You hit on the perfect idea for a new mobile app. You determined your audience and your dev team is ready to go. But what’s the best way to monetize the app? Will it bring in more revenue as a paid app or as a free, ad-supported one?

To answer those questions you’ll need to understand where the current market is and where it’s going. You’ll also want to examine your marketing goals and customer base.  All of that sounds like a tall order, but we can break it down into a few key questions.

DISTIMO Market Research Results

Is your application written for iOS or Android?

[Note that we haven't forgotten about Blackberry or Windows. For the sake of brevity, we'll focus on the two primary mobile operating systems.]
It would be nice to have a one-size-fits-all answer that’s platform agnostic. Unfortunately, your strategy may depend heavily on whether you are developing for iOS or Android (or both, of course).

“Free is the way to go with Android. Nobody has been successful selling content on Android. We will offer a way to remove the ads by paying for the app, but we don’t expect that to be a huge revenue stream.” -Peter Vesterbacka, Maker of Angry Birds

If you’re creating applications for Android, there’s a clear precedent for giving them away. According to the market research gurus at Distimo, free apps make up about 57% of the Google Android market compared to only 25% for iPhones on the Apple App Store. But what’s the reason for this discrepancy? Primarily, there are two:

Worldwide Distribution

Apple has done a great job of allowing developers to sell apps easily in more than 90 countries. Google, on the other hand, has been slow to support countries other than the United States and a handful of others. As of publication of this article, developers from only 9 countries can distribute paid Android apps, and users in only 13 countries are able to download them. That’s a small percentage of the 46 total countries where the Android Market is available. Even when paid apps are available, users are forced to register for a Google Checkout account to pay for them.  While Google slowly improves availability of paid apps, users are becoming more and more accustomed to free apps.

Monetizing Models

The Android Market has been slow to provide monetizing models that are as effective as Apple. In its first few months, the Android market provided only free apps before finally setting up the infrastructure to allow for paid ones. Once users were accustomed to free apps, it was difficult to gain traction with paid apps.

Apple has also made it easier for developers to offer in-app purchases. According to Distimo, in the US, 34% of the revenue generated by the most successful iPhone applications in December was generated by free applications featuring in-app purchases. Google finally added in-app billing as of March 29, but again they’re late to the party.

App Store Top 5 Apps

Who are your customers?

Before choosing a revenue model, you’ll want to think about your current and potential customers. For example, is your app geared for a broad audience or a niche market?  If you are targeting a niche market with a specialized app, your customers may be more willing to pay a higher fee up front. You probably wouldn’t see an enormous revenue stream from ad income with a specialized app anyway. Keep in mind, you’ll need to put more up front time and effort into designing a specialized app for a niche market in order to satisfy those users and to justify a higher fee.

Do you already have several apps on the market with a strong customer base? If you are fortunate enough to answer yes to that question, you are in a better position to charge for new apps. However, if you’ve already set expectations by offering only free apps, it could be risky to change revenue streams cold turkey. In that case, a better option might be to offer a free app with the option to pay to remove ads.

What is your goal for the lifespan of the application?

The productive lifespan of a typical app can be short, but the top selling apps have frequent updates to refocus attention on the product and to incite more reviews.  You’ll want to consider the long-term costs if your app is successful, since users will expect free updates–especially from an app they initially paid for. Ad-supported apps will continue to generate revenue (albeit less over time) even without updates.

A few more considerations: The best (or worst) of both worlds

Once you’ve determined your development platform, audience, and lifespan of your app, here are a few more guidelines to help you make the fee vs. free decision:

• Consider selling an ad-supported app with an in-app option to pay to remove ads. This approach can satisfy people who get frustrated by ads, while still meeting the expectations of users that expect free apps.
• Successful paid apps often have a free entry version for consumers to try prior to paying for a full-featured product.
• Be careful with providing paid content from a free app, as this can generate bad reviews from people who are expecting all free content. Even if more serious users pay and appreciate the value of your paid content, the bad reviews from others can seriously affect your sales.

Finally, keep in mind that paid apps have the potential to generate much higher income than ad-supported apps, but only if very successful. In other words, they have higher potential returns, but a much lower success rate at those levels.

There may be other factors in your decision to go with fee or free apps; for example a desire to port your app to the iPad or Android tablet. But in general, your decision on fee or free apps will probably come down to a few considerations: Android vs iOS, US vs worldwide distribution, and your target customers.

Glenn Touger is a freelance technical and marketing writer and contributor to Dogfish Software. He has over 20 years experience in the software industry and can be reached at glenn@touger.net.