Understanding App Economics: The Application Business Model



Mobile applications can be a fantastic conduit for many different endeavors, whether it’s a marketing play, a paid utility or game, or a peripheral service for your company. In many cases, it is central to the strategy to figure out how to make the application a financially viable endeavor. To get a better understanding of this, I went through some data (Covering January 2012 to March 2013) and decided to weigh-in on the topic: how to generate revenue with an iOS application.

*The data discussed is all from Apple’s App Store*

Average revenue per download (ARPD) is a very important figure when it comes to assessing the cash generated by any mobile app. Not only does the ARPD data give a sense of how effective the application is at generating income, it also can give you a sense of which features the money comes from, and what kind of spending behavior users are demonstrating.

When assessing the top-ten in the App Store with regard to highest grossing, the ARPD ranges considerably. The lowest being $0.37 (“What’s The Word?”, 9th overall) and the highest at $7.04 (“Rage of Bahamut”, 7th overall). Curiously, the highest grossing application from this time period had an ARPD of $4.66 (“Clash of Clans”, 1st overall), the 4th highest ARPD thus yielding the 1st highest gross revenue – indicating that ARPD is important, but not vital.

So where does this money come from? In the U.S. market at least, in-application purchases account for the vast majority, approaching 75% in fact. This is important to consider, only 1/4 of the revenue drawn from applications comes from the initial purchase price. The diagram below indicates that this is a growing trend, with users migrating their spending towards in-application purchases.


Along similar lines, as should be expected; the applications with highest ARPD were using the model of paid application with in-application purchases available. Paid-only applications came second in ARPD, while free applications with in-application purchases came last. It is important to remember however that the paid-only model is skewed heavily by applications costing more than $5, of which there are quite a few.


Overall, the average ARPD for iPhone downloads in the top 250 applications (for all revenue models) works out to about $0.97 or so.

Interestingly, the typical iPad ARPD is higher, like-for-like, when compared to iPhone $2.26 compared to $0.93 respectively – my assumption is that this is due to the iPad being a more dedicated entertainment and utility device when compared to the iPhone.

So we know where the money comes from, and which models work. Which countries are the hottest right now, in terms of ARPD? Interestingly, the Japanese market is head-and-shoulders above the rest, with $3.10, while the U.S., U.K., and Germany roughly tied at $1.05 (approx.)

The take away message here is that application users are gradually moving towards favoring the “freemium” model, in a general sense. However, if your application can obtain traction, a paid application with in-application purchases will likely generate the most income. My suggestion is to offer a trial period with the freemium model before migrating towards the paid-app model after a few weeks. I hope that this article helps you make it rain!

Reprinted by permission.

About the author: Maxim Wheatley

Maxim Wheatley is a recent graduate of Georgetown University, having studied Cognitive Science & Psychology. He is currently working to become an iOS development guru. His interests center around startups and new ventures, he has already been involved in three different startups, and started two small businesses before he graduated college. Currently based in Washington, DC, Maxim is always interested in talking about ideas and opportunities wherever they might be.

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