I wrote this for the Wall Street Journal last week. Just the basics, but hopefully useful to some.
There’s no one answer to the question of what pricing model works best for digital products because it depends on the app that the revenue model is being designed for. Overall, I’d begin by identifying what value the app creates. Does it save the user time?
Does it help them work more efficiently? Does it entertain them? Does it help them earn more? Once you understand the value your user gets from the app, you can start modeling the best way to generate revenue from it.
For apps that entertain, it’s usually best to just charge the user for using them. This is how many games are monetized. The user pays to download the app, or downloads it for free but pays for features or items in the game that make it more fun to play.
Both of these methods work, although I prefer not charging the user until they’ve gotten to play some of the game. I prefer this approach because it lets the user try out the game, and it also allows for continual revenue as the user plays more of the game, instead of just having them pay once.
For apps that help someone get their work done more efficiently, charging a subscription fee or a per-use fee is usually effective. Ideally, you would let the user download the app for free to test it out, and then ask them to pay to continue using it. This way, the user has a chance to try the app risk-free, and if it truly adds value they should be happy to pay for it.
Another method would be to design several tiers of features, allowing users to use an app for free forever, unless they need additional features or storage space.
This method is known as freemium and has worked well for some companies, but most services end up giving away too much and have a hard time getting users to upgrade.
Another common, but challenging, monetization technique is attracting users to interact with the app many times a day and then displaying ads. In these cases, consumers get to use the app for free, and the advertisers pay the company. This is best used for social media or content apps (news, videos, etc..). This has been effective for years, but growing advertising revenue requires an enormous amount of usage. It’s even more challenging on mobile, where the screen real-estate doesn’t leave a lot of room for advertisements.
When designing an app, there is no one silver bullet when it comes to monetization. The creators of the app should spend time understanding what the user values and then find a way to monetize based on that value.