11/30/2009 10:38 pm ET | Updated May 25, 2011

Cash In On Your iPhone App

Who doesn't want to capitalize on the iPhone app gold rush? With close to 120,000 apps created and over two billion downloads so far, this is officially a multi-billion dollar industry. Apps like "Don't Push the Red Button" and iFart making the top spots in the App Store, it's not unreasonable to ask "How are these apps making money anyway?" At first glance, it certainly appears to be random, but there is a method behind the madness.

There are few but powerful models for making money from iPhone apps, but across the board success comes down to two things -- users and engagement. Before we look at these models in depth, there are some strategies that any app should apply to increase downloads and user-base.

First of all, those apps lucky enough to have an online user-base such as Facebook, Huffington Post, and Yelp are best served by leveraging their existing users. Facebook in particular does an excellent job of converting users by posting a news feed item whenever a current user first connects to the iPhone app - this has enabled the Facebook app to consistently remain on the top ten list of free apps . Secondly, developers with multiple iPhone apps can use one app to leverage the other. For instance, Flipside5 has a series of iPhone games that they cross-advertise on their family of apps, reaching an instant loyal user base for new apps. App networks like ngmoco's Plus+ and OpenFeint are increasingly popular and profitable for developers as they deeply incorporate social networking virality into iPhone applications that propel new downloads.

The main ingredient -- and conversely the most elusive -- is buzz. An app that will get buzz is hard to define, but you'll know it when you see it. Buzz worthy apps generally do one thing and they do it well. They take full advantage of iPhone functionality so that the app immediately makes you feel like you can't live without it and you can't wait to show it to your friends -- case in point: Shazam. If you're one of the ten people who haven't yet heard of it, Shazam allows you to hold your iPhone up to a song and, after 30 seconds, tells you the title and artist of the song that's playing (and let's you buy the song on iTunes, of course).

Shazam leads nicely into a new model for monetizing a free iPhone app: in-app purchases. Apple recently started allowing developers to make in-app purchases in free, as well as paid, apps. This allows developers to let users download their app for free and then pay to get extra features or levels. For instance, Rolando 2, relaunched as a free app, where users can play the first level for free, then have to pay to access higher levels. Monetization of this app is determined not simply by downloads, but by conversion rate of users to in-app purchases. The exploding virtual currency market in the social gaming space will surely drive many players like Zynga, Playfish, and Playdom to extend their online social gaming experiences to the iPhone app space and leveraging in app purchasing will be a perfect fit for those developers.

Another model for a free app is the ad-supported model. Ad-supported models enable developers to release completely free versions of their apps. These apps include a premium version with more features and no ads. Some developers such as Inedible Software of Shotgun Free, find that they make much more revenue off of their free version. For in-depth case studies of apps using this revenue model, download a Mobclix white paper. For this model, a great money making app would not only have lots of downloads, but longer session times and greater life time value of users who keep coming back to the app.

Finally, there are paid apps ranging anywhere in-between $.99 to $899.99. Paid applications overall get fewer downloads than free apps, but for many developers this is still a lucrative monetization model for their premium apps. An example of an app that has been very successful with this model is Flight Control, a game that sells for $.99, and is consistently in the top 50 list for games. The key is to release your app at the right price point and schedule price drops and updates as necessary to retain new downloads and keep the app at the top of your category.

App Store success will come to those developers who leverage these revenue models most effectively. When the App Store started, the only real option for developers was to produce apps that sold for one or two dollars. However, as developers worked to build apps with more functionality, more depth, and more utility, they needed additional ways to monetize to make it worth their time. Take CNN's new paid app for instance, they added advertising so there would be a steady stream of revenue to offset the high quality features their app offers. As iPhone apps move from a gold rush, where any random app can get lucky, to a market where only the best, high-quality apps rise to the top, rest assured new and combined monetization models will emerge and serious developers will be looking for serious ways to make positive returns on their investment...which in the end creates a more exciting environment for consumers!