How Do Free Apps Make Money: Strategies and Examples

Below, we’ll explore these ways to make money from apps in detail and discuss other popular monetization ideas.

Free vs Paid Apps Model

You can wonder: why do I need to build a free application if I can just charge users for a paid one? 

The truth is that half of mobile users have never made a payment for an app. This explains why app stores feature more free apps than paid ones.

Giving away an app for free can bring many benefits. It attracts more downloads and tends to receive better reviews because users don't have to pay upfront.

With a larger user base from free downloads, developers can make use of this increased traffic to generate revenue in different ways. For instance, the app could show ads to users who don't pay, while offering paid subscriptions to remove ads and access extra features.

Paid applications, on the other hand, generate revenue by creating a loyal user base. This model focuses on delivering a premium experience from the outset, without relying on an in-app purchases model or advertisements.

When users pay upfront to download an app, they often have higher expectations and are more likely to remain engaged over time. Therefore, paid app owners often prioritize continuous updates and improvements to maintain user satisfaction and justify the initial purchase price.

The Earning Potential of Free Apps

The potential earnings from a free app can vary widely. Everything depends on the app genre, the number of app users, the chosen monetization strategy, your market, and competition.

Some applications are making millions and even billions of dollars. Take the example of Fortnite again. In 2019, the app reportedly generated over $1.8 billion in revenue. Of course, it’s rather an exception than a rule but it doesn’t mean you can’t earn thousands of dollars a month with your application.

App Business Models Difference

App business models vary based on how they generate revenue and provide value to users. Here are some common app business models and their differences:

• Free Apps (Ad-Supported)

Free apps generate revenue primarily through advertising. These apps attract a large user base by offering their services at no cost, making them highly accessible. For example, TikTok displays ads between videos, earning revenue from advertisers based on user interactions. 

While this model ensures broad reach, it relies heavily on ad impressions and clicks, which can sometimes detract from the positive user experience if not managed carefully.

• Freemium Apps

Freemium apps offer basic features for free and charge for extra features. This way, they attract many users while making money from those who want more. Spotify, for example, lets users listen to music for free with ads but offers a paid subscription for ad-free listening and extra features. 

The challenge is to make the premium version attractive enough for users to upgrade.

• Paid Apps

Paid apps charge users a one-time fee to download and use the app. This model brings in immediate revenue and often attracts more serious users. Minecraft is an example where users pay once to play the game. 

However, fewer people might download the app because of the upfront cost, so it must offer significant value to justify the price.

• Subscription Apps

Subscription apps charge a recurring fee, usually monthly or yearly, for access to content or services. This model provides steady income and builds long-term relationships with users. Netflix uses this approach, offering a wide range of movies and shows for a subscription fee. 

To keep subscribers, these apps need to constantly update their content to ensure users feel they are getting their money’s worth.

• In-App Purchases

In-app purchases allow users to buy extra items or features within the app. This can be very profitable, especially if the app has loyal users. For example, Pokemon GO lets players buy items to enhance their game experience. 

This model works well, but developers need to ensure it doesn’t feel like users must pay to win.

• Sponsorship and Partnership

Apps can earn money by partnering with brands or featuring sponsored content. For example, fitness apps might work with health brands to offer special deals or content. 

This brings in extra revenue without directly charging users, but the partnerships need to be relevant to keep users happy and engaged.

• Transactional Apps

Transactional apps make money by taking a commission on sales or charging transaction fees. These apps facilitate buying and selling, earning money each time a transaction happens. eBay is a good example, as it charges fees on each sale made through the platform. 

This model works best with a large, active user base, but there is often strong competition in the marketplace.

Best Free App Monetization Strategies

Finally, it’s time to discuss how free apps make money.

#1 Freemium Apps

In a freemium model, users enjoy the basic features of an app for free, with the option to unlock advanced, premium features at an additional cost. This approach is widely utilized in the mobile app market, from purchasing extra lives in a mobile application game to subscribing to exclusive content in a streaming app.

What’s more, most apps labeled as 'free' on the App Store and Google Play actually use the freemium model. According to Statista, 97% of apps on Google Play and 94.5% on the Apple App Store fall into this category.

