I have a potentially controversial viewpoint to share: Most apps and the companies behind them stink. I don’t just mean the functionality or feature set of the apps themselves (although many are lackluster in that department, too). I mean that they’re terrible as products on which to start up and build a business. There are a number of reasons for this.
Making money from a mobile app is not as straightforward as it might seem. Right away, you have to decide which of several revenue models to choose, and be aware of all the implications of each option. You’ll have several options, each with its positives and problems.
Paid app or paid upgrades/subscriptions within the app: You charge the customer directly for the app. This is the most straightforward option. You can have the user pay upfront when they download the app, or you can select a “freemium” model wherein you either give a free trial of all the features for a limited time then ask that they pay to continue using it after that time, or you can have upgrades that they can purchase within the app. There’s also the subscription route, where the user pays a certain amount for full access on a monthly or yearly basis.
If you go the freemium route over the pay-when-they-download route, you must be really sure about the conversion rate you need to reach in order to make the business work. Be prepared for the fact that conversion rates are often lower than expected. In other words, many users will do without the premium features or extras that an upgrade gives them. The average “install-to-buyer” conversion rate for mobile apps is around just 2%. That means you need to weigh how much it costs you to acquire a single download, your CLTV, how many people will realistically convert from downloader to buyer, and balance all that against how you’re pricing your app.
Say you’re charging $10 for the upgraded version of the app, and your cost of acquiring a download is $1. If your conversion rate is 5% (which is very high) you’re spending $100 to make $50. That’s bad business! In that scenario, you either have to price your app higher or you have to find a way to make acquisition costs much lower. Or both.
Costs aside, also keep in mind that your free customers are still your customers, and can still be demanding of your time and development resources. They’ll want features, updates, improvements, and they’ll judge you harshly if you don’t deliver. Given that the majority will never actually pay you, all you’ll have to show for it is a great rank in the Play Store or App Store.
Your other revenue model option is paid ads or data collection/sharing with partnered companies. The app itself is free, but the user is subjected to ads in order to use it. Many apps have a hybrid model, where you can have an ad-free experience if you pay. This may seem like a safer bet, especially with a very large user base. Advertisers can choose to pay you per click (CPC), per specific action taken (CPA), or for every 1000 impressions of their ad in your app (CPM). If you have millions of daily active users and can count on showing certain ads hundreds of thousands of times per day, you may end up earning hundreds or thousands of dollars a day from the app. Sounds easy enough, right? All you have to do is build a great, sticky app that millions of people want to download and use, and within which they’ll click or at least watch ads.
On the surface it is simple, but it leads me to the second big challenge app companies face…
Your users aren’t your actual customers.
A few months ago, when Facebook was under fire for a variety of data and privacy related scandals (Cambridge Analytica and beyond), you may have heard a lot of people sharing the notion that “if you’re not paying for the product, you’re the product”. This is the situation you’d be in with the advertising or data sharing monetization routes. Your advertisers or “partners” are your true customers, not your users.
This can be a difficult mental hurdle for a lot of app company founders and teams. They want to make great apps that are widely adopted and loved. They don’t realize that getting a ton of users is just a step along the way, not the end goal.
At the same time, consumers are getting more wary of apps (and websites) that share their data, and may be turned off by both ads and the practices you’d need to undertake to keep the businesses that power your apps in the fold.
Another potential risk of the advertising or data partner revenue model is app abandonment. This can happen if you don’t keep the app fresh, a competitor comes into your space with a better offering, or users just stop engaging with your app for a host of other reasons (more on this in a bit). The number of users you have is just as important, sometimes even more so, if you’re running a sponsored app than if you’re running a freemium app.
That said, app companies that do wrap their heads around and learn to navigate the user-customer dynamic with sponsored apps can do well. Those will be app companies that pair well with advertisers that inherently attract an overlapping user base. A car buying app pairs well with ads for car detailing and accessories, but less well with ads for a commuter bike share.
Low barriers to entry + saturation = fierce competition
The app market is overcrowded. In 2016, there were 25+ billion iOS app downloads, across 2.2 million apps on Apple’s App Store, and 90 billion Android app downloads across the 3 million apps on Google Play.
The staggering number of apps already in existence is in part because the barriers to entry are fairly low. If you can code, have an idea, and can raise a bit of capital, building and releasing an app is doable. There’s no production/manufacturing to set up and the overhead can be quite low. This sounds like a great thing at first, but it creates an environment in which it’s very hard to differentiate yourself from your competitors in order to effectively market your offering.
Keep in mind that just because millions of apps are getting billions of downloads doesn’t mean the love is spread evenly, or even close to it. A few dozen apps from a handful of top app publishers account for the largest chunk of downloads. Plus, downloads don’t necessarily translate to daily usage.
On average, people only use about 9 apps daily. Many of the most-used apps are in the social networking space, which already includes 4 powerhouses — Facebook, Facebook Messenger, Snapchat, and Instagram (which is owned by Facebook) — and probably doesn’t have much room for new players. Beyond that, 3 of the other top apps are utilities from Google: Google Search, Google Maps, and Gmail. Google also owns YouTube, another top-downloaded and used app. So Facebook and Google, which already have billions in revenue, a solid Web presence, and a huge chunk of desktop usage, own 7 of the top 10 mobile apps.
Let’s say you’re not aiming for the very top. Your chances are surely fine, right? Well, not exactly. In 2017, smartphone users downloaded an average of 0-1 new apps per month. That means not only is the market at the top hard to penetrate, but even getting the app in people’s hands to begin with is a hurdle. Many people feel they already have the apps they need, and may be experiencing app overload and a strong desire to avoid downloading anything new. There’s evidence that about 60% of the apps available in the Google Play Store and Apple App Store receive no downloads at all.
Low value and longevity of app companies
Even if your app is lucky enough to make it onto a lot of smartphones, the life expectancy of it may not be very long.
Nearly 1 in 4 users abandon an app after using it just once. Also, tons of apps are downloaded then deleted, especially in the Health/Fitness and Productivity markets. On top of that, mobile app usage drops dramatically within 6 months after launch or download, with about 50% of initial users being lost. From there, it just keeps dropping. Some markets fare better than others. For instance, shopping apps experience higher rates of abandonment than media apps.
Given all of the above, it’s easy to see why the average lifespan and value of a mobile app, and therefore the startup behind it, are pretty low. Bottom line: Apps are just not great time or money investments from an entrepreneurship perspective.
Of course, there are exceptions to every rule.
When/Why you Should Actually Start an App Company
Only go into the business of making apps if the app you’ve envisioned and can feasibly create is at least 10 times better than anything else in its space. Don’t just make another messaging app that’s got a few extra filters or graphics than Whatsapp, Facebook Messenger, and all the other options out there. Don’t make a fitness app that just adds decimals to micronutrient totals. You have to really, for lack of a better word, disrupt a particular market with your app in order to gain traction and be able to rise to a place of viability with your startup. You have to do something radical and new.
Another way to give yourself a better chance at building a successful app is looking for markets that aren’t saturated, where there is a real need for something amazing and revolutionary. Find the problems others aren’t tackling, and make an app that creates solutions for them. If your app successfully fills a genuine need that no one else has quite gotten right yet, you may have a real chance.