. Who are they? What is their age range? Are they willing to pay for your service? These are all important questions that will help you identify the best model for your app.

For instance, rewarded video ads are proven to work best in free-to-play mobile games but will hardly have the same effect when used in productivity apps targeted at professionals.

Analyze the Competition

Analyzing the monetization strategies used by competition apps is another important factor to consider when deciding how to make money on free apps. That will help you better understand which monetization tactics are currently popular on the market but also which ones are not too effective at capturing users’ attention.

Create a Unique App Idea

Consider this: on average, 3739 new Android apps are launched daily on the Play Store. In a market as crowded as that, having a unique app idea that stands out from the rest can be critical to your success. Copying other popular apps or games can negatively affect your app’s performance, regardless of which app monetization strategy you choose.

Bottom Line

So, how do free apps make money?

After looking at the most popular app monetization strategies, it is clear that there is no unified way that free apps earn money. The truth is, every app is different, so make sure you thoroughly explore every monetization strategy there is so you can choose the one that works best for you and your app.