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How Your App Can Turn a Profit Our expert breaks down the three business models app makers can use to generate revenue.

By Rahul Varshneya Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

I'm in the process of building a free gaming app. I want to create a revenue stream. What should I be thinking about now so that my app makes a profit in the future?

Congratulations: You’re on the right track. Thinking about monetization at the initial stages of development is essential to a successful game. You need to have a solid revenue model to sustain the game and grow traction.

There are largely three monetization models widely adopted for gaming apps: 1) Free games with in-app purchase, 2) Paid games without in-app purchase, and 3) Paid apps with in-app purchase. Understanding these three monetization models will help you think strategically about how you plan to ‘hook’ players and match that engagement to revenue.

Related: 3 Things Entrepreneurs Can Learn From Video Games

Free with in-app purchase or “freemium.” Games with this model currently draw the largest share of revenue in the United States at 75 percent, according to a recent report from Distimo, a research company that specializes in app store market data and analytics. In countries such as China and Japan, the ratio is even more skewed toward this model where it draws 94 percent of the revenues.

These freemium games have limited bells and whistles and are offered free-of-charge to users. Gamers can access a premium version or additional content through in-app purchases. This model removes a barrier (price) to downloading a game and gives game makers the opportunity to prove a product’s value. Once hooked, players can make in-app purchases to remain competitive in the game and unlock higher levels.

Related: 7 Myths of Developing Mobile Apps

Paid without in-app purchase. This model occupies just 17 percent of the gaming app market. For these games, users pay just once to download and expect updates and new features to be free. These paid games must be so compelling that users will pay for the game without playing it first. The growth for such games using this model is slow for unknown developers and can require tremendous brand building to reach impressive download numbers. The model also prevents repeat revenue from existing customers. To build a continuous revenue stream with this model, makers need to constantly build their customer base.

Related: Dream On: Here Are the Real Reasons You Should Build an App

Paid with in-app purchase. This hybrid monetization model currently draws just 4 percent of the market, according to Distimo, and has gained traction only fairly recently. It has its critics, including users who say it’s unfair to make gamers pay to download an app and then pay again to access more features. It can be tricky to build using this monetization model and games must create compelling reasons for why players should pay again for additional features and content when they’ve already paid to download the game.
Those designing their own games should choose their revenue model carefully and not necessarily follow where the market seems to be moving, since there are a number of games using all three models monetizing effectively and building their user bases. In planning, just think carefully about your game and how it engages users and how you will keep them coming back day after day.

Rahul Varshneya

Co-founder at Arkenea

Rahul Varshneya is the co-founder of Arkenea, an award-winning web and mobile app development agency.

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