3 Ways Apps Make Money

By Manish Sahajwani | January 31, 2012 AAA
3 Ways Apps Make Money

In just a short span of two decades, the Internet has changed the way we live and how we go about carrying out our business. In the early '90s, the Web started as a read-only place where people could just browse and get widely scattered information. One example is the early version of Yahoo, which used to be a directory of various links on the Internet.



SEE: From The Printing Press To The Internet

After the dot-com bust in 2000, the Web went through a serious transformation when a few Internet companies were able to establish successful business models around their offerings. For example, Google incorporated a simple, keyword-based advertising model for its search engine, eBay pioneered online auctions and Amazon became the successful online department store.

By now the Web had transformed itself into an interactive platform, popularly known as the Web 2.0, where you use the Web not just to receive information, but as an interactive medium where you can both read and write. A whole new era of Web services had begun. People took to blogging and many even started conducting their own business and personal activities on the Internet.

Imagine you wanted to go to a movie. In the past, you would have to go to a movie theater to book the tickets. Now, with Web 2.0, you can search the Internet to find the movies playing in the theaters near you, book and print the tickets from the convenience of your home. That's the new Internet for you, and a variety of Web applications are making our lives easier and making us more efficient at conducting business.

There's an App for That
It seems like there is a Web app for almost anything you want to do. Facebook is changing the way we socialize; twitter is growing as a communication platform; Dropbox and Box have made sharing files a breeze; Google apps are reducing our dependence on desktop applications; Groupon gets us the best deals; QuickBooks has revolutionized the way we manage our accounts and so on. Every day new apps are launched, adding newer capabilities to the Web.(For more about the internet, check out 5 Successful Companies That Survived The Dotcom Bubble.)

Let's look at some of the business models used by these web apps.

Advertising and Sponsorships
This is, so far, the most popular business model used across the Web. In this model, instead of charging the users for content or services, the apps place advertisements to earn money. The advertisers are usually charged on the basis of cost per click (CPC), or cost per thousand (CPM). Many large sites, such as Google and Yahoo, have found great success in this model. The model became very popular when Google came up with AdWords, the self-service advertising platform that allows advertisers to widen their reach by placing their ads next to the search results. Such advertising saw great success, as it was highly targeted based on the keywords being searched by the users. Google then launched the AdSense program, which allows even small publishers to start displaying ads in their blogs or sites; they then benefit from Google's huge reach and ad inventory. Today, many apps use advertisements as their only source of income.

Paid Products and Services
In this model, the app charges its users a fixed or a periodic fee for using their product or service. Most apps follow a freemium model, where a basic level of product or service is provided free to the user, but to use the full product they will have to pay. Some apps even support their free version with advertisements and offer an ad-free version with additional features at a premium. Examples of companies following this model are Dropbox and Quick Books Online. Even gaming companies like Zynga make money in this way. Both of them have a free basic version and charge their customers to use the full product.

E-commerce
This is another popular business model where companies set up online shops to sell physical and digital products. For physical goods, the companies maintain warehouses with inventory of their products, while customers go to the online shops and make purchases. Even the payments are collected online, via electronic payment gateways. On receipt of the order and payment, the products are then shipped to the customer. The company makes money from each sale, like a traditional brick-and-mortar business; however, without maintaining a number of actual stores, overhead is significantly lower. Profit margins, therefore, will depend largely on how efficiently they run their businesses. The most popular companies following this business model are Amazon and eBay.

Even services are being sold online. For example, elance.com is a freelance network that connects buyers of services to the sellers, and provides them with a platform to work on projects. Elance earns by charging a commission on each of the projects completed over its platform.

The Bottom Line
These are the three most widely used methods for Web apps to make money. The Internet continues to evolve and we will see a lot more activity in the future. Web gurus are already talking about the Web 3.0 revolution, where the focus of applications is going to shift to data and personalization. In the future, the apps will make finding and acting on information easier than it is now; such advancements will bring along even more business opportunities. (To learn more about the internet, read The Industry Handbook: The Internet Industry.)

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