I can’t stop thinking about ways the mobile app industry as a whole, and the companies that drive it, can make money. As I have written before, that’s primarily driven by an interest in self-preservation. I work in this industry, and it has to generate more money for more players. Today, the apps side of the business generates meaningful revenue, but for a relatively small number of companies. The biggest beneficiaries, by far, are Apple, which uses apps and the iTunes App Store to command higher device prices, and Google, which cares not a lick about device prices but seeks every opportunity to grow its addressable market for paid search. Speaking of search, try looking up “how many apps never get downloaded,” and you’ll see how hard it is find an audience for your app.

In previous posts, I’ve discussed improving app discovery. I’ll devote more to this topic in the future, but let’s assume you can drive downloads. This post is all about how to make money. Today, there are three alternatives. Each has its pros and cons.

1. Pay-per-download: Publishers charge for every app download. App stores and/or operators handle these transactions via credit card or a customer’s monthly mobile bill. Developers usually receive 70 percent of the purchase price, with the app store and/or operator taking 30 percent. Pros: this is the easiest, most transparent model. Billing is easy and, when managed through operators, often can result in the ability to sell your app in many markets, including ones where credit card penetration is low. Cons: have you looked at app pricing? It’s low, often just $0.99, so selling in volumes is essential. Because so many apps are free, download volumes of paid apps usually are lower than their free counterparts. Developers also don’t own customer data or relationships. App stores and operators do.
2. In-app advertising: Publishers usually give away the app for free and then expose customers to ads, sponsorships or promotions within the app. Pros: this solves the pricing challenges associated with pay-per-download, which helps to increase downloads. Companies like InnerActive and Millennial Media offer easy, end-to-end solutions that enable apps to accept advertising. Mobile metrics are mature enough to provide useful data to advertisers. Cons: cost-per-thousand, or CPMs, for mobile advertising are low. That’s because there is an excess of advertising inventory. Until the industry finds ways to utilize more of that inventory or devises more effective creative units, i.e. increase the “cost” component of CPMs, the only way developers can make significant revenues is to drive more and more thousands of users. That’s no easy feat.
3. In-app purchases: publishers enable customers to buy virtual goods, services and content within an app. As with pay-per-download, apps stores and operators manage the billing. Pros: as with in-app advertising, this model lowers the barrier to entry by enabling developers to give apps away for free. It provides customers low cost ways of increasing their engagement with an app. Developers can use the base app to sell subscriptions, premium content, and things such as extra games levels, weapons, currency, tips and cheats, and more. Cons: requires building a sizable base of users. Zynga’s experience shows that only a small fraction of an app’s user base will buy stuff in an app. App stores and operators own customer data and relationships. They also continue to take 30 percent of every transaction and usually forbid the sale of anything but virtual goods, thus ensuring that they claim a portion of every purchase possible via the app.

These are the three business models most commonly used today to monetize app development. Each one has made some developers wealthy, but none offer assurances of profitability. All of them still require that a developer invest in meaningful marketing to build awareness and drive downloads.

In 2013, I expect more models to emerge, but the real innovation will happen in improving app marketing and discovery. I’ll devote more time to this topic in coming posts. Both have to improve so that more money can flow to more of the sector’s participants. After all, there is nothing guaranteeing our success. There is nothing intrinsic to the mobile app business that ensures that it won’t become like the radio business: ubiquitous, beloved, and not very wealthy. I don’t think that fate awaits us, but we clearly have more work to do.