Nearly one in five millennials only use a smartphone—no laptop, no desk computer (source: MediaPost).
The debate around mobile advertising and the effectiveness thereof is multifaceted and complex. Just a few years ago, when the Apple first came out with the app store, app and game developers were entering into a new world. This new, exciting world brought incredible ways to make money and connect with a global audience never seen or experienced by developers before. Competition was slim, users were excited, and companies were taking advantage of the mobility, interactivity, and big data. Now, just a few years later, the scope is much bigger. With over a billion apps on the app store, competition is incredibly high, the marketplace saturated, and data has made app development companies valued at billions of dollars, higher than magazines or newspapers that have been around for 50 or a 100 years.
The first iPhone was released on June 29, 2007 and with that came the Apple App store. In just 6 short years, mobile technology has made huge strides. Now with the iPhone 5s, we have a small computer in our pockets — running true 64 bit processing, containing a 8 megapixel camera, and a retina display. Over 60% of Americans now have smartphones (source: MarketingLand). So it is no wonder that in 2012, the mobile industry was worth $53 billion and expected to rise to $143 billion in 2016 (source: Vision Mobile). Mobile App companies are making incredible amounts of money, inconceivably fast.
Downloading an app tells a story. Each time we download an app, we reveal a little bit about ourselves – our habits, our inspirations, our passions. Just by looking at a person’s phone, you can tell whether they are a cook, a hiker, a technology geek, a social creature. For many Americans, the smartphone is the center of their life. Mary Meeker tells us that we check our phones 150 times a day, between apps, voice calls, texts, and utilities (source: Business Insider). This is a huge market to tap into.
For mobile app companies, the most important aspect of their business is their users. There is a direct correlation between user acquisition and revenue. Kevin Schaum, Advertising Operations Manager at Backflip Studios, believes knowing the value of a user is one of, if not the most, important part of an app company. If you don’t know the value of a user, then you don’t know how much to spend on user acquisition. Spending greater than the value of that user on user acquisition could potentially be detrimental to a start-up business as they could become ROI negative on a multi-million dollar ad spend.
In the beginning, it was popular to sell mobile apps for .99 cents or $1.99 — I’m going to call this the “one-time purchase model.” Sure, maybe users would throw $1.99 at an app, but because it was a one-time purchase, companies could not make more than $1.99 per user. This meant that the value of a user was $1.99. This also meant that the maximum amount a company was able to spend on per user basis was $1.99 or less. Companies quickly learned that the one-time purchase model was not an effective way of making money.
Companies quickly moved to a “freemium” model. A freemium model allows users to download and play apps completely free of charge, but they may have to wait. They may have to wait for characters, for missions, or for time for things to grow or harvest — such as crops in Farmville, buildings in Megapolis, or additional level-based content in Clash of the Titans. So, if the app is free to download, how does a mobile app company make money? In-app purchases take the place of app purchases. In-app purchases allow users to speed up the game for a small amount of in-game currency. For game developers, Schaum says, in-app purchases are the primary source of revenue. Even though only a small percentage of people actually take part, you can make more average money on a per-user basis than if you were to release the game in its entirety for only .99 cents. This small percentage of users may be willing to spend $2 per day to play and even though money is only spent by a few people, the average value of a user goes up. Additional average value of a user allows app companies to spend more than a one-time purchase price of $1.99 on user acquisition. At this time maybe the average value of a user goes up to $5 which means app companies are maybe willing to spend upwards of $4 to get a new user. “User acquisition is more expensive than ever,” Schaum explains.
User acquisition is a hurdle that every tech company has to jump over. Without users, products are virtually useless. App companies must create value for consumers. Execute well, then refine, refine, refine until you’re product serves your users perfectly.