How Free Apps Can Make More Money Than Paid Apps

Editor's note: John Manoogian III is co-founder and CTO at 140 Proof, a venture-backed startup for targeted Twitter advertising.

While building apps for Apple and Android app stores can be highly lucrative ventures for developers, one of the hardest decisions an app developer has to make is how to get the app to pay for itself. Often the "monetization strategy" — shorthand for "how will this app make money?" — is left for last.

It's hard enough to get discovered by consumers among the millions of already existing apps, not to mention convince people to buy it. People increasingly prefer free, ad-supported apps for their tablets and smartphones, yet many developers still aren't sure how to tackle the free vs. paid issue. Deciding when to charge for your app, and when to try an ad-supported model, is one of the hardest decisions developers must make.

Four Monetization Strategies for Apps? Actually, There Are Only Two.

Developers have several monetization options available, each with its own requirements and pitfalls.

Before moving forward with a strategy though, there are a few of questions an app developer should explore in order to answer the ultimate question, "how can I monetize my app?"

1.       Is my app engaging enough for people to use it often?

2.       How willing are people to pay an up-front fee for my app?

3.       How do competitors in my space monetize their apps, and how successful are their strategies?

As app markets across platforms explode, developers are talking to each other to determine the best type of monetization model to use. Most will tell you it's a choice among four major options:

1.       selling your app in the app store

2.       offering a free, subscription-supported app

3.       offering a free app, with in-app purchases

4.       offering a free, ad-supported app

But the choice really boils down to two strategies: getting paid by users or getting paid by advertisers.

Who Pays More for Apps: Users or Advertisers? (AKA Which Monetization Strategy Makes More Money: Free or Paid?

When it comes to users, the overwhelming majority of Android and iOS users resist paying — whether it's for apps, subscriptions, or add-ons–so smartphone and tablet developers are particularly interested in experimenting with monetization through ads. On the other hand, advertisers are MUCH more willing to pay developers than users are. Just like developers, advertisers need to market their product.

How Much Money Can an App Make With Advertising?

Ad spending on apps of all kinds – both mobile and desktop — is growing. Most industry analysts choose to measure only mobile app spending though, as most apps are created for the mobile and smartphone space. Mobile advertising revenue increased nearly 1.5X in 2011, to top out at $1.6 billion for the year.

The future of app monetization clearly lies in ad-supported model. A recent study by Cambridge University computer scientists found that 73% of apps in the Android marketplace were free, and of those, 80% relied on advertising as their main business model. Free apps are also far more popular in terms of downloads, the researchers said. Just 20% of paid apps are downloaded more than 100 times and only 0.2% of paid apps are downloaded more than 10,000 times. On the flipside, 20% of free apps get 10,000 or more downloads.

The Best Part Is: You Can Deploy Multiple Monetization Strategies

While free apps reach the majority of users who tend to be price-sensitive and almost never buy apps, there is a subset of users who prefer to avoid advertising and seek paid (sometimes called "pro") versions of their favorite apps.

Developers can cater to both types of users with a two-pronged approach to app development: create both a free version and a paid version. The multi-pronged approach is popular with big players in the publishing industry. For example, The Guardian (UK) is testing two apps: a free, ad-supported Android app and a paid-only iPhone app. Echofon is also a great example of an app that caters to both kinds of users. They have free and paid apps for all platform versions of their Twitter apps.

In short, before moving forward, investigate all ad-supported revenue options when you launch a new app. There are many ad networks available – shop around and see what CPMs (cost per thousand impressions) or CPCs (cost per click) they offer and how much work is involved integrating ads into your app.

And more than anything, make sure to consider any changes to the user experience that will occur if you introduce by the ads. After all, you want ads that integrate well into the user experience, rather than ads that drive users away in annoyance.