Giving smartphone apps away could mean big bucks later

Hans Eriksson of Bambuser is an apps guru

So you've decided your business needs a mobile phone app. The design is done, the information architect has given it the all clear; it is a thing of beauty.

That just leaves the small but important matter of how you're going to make money out of it.

If you think pinning a suitable price tag on it and waiting for it to take the various app stores by storm is all that's needed, you could be in for a nasty surprise.

Mobile app downloads are expected to have increased from over 7 billion in 2009 to almost 50 billion in 2012, according to consultants Chetan Sharma.

This translates to a growth in revenue from $4.1bn (£2.5bn) to $17.5bn.

But although 80% of the 2009 figure is accounted for by paid apps, by 2012 that is expected to drop by around half.

The rest is made up of a mixture of advertising, virtual goods (things bought within the app environment, such as tools in social games such as Farmville), and other revenue models.

Sometimes giving your app away for nothing may mean a bigger payoff in the future.

Lights, camera, action

In parts of the Middle East and North Africa, 2011 has been a turbulent year. In Egypt, this culminated in the fall from grace of then-president Hosni Mubarak after nearly 30 years in power.

Social media was credited with playing a key role in the movement - and in Tahrir Square activists were broadcasting live video using their mobile phones to websites, blogs and Facebook using a service called Bambuser.

Company chairman Hans Eriksson is understandably proud.

"The protesters just got the picture out to the world about what was going on that traditional media just couldn't capture, especially towards the very end when journalists were holed up in hotels and broadcasting from balconies," he says.

"People were broadcasting from the square about what they were seeing and feeling. There were some truly amazing moments."

The mobile phone app is available free for all platforms.

"When it comes to the digital world, if you take away e-commerce and gaming, it's all about volume that you can monetise at a later stage" says Mr Ericksson.

Ultimately, he says, Bambuser plans to make money in the same way You Tube does through advertising. In the meantime, it shows advertising around the video streams, as well as marketing for the product itself.

The other main source of income is a premium-paid version for business users.

The exposure the service got during the unrest in Egypt translated into an increase in interest from media companies and broadcasters. All of the main public television channels in the Nordic countries are now using it.

If you build it

Another organisation with a very different business model that has chosen to give their app away is Open Buildings.

The project is a community-driven platform for companies in the construction industry that aim to find new business and show off their work.

What started as hobby has become a start-up with $2m in venture capital funding.

Co-founder and chief executive officer Adel Zakout says it has been a strange journey.

"Our ambition was initially to create an archive of the world's built environment.

"Our focus changed as we gained funding and our experience grew. At the moment we're trying to help companies in the construction industry create an online presence, create a portfolio of work online, and become easier to find."

Once the community is fully established, the company plans to work on a 'freemium' model - the basic package will be free, but there will be charges for add-on services and marketing.

Making their apps free allows them to build on that community, says Mr Zakout.

"Our focus is on making money from the professionals rather than charging customers for the product.

"By making it free we were able to access a much larger audience of people, we were able to build up our community and get companies adding projects to the site at a much faster pace than if we charged."

Open Buildings does plan to create other sources of income from the apps. It considered advertising, says Mr Zakout, but decided that would impact too heavily on the user experience.

"[It works] where you're able to have very contextual advertising. If I were reading an article, for example on fashion trends, to have advertising on certain clothes or style and then be able to click on them and learn more. When ads are a real part of the experience as opposed to being an add on," he says.

Instead, the plan is to offer city guides that can be purchased within the app and downloaded at home, to avoid roaming charges.

Choices, choices

So, given the options out there, how do you know which one is right for you?

Iljar Laurs is the founder of Get Jar, the world's biggest free app store.

He believes that as the market for applications has evolved, apps have become, like web pages, more like shelves for content.

As such, different business models need to be developed for different types of content. To do this, you need to measure two things - stickiness and utility.

Utility means how much the user values the time using your app.

"If it's a game like Angry Birds, it's really high because you're really into the game.

"The general rule is the higher the utility of the app, the more the consumer is prepared to pay for the app up front.

"If it's a relatively simple application, like a web app like chat or messaging, the consumer is less likely to pay anything at all and you have to go for other models."

'Extremely sticky'

Open Buildings plans to work on a freemium model

Stickiness refers to how often you end up using an app - if you 'stick' with it.

"The majority of games are only played three or four times and are very unsticky.

"Some apps like Facebook are extremely sticky - I might use it 10 times a day for the rest of my life."

Stickiness means that advertising might be a good option.

"If you have an unsticky app and choose to go with advertising, you will only display it three or four times. As the current rate is $1 for a thousand impressions, you won't make much."

According to Mr Laurs it is a simple equation.

"If you have a high utility but low stickiness you go for a paid app. High stickiness and low utility, like web applications, then advertising is the choice.

"High stickiness and high utility, for example social games like Farmville that are really engaging and the consumer plays for months, then you typically do offer either a subscription model or virtual goods."

Recouping costs

Virtual goods - for example things players need to enhance a game - have been pioneered by companies like Zynga, the creators of Farmville.

Considerations include whether your target market can easily pay for things - for example are they underage and have no access to a credit card?

And you need to weigh up the rates taken by the market place for a paid for app with the rates charged for using advertising.

Apple, for example, takes 30% of the face value of every app sold in its iTunes store.

But if you simply want to promote a product - a shiny new BMW, for example - then making your app free and recouping the cost in increased sales is the sensible option, says Mr Laurs.

"As long as the app is perceived as free for the consumer then the marketability of the app is generally 50 times higher than any paid app.

"If you direct the user to the paid app, in general your conversion rate will be 50 times less."

"It's way easier to get consumers converted to free apps than to pay for them. It's human nature."