Mobile app monetization: Freemium is king, but in-app ads are growing fast

Freemium revenue for mobile apps was up 211 percent last year, according to a new report from mobile analytics company App Annie and IDC.

Clearly, free is working.

While a fairly strong majority — 83 percent of the top thousand apps on each of the iOS app store and Google Play — monetize via freemium, an even bigger proportion of revenue generated by those top 2,000 apps arrives via freemium: 92 percent.

We studied mobile game monetization.
Here’s what we learned.

Freemium monetization includes various forms of in-app purchases, such as purchasing virtual goods like upgrades or speed-ups, buying additional functionality like levels or content, buying more time to use the app, paying to remove ads, or a combination of them all. The New York Times app, for instance, allows you to view a certain number of articles but blocks the rest unless you subscribe.

The most common option according to the survey is offering additional functionality for a price, with over 50 percent of App Annie’s developer respondents indicating that this was their preferred method.

Naturally, the key to success as an app developer who uses the freemium model is getting as large a percentage of your free users buying something as possible. That’s a significant challenge, however, with fewer than five percent of developers reporting that more than 30 percent of their users had bought something in the app.

In fact, 80 percent of developers reported that less than five percent of their users made even one single in-app purchase.

The U.S. still leads in app revenue, with 1.7x growth last year, while Japan and South Korea are growing at higher multiples (2.2x and 2.3x, respectively) on smaller bases. India is seeing growth triple, albeit from a very low starting point, and should see app revenue jump by 870 percent from 2013 levels to 2017.

Interestingly, less than half of the developers surveyed said that they used in-app advertising, as 58 percent said that they did not use ads in their apps. Once again, there’s a steep curve to actually start making any money, with ad revenue from all of a developer’s apps only hitting $10,000 a month in the 75th to 90th percentile.

Very rarely, breakout apps can make over $100,000 per month, App Annie said, which of course is what Flappy Bird experienced.

Despite the lower numbers of developers choosing ad-based revenue models currently, the study says that mobile in-app ad revenue will surpass PC display ad revenue by 2017. IDC numbers cited in the report suggest that the proportion of ad revenue to total app revenue will grow in every major mobile market by that point, with U.S. edging up to around the 60 percent level; Germany, the UK, France, and Brazil growing significantly; and only South Korea and Japan remaining below the 50 percent mark.

App Annie and IDC surveyed more than 2,000 game developers for the survey.