Freemium apps are typically easy to use and appeal to a broad audience. This allows developers to provide a simple, essential version that meets the needs of all users while offering extra features to those willing to pay for more, generating additional revenue.

Although freemium blends the benefits of free and premium services, it isn't always the best choice for every app. Sometimes, a fully premium model can be more appropriate.

#2 Premium Apps

A premium application charges users for downloading the app.

This model works best for apps that are highly specialized and cater to a specific market niche. 

For example, a professional photo editing app designed for graphic designers and photographers, like Adobe Lightroom, fits this category. This app offers advanced editing tools and features not available in more general photo editing apps. 

Since the target users have precise requirements and understand the value of these specialized features, they are more willing to pay upfront for the premium version that meets their professional needs.

#3 In-App Purchases

In-app purchases are a common strategy how to earn money from apps where users can buy additional features, content, or services directly within an app. This model is frequently used in mobile games, where players can purchase extra lives, special items, or cosmetic upgrades.

However, not only the gaming industry is actively selling through in-app purchases. Think of Spotify. While Spotify itself is free to use with basic features, users have the option to purchase a premium subscription that unlocks additional features such as offline listening, ad-free music streaming, and higher audio quality.

How does it work?

However, in-app purchases need to be balanced carefully to ensure they don't disrupt the user experience or create an unfair advantage, maintaining a positive perception of the app among its users.

#4 Advertising

In-app advertising is one of the most common methods how to make money with apps. If you download free apps, most probably you have come across all the types of in-app advertising.

From simple banner ads to full-screen ads and video rewards, in-app advertising comes in many shapes and sizes — each offering different revenue potential.

Depending on the app, its users, and the products being advertised, mobile ad networks provide a range of incentives to display their ads to engaged users. Partnering with networks like Google AdMob or Unity Ads connects app developers with advertisers ready to pay for impressions, clicks, or user actions.

There are different types of ad formats, each offering different user engagement levels and revenue potential.

1. Banner ads - small ads displayed at the top or bottom of the screen to attract you to other apps or websites. They can feature a combination of images, videos, and text..
2. Interstitial ads - full-screen ads that appear at natural transition points in the app, such as between game levels. They often include videos, images, or text that encourage interaction or lead you to an external website.
3. Video ads - short video clips that users can watch, often in exchange for in-app rewards.
4. Native ads - ads that match the look and feel of the app’s content, making them less intrusive.

Various revenue models like Cost Per Mille (CPM), Cost Per Click (CPC), and Cost Per Action (CPA) determine earnings based on views, clicks, or specific user actions. High user engagement and strategic ad placement further boost revenue without disrupting the user experience.

Duolingo, a popular language-learning app, is a great example of how to make money on apps with advertising. As of 2020, Duolingo was estimated to generate around $180 million in revenue annually. A significant portion of this revenue comes from advertising, as the app has millions of active users engaging with ads regularly.

The app displays interstitial ads between lessons and offers banner ads within the app interface. Users can opt for an ad-free experience by subscribing to Duolingo Plus, but the free version, supported by these ads, remains highly popular.

#5 SMS and Text Marketing

SMS and text marketing is a powerful strategy to engage users and earn money with free apps. Text messages have a high open rate, making them an effective way to reach users directly on their mobile devices. Unlike emails, which can be easily ignored or sent to spam, SMS messages are typically read quickly after receipt.

Apps can use SMS marketing to send personalized messages, such as special offers, discounts, new feature announcements, or reminders. This direct communication encourages users to engage more with the app, make purchases, or upgrade to premium versions.

MyFitnessPal is a fitness app that successfully uses SMS and text marketing to boost user engagement and revenue. By sending personalized workout reminders, nutrition tips, and special promotions directly to users’ phones, MyFitnessPal keeps its audience engaged and encourages them to use the app more frequently.

While exact revenue from SMS marketing alone isn't typically disclosed, MyFitnessPal's overall strategy, which includes in-app purchases, premium subscriptions, and targeted marketing, has contributed to its significant earnings. As of 2020, MyFitnessPal was generating around $100 million annually. A portion of this revenue can be attributed to its effective use of SMS marketing to drive user engagement and conversion to premium services.

