On the Monetization of Mobile Apps

56 Pages Posted: 29 Jan 2019

See all articles by Gil Appel

Gil Appel

University of Southern California - Marshall School of Business

Barak Libai

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship

Eitan Muller

New York University (NYU) - Department of Marketing; Interdisciplinary Center (IDC) Herzliyah

Ron Shachar

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship

Date Written: January 20, 2019

Abstract

Though the mobile app market is substantial and growing fast, most firms struggle to monetize apps profitably. Monetizing apps is done in two ways: a) selling advertising space within a free version of the app, and b) selling a paid version, termed freemium or in-app purchase strategy.

In this paper, we present a framework for monetization of mobile apps, using two central empirical regularities concerning the relationship between users and their mobile apps: a) Uncertainty: While consumers have some prior knowledge of their fit with the app, they remain uncertain regarding their exact utility until they are using it; and b) Satiation: The utility of using the app may decrease with time.

While work on the monetization of digital goods has largely overlooked the role of satiation and the consequent retention issues, we show that in combination with uncertainty, it elucidates the role of the segments of consumers that download the free vs. paid version of the app, and how to balance these two segments so as to monetize mobile apps.

We encounter two distinct scenarios: In the first, advertising drives most of the revenues; while in the second, revenues are driven by the paid version of the app. We explain how uncertainty and satiation affect the prevalence of the respective scenarios and impact the share of revenues from the paid vs free version of the app. We also demonstrate that a firm can profit from offering a free version with ads even if advertisers are not paying for these ads. In other words, the firm benefits from offering a “damaged good” version of the app that includes ads, even if this version is free to consumers, and the advertisers are not paying for the ads.

Keywords: advertising; freemium; mobile apps; online strategy; pricing; retention; satiation

Suggested Citation

Appel, Gil and Libai, Barak and Muller, Eitan and Shachar, Roni, On the Monetization of Mobile Apps (January 20, 2019). Available at SSRN: https://ssrn.com/abstract=2652213 or http://dx.doi.org/10.2139/ssrn.2652213

Gil Appel (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Barak Libai

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship ( email )

P.O. Box 167
Herzliya, 46150
Israel

Eitan Muller

New York University (NYU) - Department of Marketing ( email )

Henry Kaufman Ctr
44 W 4 St.
New York, NY
United States

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Roni Shachar

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship ( email )

P.O. Box 167
Herzliya, 46150
Israel

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