According to American IT analyst firm Gartner, 102 billion app downloads were performed last year, but only a fraction of these apps are profitable in the sense that they generate a steady stream of revenue.
Tim Rea, CEO of global messaging app Palringo spoke with TechRadar Pro about what he believes are the ingredients of success for a profitable app business, and how his own company drives business revenue by trying to stay close to its online community.
TechRadar Pro: So what are the key ingredients needed to make an app profitable?
Tim Rea: It goes without saying that the service needs to be good quality and engaging. I use the word service rather than app because in many cases I think it is dangerous to think and talk about "an app" as though it is a one-off piece of development that a developer throws out there. A service is different. We have a substantial development, operations and infrastructure commitment associated with delivering a high performance service.
In terms of profitability, the term profit implies that you can generate more revenue from the service than it costs you to run. With some of these quality services, the cost of running can be high if you consider cost of hosting, bandwidth, operations management, denial of service protection, storage.
We put a lot into establishing an efficient operation. For many, if not most businesses like ours, the big cost is in acquiring customers. Here again there is a cost/value equation. With deep pockets you can spend a lot of money to ensure a big flow of users into your service, but that doesn't mean they are going to be the right users.
It is a non-trivial exercise to develop a view that tells you the difference between an engaged user vs. someone who just logged in for no particular reason and never comes back, or between a user who spends or brings value to the community and ones that might be getting involved for the wrong reasons. It is important to focus on acquiring the right users at an economically viable cost.
Finally, the model has to make sense. Advertising on mobile still has its challenges, but it is possible to build a business based on advertising if the conditions are right. Many apps take what I'd call a "box shifter" approach to generating revenue: pay a £1 and the app is yours.
However, there is not much of a revenue stream beyond the original sale and so it is hard to grow the business. Then there is the "sell stuff" model: sell users things that improve their experience. This can be hard to do without creating a scenario where people feel they cannot gain value without paying e.g. a messaging app where you have to pay extra to use the vowels!
TRP: How do you monetise your users?
TR: We operate in the "sell stuff" category. Our users can get full value out of our service without buying stuff, but we have tried to strike a balance in finding ways to add value to a user's experience with extra virtual goods that they would be happy to pay for.
TRP: How is your monetisation model different to that of other global messaging and social sharing apps?
We started life with a pure messaging view of the world and much work went in to achieving efficiency in supporting the communication experience. As we began to seriously consider how best to generate revenue, we also spent much time studying usage patterns.
This led us to the conclusion that, although our messaging component was a crucial aspect of the service, our users were more focused on building communities and that the building of these communities, as well as the participation within established communities, had a very competitive dynamic, similar to many games.