#6 E-Commerce

Free apps can integrate an e-commerce platform within the app, allowing users to browse and purchase products directly. This can include physical goods, digital downloads, subscriptions, or services related to the app's niche.

By selling products or services, apps diversify their revenue streams beyond traditional advertising or in-app purchases. Each transaction earns revenue through sales commissions, transaction fees, or markups on products sold.

Another way how does a free app can make money through e-commerce is affiliate marketing when users make purchases through affiliate links within the app, the app earns a commission on each sale.

For example, a cashback and shopping rewards app, Rakuten Ebates allows users to earn cashback on purchases made through affiliate links. The company partners with thousands of retailers and brands who pay commissions for sales referred through their platform. Users browse through the app to find deals and offers from various retailers. When they click on an affiliate link and make a purchase, Rakuten Ebates earns a commission from the retailer.

#7 Crowdfunding

Crowdfunding can be a creative and effective strategy to earn money with free apps, ​​allowing mobile app developers to raise funds directly from users who believe in their app's potential.

First of all, you need to create crowdfunding campaigns on platforms like Kickstarter, Indiegogo, or GoFundMe, outlining the app's features, goals, and how funds will be utilized.

Users interested in the app's concept can pledge financial support to the campaign. In return, backers often receive rewards or exclusive access to app features once developed which creates a community around the app, fostering a sense of ownership and support among backers who want to see the app succeed.

Pebble Smartwatch is a great example of how crowdfunding can lead a tech product to success. The company launched its first Kickstarter campaign in 2012 with a goal of raising $100,000 to fund the production of its smartwatch. The campaign quickly gained traction and surpassed its goal within hours, ultimately raising over $10 million from more than 68,000 backers.

#8 Data Monetization

Apps collect a wide range of user data, including demographic information, browsing behavior, app usage patterns, location data (if permitted), and more. This data is typically gathered through user consent and in compliance with data protection regulations like GDPR or CCPA.

To protect user privacy, collected data is often anonymized and aggregated. Anonymization removes personally identifiable information (PII) from datasets, while aggregation combines data from multiple users to analyze trends and patterns without identifying individuals.

One of the primary uses of data monetization is targeted advertising. Advertisers can use app data to target specific audience segments more effectively, delivering personalized ads based on potential users’ interests and behaviors. This increases the likelihood of user engagement with ads and can lead to higher advertising revenue for the app.

Apps may partner with third-party companies, such as advertising networks or data brokers, to monetize their data. These partnerships involve sharing anonymized data in exchange for financial compensation or other benefits, such as access to enhanced advertising opportunities or market research insights.

How to Choose the Best Monetization Strategy - a Tip From inVerita

Picking the right way to make money from your app can be challenging. Here are some tips to help you decide:

Understand Your App’s Purpose

The key to monetization is knowing what your app offers. For instance, a basic weather app might use ads or get sponsorships, whereas a more advanced weather app with detailed forecasts and radar features could charge a subscription fee for premium services.

Get to Know Your Users

Understanding your audience is essential. Different users react differently to app monetization models. Small-screen users might find pop-up ads annoying, and Android users might not want to pay extra for features typical of iPhone apps. Think about how your users typically spend money.

Observe Successful Apps

Study similar apps to see what works for them. User feedback can highlight what people appreciate or dislike, guiding you in refining your approach. For example, if you have a fitness app, look at popular fitness apps like MyFitnessPal. If users complain about too many ads interrupting their workout tracking, consider fewer, more strategically placed ads or offering an ad-free premium version.

Mix and Match Strategies

Successful apps often use multiple revenue streams. A freemium app could show ads in its free version, offer in-app purchases, and provide premium content. Additionally, the app might send updates via email or text and sell anonymized user data to third parties.

To choose the best strategy, consider your app's purpose, understand your audience, learn from other apps, and combine different monetization methods when needed.

Conclusion

There are numerous ways how the free apps make money. Nevertheless, some of the popular monetization strategies can be quite tricky, so it’s very important to stay flexible as you develop your product and keep improving it.

At inVerita, we have been building apps for various industries and for different purposes. We know how to build a product that users will download and keep using.