When you have an app idea and you are creating it with the intent to make money, you have a few options. You can either create an app, sell it for a fixed price on any one of the many app stores or you can create a free app with advertisements that will make you money whenever one of your customers uses the app and views the ads. When looking at these two options, it’s pretty difficult to know right off the bat which one will net you the most money. If you go with paid apps, you might lose out on potential revenue from long-term repeated use of your apps. However, if you go with free apps, you might end up losing an initial burst of capital from the original sale of each app. There’s only one way to know whether free or paid apps are better for your business, and that is to look at how most people use apps and what advertisers are willing to pay for advertisements.

So, how do most people use apps? Pinch Media did a study on this subject and dug up some useful data. According to their research, the average free app gets used 6.6 times more than its paid counterpart. While this sounds like a strong reason to go for free app that sell advertising space, the math doesn’t quite work that way. Here is why. Let’s assume that our paid app sells for 99 cents. In that case, Apple will take its 30%, giving us a net profit of approximately 70 cents per sale. The free app then has to make up that 70 cent difference per download through advertising in order for it be as good as the cheapest paid app. Pinch Media says the average app gets run 12 times. When an app is made free, this number is multiplied by the 6.6 factor to give it an average total usage of about 80 sessions. Now the answer as to whether it’s a good idea to make a paid app or a free app is boiled down to the following question. Can a free application make 70 cents in advertising revenue in 80 use sessions?

Greg Yardley, the CEO of Pinch Media, very confidently states, “Hell No” as the answer to this question in his presentation of the research. The only way a free app could make this kind of money is if it were able to somehow net .75 for every thousand advertisement views (known as CPM in the biz). Here is the logic. Your app will only be able to serve one or two advertisements every session. If your app can serve one ad per session, and it is used eighty times, then you will have 80 impressions. At .75 per thousand impressions, you will have made your 70 cents.

Of course, no advertiser in their right mind will offer a rate this large for smartphone applications development, especially one that is just entering the scene. Most companies offer $ .50 to .00 for every thousand views. This is at least four times less than what your app will need in order to make up the seventy cents.

After all of this math, Pinch Media concludes that the best plan for any app is to start it off as a paid app, install software to determine how it is being used, and then go from there. The company states that less than 5% of top-performing apps are “sticky” enough to make money from advertisements. What might be a good example of a sticky app? Well, Pandora keeps people listening with rapt ears and is used over and over again. At $ .5 to .00 per thousand ad views, Pandora can keep its operation running through sheer user view volume alone.

To make money from advertising, your app either has to make a lot of money per advertisement view (CPM) or it has to beat the average smartphone app’s relatively low rate of use. Since everyone starts with zero information on the rate of use of their apps, and most advertisers are unwilling to give very high CPM rates, the most prudent decision is to make your app a paid app. If you have any more questions about your new app idea and whether it will be a good idea to make it free, Appiction – one of the leading iphone application development company has a team of marketing consultants who will guide you in the right direction. We’ll help you use the analytical tools that will give you the information you need. Here’s to the success of your new app!