Why subscription-based app monetization is more relevant than ever

When thinking of the word ‘subscription’, images of video streaming platforms like Netflix or music streaming services like Spotify most likely come to mind. However, this form of app monetization has taken off in recent years across all verticals, from health apps to gaming apps. By 2021, the top 100 subscription-based apps worldwide were raking in a whopping $18.3 billion in revenue. With this undisputable success, subscriptions are projected to continue climbing in 2023, with the economic downturn sharpening the need for multiple revenue streams. But what makes this revenue model so profitable, and is it likely to be sustainable in the long term?

What is a subscription-based app?

Let’s start with the basics. Subscription-based apps are classified as any app that charges users a recurring membership fee. This fee is often charged as a monthly subscription, but can also be weekly, quarterly, or annually depending on the app. Because of this ongoing payment, subscription-based apps are almost always free to download on app stores.

There are three pricing models that are typically used by subscription-based apps. We’ll take a look at an example of a successful app from each model.

Pay to upgrade

Also known as a freemium model, the core function of the app is accessible for free. Users can then pay to upgrade their experience by accessing additional features, unlocking extra content, or removing the ads that would otherwise bring in revenue for the app developer.

Pay to upgrade in action: Duolingo

Education app Duolingo offers an ad-free experience for users who subscribe to Super Duolingo. Subscribed users also receive a personalized daily practice plan and unlimited hearts and gems.

Simply put, companies prefer a subscription-based model because it provides a predictable recurring revenue. However, there are both pros and cons to subscription-based apps – for app developers and app users alike. They can be summarized as follows.

Benefits of a subscription-based model

• Apple’s incentive: App developers who make more than $1 million annually receive 70% of revenue made through the Apple Store, with Apple keeping the remaining 30%. However, this cut is bumped up to 85% for subscriptions that are renewed after the first year.
• Reliable, higher revenue: Not only can app developers more easily predict revenue to improve cash flow, but the revenue brought in by subscriptions is generally higher than other revenue models.
• Ad-free experience: Users can experience an uninterrupted journey without the need for an in-app advertising revenue model.
• Higher engagement: Because users want to get value for their money, they are more likely to stay engaged with your app on a more regular basis.
• Automatic renewals: Subscriptions automatically renewing removes one primary decision point where consumers would otherwise churn. This improves your app’s retention rate.

Downfalls of a subscription-based model

• Need for recurring value: Consistent payments on the user’s end means consistent value added is needed on the developer’s end. If a user is continually paying for the exact same functionality or content they will be more likely to look elsewhere for a free or once-off app purchase alternative.
• Subscription overload: With more apps moving to a subscription model, consumers are paying a higher volume of subscriptions at a time. This makes app users much choosier over where they spend their money, and how much they spend.
• Higher stake reviews: There’s a higher chance of negative reviews or word of mouth with subscription-based apps because users oftentimes review the value they feel they are getting, rather than the app experience alone. If your app was previously free to download and use – or charged a once-off lifetime payment to use – and you are now moving to a subscription model, existing users may understandably be upset. There is also potential for backlash from users who have forgotten about a subscription until it automatically renews, and they are reminded on their bank statement after the fact.

If you’re looking to create your own subscription-based app, we’ve gathered together our top tips for developers.

1. Provide killer onboarding. App onboarding is oftentimes more important for a subscription-based app. This is especially true when using the ‘pay to use’ model. Avoid common pitfalls by exhibiting value before asking for a user to subscribe. If you are using the ‘pay to upgrade’ model, offer a clear exit from your paywall and do not push subscriptions too early in the user journey.
2. Show what you’ve got on offer. If you aren’t opting to use the ‘pay to upgrade’ model, make sure you still include a free trial or show the content that will be unlocked when subscribing. A one-week trial is most popular among app subscriptions.
3. Tread carefully when making the switch. If your app was previously free to use or required a once-off lifetime payment, make sure you respect your existing customers by clearly communicating the move to subscription-based and allowing them to remain on the previous model as valued customers.
4. Choose your pricing model carefully. Your subscription price can make or break your app monetization. Pricing will vary depending on vertical, so begin with competitor research to see how much other apps on the market are charging. Then, take a usage versus pricing matrix into consideration. Lastly, consider how often you will be able to update the content on your app. Less frequent updates should equal a lower price point.