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Evolution of the app business model

Posted by Chad O'Connor  August 28, 2013 11:00 AM

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Apple launched the modern smartphone era during summer 2008, and in a little less than five years, the technology giant reached 50-billion App Store downloads. During this time, apps have evolved in many ways, including how they are monetized. From the initial focus on encouraging (paid) downloads to the current focus on monetizing in-app usage, mobile app publishers are beginning to think about what’s next for monetizing the app. In particular, they’re thinking about how they can leverage insights and data to maximize success.

The First Age of the App Era: Maximizing Downloads
The modern App Store was a great equalizer, enabling developers working out of their garages to reach millions of well-heeled customers. Companies such as Rovio, RedLaser, and Doodle Jump emerged each with the simple business model of selling high quality apps for just $.99. The business model worked, with industry data confirming that paid downloads represented a large majority of app revenue from 2008 through mid 2011.

Established companies and brands recognized the seismic shifts taking place in the industry and, subsequently, entered the market. It became increasingly difficult for smaller developers (and even many large ones) to market their apps, break into the Top 100 and gain the recognition that comes from such a vaunted position.

This competition drove more and more apps to be downloaded for free, with the focus shifting to engaging and retaining users and generating revenue through other channels. This change ushered in a second era of apps that shifted away from a focus on downloads to a focus on engaging and retaining users and monetizing usage.

The Second Age of the App Era: Monetizing Usage
With the passing of paid downloads as a primary business model, developers started learning to employ tools such as segmentation, retention and funnel analysis to engage and retain users. And they did, abandonment rates of apps dropped from 26 percent in Q1 2011 to 21 percent by Q2 2012. Developers had figured out how to attract large audiences and how to retain and engage them.

App developers then worked to monetize app usage through advertising and in-app purchasing. The in-app purchasing model offered by Apple was initially viewed skeptically – it complicated the existing, simple low-price, high-volume business model and still took a 30-percent revenue share.

While slow to gain momentum, in-app purchases eventually turned the app business model on its head. According to Vision Mobile, “In-app purchases and Freemium are on the rise, having grown by 50 percent compared to [Vision Mobile’s] 2012 survey and are now used by more than a quarter of the developers in [Vision Mobile’s] survey. In-app purchase is now the second most popular revenue model on iOS, with 37 percent of developers using it, falling slightly behind Pay per download.”

Increasingly, the most successful app publishers are employing business models based on in-app purchases, subscription and commerce within the app. However, this shift has also highlighted challenges, in particular, how little app publishers actually knew about their customers. For example, who are my most valuable customers and where are they coming from? How many days, weeks or months am I keeping them engaged? Which features are increasing engagement and which are turning users away?

The Dawn of a New Era: Increasingly Sophisticated Marketing
In the traditional online world, companies aggressively adopt marketing automation, email marketing and customer relationship management solutions to boost effectiveness and performance. Online interactive marketing tools from ExactTarget, Marketo and others are used cost-effectively to nurture engagement and identify customers that might be ready to make a purchase, subscribe or engage more deeply. Smart businesses also analyze and track customer acquisition costs (CAC) and customer lifetime value (CLV) to improve decision-making.

The next evolution for app publishers is to invest in marketing or get left behind. Success in the app world will require app publishers to go beyond just creating the sexiest apps and instead to effectively leverage customer data and multiple channels such as email, push alerts and in-app messages to reach and engage users.

As the new era of mobile apps dawns, the winners will be those companies that not only build a desirable app, but who best understand their users and figure out how to maintain a profitable long-term relationship with them.

Raj Aggarwal is CEO of Localytics, a Boston-based mobile app analytics and marketing company.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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