According to American IT analyst firm Gartner, 102 billion app downloads were performed last year, but only a fraction of these apps are profitable in the sense that they generate a steady stream of revenue.
Tim Rea, CEO of global messaging app Palringo spoke with TechRadar Pro about what he believes are the ingredients of success for a profitable app business, and how his own company drives business revenue by trying to stay close to its online community.
TechRadar Pro: So what are the key ingredients needed to make an app profitable?
Tim Rea: It goes without saying that the service needs to be good quality and engaging. I use the word service rather than app because in many cases I think it is dangerous to think and talk about "an app" as though it is a one-off piece of development that a developer throws out there. A service is different. We have a substantial development, operations and infrastructure commitment associated with delivering a high performance service.
In terms of profitability, the term profit implies that you can generate more revenue from the service than it costs you to run. With some of these quality services, the cost of running can be high if you consider cost of hosting, bandwidth, operations management, denial of service protection, storage.
We put a lot into establishing an efficient operation. For many, if not most businesses like ours, the big cost is in acquiring customers. Here again there is a cost/value equation. With deep pockets you can spend a lot of money to ensure a big flow of users into your service, but that doesn't mean they are going to be the right users.
It is a non-trivial exercise to develop a view that tells you the difference between an engaged user vs. someone who just logged in for no particular reason and never comes back, or between a user who spends or brings value to the community and ones that might be getting involved for the wrong reasons. It is important to focus on acquiring the right users at an economically viable cost.
Finally, the model has to make sense. Advertising on mobile still has its challenges, but it is possible to build a business based on advertising if the conditions are right. Many apps take what I'd call a "box shifter" approach to generating revenue: pay a £1 and the app is yours.
However, there is not much of a revenue stream beyond the original sale and so it is hard to grow the business. Then there is the "sell stuff" model: sell users things that improve their experience. This can be hard to do without creating a scenario where people feel they cannot gain value without paying e.g. a messaging app where you have to pay extra to use the vowels!
TRP: How do you monetise your users?
TR: We operate in the "sell stuff" category. Our users can get full value out of our service without buying stuff, but we have tried to strike a balance in finding ways to add value to a user's experience with extra virtual goods that they would be happy to pay for.
TRP: How is your monetisation model different to that of other global messaging and social sharing apps?
We started life with a pure messaging view of the world and much work went in to achieving efficiency in supporting the communication experience. As we began to seriously consider how best to generate revenue, we also spent much time studying usage patterns.
This led us to the conclusion that, although our messaging component was a crucial aspect of the service, our users were more focused on building communities and that the building of these communities, as well as the participation within established communities, had a very competitive dynamic, similar to many games.
Pure messaging suffers from a lack of a clear business model in that users are hesitant to pay for the communication utility. We need only look at Viber which got away with a very nice sale price, but despite impressive sounding user numbers, had paltry revenues and substantial costs. In our case, the critical step was to think like a game.
We began by creating simple games like Hangman and we've gone on to build a substantial gaming capability that will allow us to build and develop these games further. Our efficient communications platform enables us to support real time conversation within a community, and the messaging and community capability supports a unique approach to gaming.
We are not building a communication capability that can be incorporated into games, but looking to build games that revolve around the messaging and communications capability.
TRP: What additional services do users benefit from if they decide to pay for additional functionality?
TR: There are a few functional elements related to monetisation, but for the most part we try not to take the approach of forcing users to pay to have the core set of capabilities required to fully engage. I hate the "ok, now you have to pay if you want to keep going" approach, or the "if you don't pay we will ruin your experience with irrelevant ads", or just a general "this is going to suck unless you pay us."
There are optional extras that users can buy to, for example, build their communities more quickly or manage their communities more effectively or give their users some games to play to add to the amusement
TRP: How many of your customers decide to pay for additional services and why?
TR: This is always a tricky question, so let's start by saying that we have not *yet* looked at ways to increase the number of spenders. At the moment, we typically see 1-3% of our user base spending money on a regular basis. And as to why? They spend because it is cool - obviously!
TRP: At which stage in the development of the app was it decided that you monetise through incentivisation of your customer base?
We went through various stages starting with a naive view that we'd have a cool messaging app, generate some ad dollars and then charge people for some element of usage. We then went through a phase of thinking maybe we shouldn't worry about getting money from consumers, but instead try to deliver parallel services to telcos (white label) and to enterprise and just charge them, maybe justifying the consumer service on basis that it is a great testbed.
Then a little over a couple of years ago we took a cold, hard look at the situation and decided that we needed to focus down onto a particular niche and build a suitable, sustainable model that we could then expand up into a viable business.
TRP: What are the benefits of incentivising users to pay for added functionality over free-to-use apps and advertising-based revenue models?
TR: It focuses attention on what users are doing, what they are interested in and what they want. It generates some money (vs free to use apps!) and is a basis for a real business (vs ad based approach!). As I said, an ad-based approach can be viable but it's tricky.
Generally in the mobile world it just doesn't work well because we have got into a view of the world that has most publishers thinking "if my users don't pay I will show them ads" so they are basically saying "hey, I've got a bunch of people who I know will not pay and I'll show them your ads!"
That is why they are not worth much. Beyond that, a service needs decent, coherent volumes of users and an ability to properly characterise their audience and package them for sale. Not so easy.
TRP: Can you share anything in terms of where you see the mobile messaging space heading? What monetisation models do you predict have the potential for growth?
Messaging in terms of the communication utility is seen as a right, not a luxury. Users don't think in terms of paying for it even if it is faster, fancier etc. I get free, unlimited SMS with my core mobile contract, Apple offers a free messaging service that sits right alongside the SMS on my iPhone, there are dozens of messaging apps I could download to use, many of which offer the "advantage" of disappearing (anyone realise that it is harder to actually keep the messages and offer a history function?!).
The Viber and WhatsApp - and now Snapchat - hype has created a rush to build more messaging apps. Build it, hype it up, get as many users as possible and maybe then it will get bought by someone with very little sense but a lot of cash! Messaging services have very little scope to provide the basis for sustainable businesses. However, messaging-based services can be interesting: messaging can be the core, but it is what is on top that is important.
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