Last week I wrote about a way of thinking generically about different types of app. Today, I’m going to take a look at the underlying business models that might underpin apps.

To start with, many apps are developed out of altruism. Software developed for charity, for general good, to prove a point or “just because” forms a significant category in the history of software as well as into the future (and that’s to say nothing of the hornet’s nest that is the world of Open Source).  The Guardian app (flowing as it does out of the not-for-profit Scott Trust-owned newspaper) is an interesting example of an app falling into the category of altruism.

The Guardian App also, though, falls into the category of “Sticky” marketing – a term coined by Grant Leboff to describe marketing activities that add value in and of themselves to the end consumer. More traditional marketing – extending out the reach of a brand – is also becoming more common in the world of Apps; this is an  extension from the revolution that happened in the past 10 years where every advert started to carry a URL, and now marketplace logos are becoming more common. The BA App probably covers off both of these marketing aims, adding value to customers and also differentiating the brand above budget airline competitors.

Next we have apps that are there to sell thru products and services that exist elsewhere, or to reduce the cost of transactions for the supplier. The BA app, as previously mentioned, allows for customers to upgrade their seats (a sale), but also presumably reduces down the cost of doing business (doing away with paper boarding passes, for example). Spotify’s apps give premium functionality to subscribers (who transact independently of any app marketplace), and Add Lee’s app is there to make money from taxi bookings (again, transacted independently of any marketplace).

These sorts of app are generally delivered for free in marketplaces, as it’s an ambitious supplier that will put a paid-for barrier to entry on someone using their services.

The final category of app business model is one where it is the app itself that is there to generate revenue – either through direct sales of the app itself through a marketplace (the Angry Birds on Windows Phone or iOS model), through advertising revenue (Angry Birds on Android), content syndication (Spotify) or through selling the app itself to another business (for example, TweetDeck being bought by Twitter), or at a smaller scale with sales being brokered through services like Apptopia.

These four models determine different cost/investment models:

  • altruistic apps need to be able to keep cost to a minimum (unless they are the output of a wealthy and generous benefactor);
  • marketing apps will be a marketing investment, and the return on that investment is likely to be at the soft end of the spectrum (brand value, customer perception, loyalty, etc);
  • revenue or cost saving apps are essentially a cost of sale, probably need to be minimised, and there may be need to make significant capital investments at certain stages of growth over time (although I have misgivings about the concept of “economies of scale“, particularly in this era of massively commoditized Cloud services)
  • apps looking to generate their own revenues through marketplaces will have a cost of sale/revenue share set by the economics of the marketplaces they are using. Some savings might be seen as sales increase (for example as announced with the Windows Store model), and in time it will be interesting to see what competition emerges between marketplaces.

Over the coming weeks I’m going to be talking with as many people as I can about these models to refine and validate them – again, any feedback is most welcomed.

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