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How do you make money from an app without third-party advertising?

Jackie Lampugnano

This question has been in my head ever since I returned from SxSW and saw so many new interesting mobile apps and games. The same question holds true for new social networks.

A lot of the new ideas by these startups were interesting, and I can see why people would want to download or sign up for the app, but that doesn’t necessarily translate into revenue for the creators. Sure, offering third-party advertising like Facebook does might provide a solution for generating a profit, but what if that option doesn’t really fit into your business model?

Or what if you simply don’t want to run ads or use pay-for-play promoted tweets? In my opinion, they turn people off anyway.

The point is that there has to be another way to make money from new apps and social sites without subjecting people to ads that interrupt their experience with your product and/or service.

Since I’m not an expert on the subject, I thought I’d turn to a friend who’s much smarter and more innovative about these types of things: Len Kendall.

Of course the first thing he told me is “there’s no catch-all method for making money when building an app.” (Wishful thinking that there’s a one-sentence answer to this question, I guess).

Naturally, I kept bugging him.

After talking to Len, I was able to pull out some of these key takeaways:

1) First consider: what does it do? What problem does it solve? What purpose does it serve?

This will lead you into the next question you need to ask.

2) Why is it worth paying for?

Len informed me that “paying for” can come in many forms: premium services, access to content and/or data for marketing purposes, exclusivity or rank among peers, and so on.

Well, if that’s the case, then in my mind the next most important aspect is to think about who’s using (or will use) the app. As many marketers have indicated, audience is key. The same goes for app building. Depending on your audience, you’ll want to take a different approach.

Why does that matter? Because your users are the ones who will eventually provide the money-making opportunities. If an app becomes invaluable to a consumer, they’ll be willing to pay money to access more of your content.

Think about apps and/or services you can’t live without: if the creators told you that you’d get an even better version with X, Y, Z capabilities that are above and beyond what you had access to previously…wouldn’t you throw some extra money to pay for that?

This group of people might be part of a small percentage, but they’re the brand advocates. They help grow the user base over time.

A main assumption I’m making here is that your product provides a great free experience. Start by perfecting that aspect of it, but why not think in terms of evolution? Evernote is a great example of this.

As mentioned in the TechCrunch article on Evernote that summed up Evernote’s CEO, Phil Libin:

“A year ago Evernote was making most of its money from licensing its technology, but it focused on its premium plans ($5/month or $45/year) because that was more scalable. Now, premium subscriptions bring in around $300-400k a month, and licensing represents around $45k.”

“Evernote has 3.1 million cumulative users, and adds around 10k a day. Around 68k paying customers.”

“Users have grown more valuable over time. New users convert to premium at a rate of .5%.  But of the users that signed up two years ago and are still active, 20% have become paid customers.”

So, I suppose it comes down to figuring out what makes sense for your app, both with regards to your audience and your value proposition. But what else?

I only delved into this topic a little bit, but I’d love to hear your thoughts. Being a techie I can’t help but be curious. Enlighten me, please.