Mobile app monetization: Think business model, not ads

Oliver Roup is the CEO and founder of VigLink.

According to statistics released from the Interactive Advertising Bureau, mobile advertising spend rose to $3.4 billion in 2012, up 111 percent from the prior year’s record levels, and mobile advertising now accounts for 9 percent of all digital revenue.

Spending on mobile devices continues to accelerate at an aggressive pace; naturally, advertisers are following the consumers. Despite this growth, the traditional display ad model of advertising that dominates the Internet just does not translate well to the several inches of screen available on the typical smartphone.

On a 21-inch screen, a small banner ad simply becomes part of the scenery, and doesn’t take up so much real estate to impact the user experience. While mobile-specific ads are designed to be less obtrusive, they still occupy a significant number of pixels – space which could have been used to improve the app experience. These ads are simply taking the desktop ad model that has been around for years and crudely molding it to the smartphone. Considering the limitations of mobile banner ads, what are the alternatives to traditional display or interstitial ads?

Freemium

Popular with many games and some service-oriented applications, the “freemium” model offers a stripped down experience for free and a fully featured app for those who pay. In a game setting it could mean payment unlocks certain levels, while the basic levels remain free. Freemium can be a way to drive initial traffic, but it does have its downsides. A core drawback is the app developer is intentionally providing a large segment of its users (the “free” ones) with an inferior experience or service.

Affiliate and Referral Marketing

Affiliate marketing through links is one track mobile developers are taking to monetize applications without devoting valuable screen space to a third party. New services are automatically transforming existing mobile links into revenue-generating links by directing the user to one of thousands of retailers. Instead of an ad, viewers are unobtrusively presented links within relevant content.

The popular mobile and social shopping app Wanelo (also available as a web app) showcases products available for sale , each of which is shared by a member of the Wanelo community. The app lets users follow certain stores or individuals and discover products they love. These discoveries turn into purchases, and these purchases provide Wanelo with referral revenue.

Another form of affiliate marketing for apps is to promote other mobile apps with the goal of earning commissions when the app is purchased and downloaded. These types of ads typically have a more integrated and natural feel within the app, especially if the content or style (for example a skiing game referring a mountain weather application) of both applications are natural complements.

In-App Purchasing

Beyond display ads and affiliate marketing, a major and growing mobile monetization strategy is in-app purchases. Buying these virtual goods typically provide deeper levels of engagement with the app content. Games might offer virtual currency or the ability to buy a personalized avatar. When designed well, in-app purchasing can turn a “free” app into a highly lucrative income stream. Indeed, some of the highest grossing apps are free.

Which monetization strategy to choose depends on several factors including the purchasing habits of the target audience and the type of application. For example, many shopping-related apps lend themselves to affiliate style marketing, while games are a natural fit for in-app purchasing. For a service, a developer could consider charging a small fee for the app to make it more exclusive, after a period of free trials.

Finding the right mobile monetization technology partner is another important step for developers. It’s important to select a partner with flexible APIs, with the developer having the freedom to only make the API calls they want, when they want. Monetization can also be tailored to the capabilities of today’s devices. For example, cameras can enable bar code scanners, GPS enables local targeting, and of course, it’s a phone and many businesses are willing to pay per call.

Monetization should not be an afterthought for developers. Business models should be considered first, and then developers should create or integrate technology that will enable the business model to be successful. When app development is approached in this manner, it is unlikely many business models will include relegating 10% of available screen space to static ads.

Oliver Roup is founder and CEO of VigLink, an automated affiliate marketing company that works with more than 30,000 merchants to maximize content publisher revenue via links. He brings over 15 years of software experience to VigLink. Previously, he was a Director at Microsoft in charge of product for various media properties including XBOX Live Video Marketplace, Zune Marketplace and MSN Entertainment.

iPhone 5 photo by Devindra Hardawar/VentureBeat