If you’re planning to release a mobile app and you plan to use it to generate a profit, there are lots of different revenue models you could use to make money. In-app purchases and freemium apps are great ways to get users on board and then create revenue, which removes barriers in the sales process. And although paid apps are a challenge to market properly, the ones that succeed tend to be very profitable. But one of the best (and most overlooked) profit models for mobile apps is the subscription model. With app subscriptions, you can create ongoing revenue that can give you much-needed stability.
One great example of a subscription app is Lumosity. The Lumosity app allows users to train their brains with over 50 different brain exercises designed by cognitive psychologists. The Lumosity app offers a month-to-month subscription for $11.99 per month or a year-long subscription for $59.99. And with a 5-star rating from over 93,000 users, clearly Lumosity is just one example of a phenomenal success in the world of subscription apps.
So why are more developers moving to subscription apps? Here’s what you need to know.
Subscription Apps Increase Average Revenue Per User
Average revenue per user (ARPU) is a critical metric for anyone who wants to monetize an app. Simply put, it’s the amount of money your average app user spends on your app within a given timeframe. So if you wanted to discover what your monthly ARPU is, you’d divide the total amount of revenue your app generated for the month by the number of users who were active that month.
One of the best reasons to consider a subscription model is that apps that offer subscriptions see a far higher amount of revenue per user than apps that don’t. According to a 2013 study by VisionMobile, apps that use subscriptions as their revenue model earn 2-3 times more money per user than apps that rely on advertising or paid downloads. They also earn 50% more money per user compared to apps that offer in-app purchases.
Clearly, when it comes to app monetization, subscriptions are beating out the other options. But that’s not where the story ends. According to Scout Research, increasing your average revenue per user is the fastest way to increase your overall profits – and it’s actually more effective at boosting profits than both cutting sales expenses and increasing the number of downloads.
A Subscription Model Will Boost Long-Term Engagement
It’s great to have an app that makes money, but one problem a lot of developers encounter is that their app only makes money for a short period of time. The app comes out and is a smash hit, but then the novelty wears off. The users find something else to spend their money on, and they abandon the app. Though the developer did make money by charging for the app, it was a one-hit wonder – and the developer suddenly has to go back to work creating The Next Big Thing.
But what if you could rely on a stable audience of users who love your app and gladly pay you each month to use it? With a subscription model, you’ll have a very engaged user base that wants to use your app on a regular basis. Why? It’s because of a psychological phenomenon called the Sunk Costs Fallacy.
The Sunk Costs Fallacy describes a system of behaviour wherein a person continues a behaviour because they feel like they have to keep going in order to avoid losing what they’ve already invested. It’s why people go to outdoor concerts even when the forecast is calling for massive amounts of rain – even though they’ll hate being stuck outside in the rain, they’ll feel obligated to go to the concert because they’ve already paid for tickets.
When we apply the Sunk Costs Fallacy to apps, it’s easy to see how a subscription model can boost engagement. If the user has to pay a simple one-time fee, then it’s easy to just walk away from the app. But if the user is paying for the app every month, then he’ll feel obligated to use it every month in order to feel like he got his money’s worth.
Cash Flow: Subscriptions Bring in Reliable Income
In the world of business, cash flow is the Holy Grail. If you’re planning to earn money from your app, you’ll want to ensure that you get paid regularly – it’ll help to keep your war chest well stocked, pay your expenses on time, and buoy you through difficult times. A subscription-based mobile app will generate a set amount of revenue per user for you every month, and the more users you get, the more your cash flow will grow. When you know that you have a reliable source of income every month, you’ll find that it’s easier to make strategic plans and allocate resources to projects.
Consumer Psychology Says Subscription Discounts Work Wonders
It’s not uncommon to see subscription apps that offer discounts for longer subscription periods. Much like magazines that give you a 20% discount if you subscribe for 3 years, mobile apps that offer discounts for 6 months to 1 year of use often perform better. Why? It’s simple: People like saving money. For the business, it means a big increase in customer lifetime value and a more predictable income. Plus, it gives the user base another pricing option that might suit them better than a flat rate – and users love choice. According to research by social psychologist Dr. Sheena Iyengar, people want more choices because they believe that having more choices means having more freedom. That means instead of just offering one subscription model, offering multiple models can boost conversions. Having just a single purchase price, though, deprives the user of choice and keeps conversions down.
Recurring revenue is a powerful way to improve user acquisition and retention, bring in much-needed cash flow, increase user engagement, and boost revenues. Businesses in every industry are starting to recognize the value of subscription models, from subscription flower delivery services to subscription shaving supplies to subscription coffee. And now, savvy app developers are seeing the value in the subscription model and offering subscription-based apps. From consumer apps to enterprise apps, subscriptions are starting to make more and more sense as a revenue source.