Business Model Breakdown is a blog series where we break down a business model into its most elementary components, so that we can see how it is changing the value paradigm in its respective industry

Earlier this week we talked about The New App Economy that is emerging. The opportunity to develop a red-hot app and cash in is second to none; but like anything else in the business world, there has to be some thought put into the business model behind the application. App developers face a variety of possibilities when trying to select the right business model for their app – today we are going to explore these options and break them down to their simplest components.

As the app market grows, so will the sophistication of the consumer buying the app. Whether it is a productivity tool for small business or a new game, consumers will begin to demand more from the experience the app provides them. The added sophistication of the consumer will mean less people are likely to impulsively buy the game of the week and will instead focus on apps that provide lasting, long-term value.

What this means to app developers is that over time they will no longer be able to pump out apps hoping to make a quick buck. Weekend-coding wonders will be one-in-a-million longshots, only to be replaced by apps that add long-term value to customer’s lives. Therefore, the apps that make it to smartphone screens will be the ones with the best design and the best business model.

So what types of business models exist for app developers?

  1. Pay-to-download – Users pay a one-time fee to download the app. It’s the most common model to monetize an app, as pay-to-download apps account for approximately 60% of the revenues from apps.
  2. Ad-supported – Advertisers pay to embed their own ads within the app. Today, ad-supported apps generate approximately 12% of the revenues, but that number is expected to grow greatly as the market develops.
  3. Virtual goods – Free to download, but loaded with virtual goods that users can pay for. This is a common business model for many games. Chetan Sharma expects the majority of app growth from this app business model.
  4. Freemium – for free downloads, users get access to a basic level of app functionality. To get added levels of functionality, they must pay for an upgrade.

So which business model works the best?

There is no right answer to this question; it depends on the business objectives of the app. Once a company can determine what they want to get out of the app, they can select the optimal business model and build out an effective strategy.

The trend certainly indicates that ad-supported and virtual goods apps will be the greatest drivers of growth in the app economy. But these are simply macro trends. To become profitable, app developers will have to select the right business model and execute a rock-solid marketing strategy.

Overall, consumers stand to benefit the most as competition in the app marketplace intensifies. The growth in the market will bring in many sophisticated companies and developers, putting the squeeze on one-hit wonders.

+ Download a copy of the business model canvas (click here)

+ Business Model Breakdown – ETSY
+ The Key Components of a Business Model

Crowdfunding Strategy – Summary

Building Blocks – PLAN – the Business Model

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