Let’s face it: every app marketplace is connected to a greater product or service. For some service providers, marketplaces are viewed as a value-add for end users, where the marketplace and apps are thrown in for free to enhance the core product. However, we’ve seen from experience just how valuable app marketplace monetization can be, turning a platform into a genuine, income-generating product — but should you?
In this article, we’ll help you make the decision whether or not to monetize your app marketplace. We’ll look at the practicalities of doing so, discuss the pros and cons, and list out the questions you need to ask yourself to make the right call.
Monetization Strategies for App Marketplaces
If anything, there are no set rules in the app marketplace space. With that in mind, you can probably think of a bunch of ways to monetize a marketplace, but let’s introduce you to the two most popular, before you start to pick-and-mix:
Commissions on Paid Apps
The first approach to app marketplace monetization is by taking a commission on the sales of paid apps. In this case, developers build apps for your platform, users pay the developers for access, and you take a percentage of the developers’ proceeds.
In fact, this is the business model that some of the world’s most popular app marketplaces use, like the Apple App Store, which takes a commission of 30% on developers’ sales. From that 30% commission alone, Apple generated over $12 billion in revenue in the third quarter of 2018.
Personally, we think this model is a great choice for monetizing most stores. For starters, it encourages developers to create better apps (since they can freely charge for them), thereby giving end users an improved experience. Also important: developers are billed proportionally to the money they earn, so there’s no worry that small teams will get thwarted by high subscription costs.
It’s entirely up to you what commission you choose to take on developers’ sales, whether it’s 80-20, 50-50, or something else. With OpenChannel, we let you choose whatever commission you like, and we definitely don’t take a cut of the proceeds ourselves!
From a practical standpoint, taking commissions on paid apps also involves handling payments as a whole — i.e. collecting payments from users across the globe and distributing profits to developers. Needless to say, that means there’s a lot to consider (especially bearing in mind regulatory concerns). OpenChannel takes care of the entire process using Stripe (or your preferred custom payment platform) to handle payments, but we seriously recommend starting with a major payment platform if you’re going to attempt this yourself.
The second major approach to app marketplace monetization — and definitely the simpler of the two — is to charge developers a subscription fee on an annual or monthly basis. They get to publish apps for your platform, and you charge them for that privilege.
If you’re wondering what’s in it for the developers (who after all, are contributing to your platform), that depends on a few factors. With some marketplaces offering all apps totally free of charge, developers will pay to publish apps just to encourage users to take advantage of their core offering, which ultimately drives them business. More commonly, the app marketplace allows developers to publish apps both free and paid, with the subscription fee replacing any troublesome commissions.
In terms of practicality, this is usually the easier approach — especially if you don’t have to handle app payments at all (as in the latter example). There’s just one monthly/ yearly subscription fee to collect, which is surprisingly easy to implement.
Other App Marketplace Monetization Strategies
While we won’t cover them in detail, there are definitely other ways that you can monetize an app marketplace. Here are two other suggestions if you’re looking for something different:
- Advertisements: If you’re not looking for huge returns on the back of your app marketplace, you can also consider putting up advertisements or sponsorships. For this to work, the key is to make it feel relevant; for example, you could add a Promoted or Featured Apps section to the top of each directory page, linking to apps made by sponsors.
- User Subscriptions: A twist on the usual subscription approach, you can also monetize your app store by offering users subscriptions to the store. This will likely be an all-or-nothing approach: either users pay for access to the store or they forego it completely. We don’t like this strategy so much since it somewhat defeats the point of a marketplace, but it might work for your specific implementation.
The Many Pros and Cons of App Marketplace Monetization
Although we’re fans of app marketplace monetization as a whole, each strategy has its flaws. To help you decide whether monetization is right for you, let’s walk through the various pros and cons:
- Allows marketplace owners to treat their stores as bona fide, income-generating products, resulting in long term enthusiasm for the store
- Gives business folk concrete evidence of the value of a marketplace
- Profits can be reinvested to continually improve the marketplaces
- Increases Lifetime Value (LTV) of customers, where the marketplace owner earns more per customer and better apps means greater customer retention
- Monetization can cause complexity in both code and accounting (that’s why we pre-built app marketplace monetization strategies into our platform)
- Users may find some monetization strategies obtrusive or obstructive, decreasing user engagement (this can be avoided with the right strategy)
On the whole, we think the pros outweigh the cons for most stores. Having said that, you need to be extremely careful in choosing an app marketplace monetization model that won’t kill your store. First things first, decide whether you will allow paid apps on your store.
Pros and Cons of Allowing Paid Apps
Paid apps are an integral part of the commission model and often the subscription model too, since revenue needs to be generated somewhere along the line. With that in mind, these two monetization strategies will likely require you to allow paid apps on your platform (unlike, say, an advertisement-based monetization strategy), but what are the pros and cons of doing so?
- Allows for flexibility with choosing advanced functionality: users only pay for the apps they need, instead of paying for a more expensive overall product
- Encourages developers to create better apps (since they get paid)
- Uncertainty with expectations for app support (who is responsible for maintaining the app and for how long?)
- Store owners must vet apps more thoroughly
What’s more, allowing paid apps is an easy way to encourage developers to create top-quality products and more of them. According to the 2018 State of API Integration Report, more than 60% of leading platform providers believe that more integrations means more revenue.
By quickly integrating into multiple application ecosystems, you diversify how similar use cases are used in different environments, increasing your stickiness and preserving your longevity in the market.
If you can set out clear guidelines for how apps will be maintained and what users should expect from paid apps, all that remains is to develop a universal workflow for vetting those apps thoroughly.
Not a problem? Great — let’s look at the pros and cons of the two most popular app marketplace monetization models: the commission-based model and the subscription model.
The Commission Model
As described earlier, the most popular approach to app marketplace monetization is by taking a commission on the sales of paid apps. Here’s what you need to bear in mind with this model:
- Smaller development teams aren’t thwarted by high subscription fees (pay-as-you-earn model instead)
- Bigger development teams don’t underpay for the profits they make on your store
- Store owners’ profits will grow as app popularity grows
- Definite complexity in code and accounting (collecting and distributing payments across the world quickly gets messy), unless you start with a solution that already covers this
- Bigger development teams might feel like they pay too much, decreasing developer satisfaction and losing app opportunities
The Developer Subscription Model
Offering developers monthly or yearly subscriptions to your marketplace is the second most popular model for app marketplace monetization. Before opting for this strategy, consider:
- Option to forego paid apps on your marketplace completely
- Less confusion in code and accounting, especially if paid apps are not allowed
- Smaller development teams might struggle to pay fees
- Bigger development teams underpay for the profits they make on your store
- Store owners’ profits won’t grow as fast as app popularity grows
Should You Monetize?
If you’re looking for a single answer to this question, all we can say is that it depends. We’ve tried our best to outline the many advantages and disadvantages of app marketplace monetization above, so our advice would be to go through the list again and see how the pros and cons weigh against each other in your circumstances.
For example, if you view your marketplace as nothing more than a supplement to a core product, you might just focus on the monetization of that product instead of trying to cash in along the way. On the contrary, if you want to build a platform that can stand for itself, and you’ve got the resources to do so, we’d highly recommend you give it a shot.
You’ll be glad to know OpenChannel includes a full suite of monetization features, especially for the commission-based model, letting you set up monetization in minutes just to test it out.