How do web apps make money?
In a world like ours, overflowing with ideas in action in the form of start-ups and mobile apps, there’s a lot to catch up with in the realm of the digital. We casually come across topics like — Big Data, Cloud Computing, Blockchain, Cryptocurrency, User Experience and Empathy, AI/ML/NLP, AR/VR/MR, etc. without paying much attention to what these really mean. One such topic revolves around the question — “How does ‘X’ (random web app) make money”?
So, how do Facebook and similar apps benefit from giving out stuff for free? This field of study is also referred to as App Economics or Monetization which attempts to answer questions with respect to search engines (like Google), social media platforms (like Facebook, Instagram, Snapchat), free online games (like Candy Crush), other web services (like Tinder), online news platforms (like Times of India, CNN, The Guardian), web streaming platforms (YouTube , Zee5), cab/ transport services (like Uber, Ola), hotel/property aggregators (like Airbnb, OYO), transport booking websites (like RedBus, Greybus), stock trading platforms (like Robinhood, Revolut) or chat platforms (like WhatsApp, WeChat) and how some of these platforms make money without charging the user at all or just a minimal premium.
The Economics of Web-Apps is quite different from real-world Business Economics. These work on new age monetization techniques that can be divided into following few broad categories-
1. Monetization through Advertisements (or How did tech companies like Facebook and Google get so big?)
Facebook and Google are one of the most used online platforms of the era. Their need has been smartly generated over the years, such that we find it hard to live without them. People often ask that how does the company run, employ so many people, and maintain a perfectly enjoyable experience for users. Where does all the money come from? The answer is simple — Ad Auctions.
There are advertisement spaces on the app that are consumed by these ads once you sign-in. The marketing teams of parent companies of the ad product/service are constantly participating in what’s called ‘Ad Bidding’ which is like general bidding or filling tenders but is done online. Whoever wins the bid has their ad displayed.
Now, Facebook and Google charge them based on CPI (Cost Per Impression) i.e. every time an ad is displayed or CPC (Cost Per Click) i.e. every time the ad is clicked. The bidding, however, doesn’t just depend on the ‘bid’ amount.
There are various other factors that determine the ‘win’. For instance, the relevance of the ad for the person viewing it (e.g. A cat food ad isn’t relevant for someone who doesn’t own a cat). It doesn’t make sense to display an ad 10 times that gets viewed once over displaying it 5 times where it gets viewed thrice. This process is called Ad Targeting.
Ad Targeting is typically run on the data that you subconsciously provide Google/Facebook. Your searches and history (like ‘Best Camera to Buy’, ‘Cameras within the Range of 6000 to 15000) tell Google that you have been looking to buy a camera and it starts showing you ads relevant to that search.
Now, it is of course, a debate whether it’s right to invade someone’s privacy by monitoring their online activity and a lot of privacy advocates question this behaviour. It is believed that the simple answer to this is “If you aren’t paying for the product, you are the product”
A lot of people also fear that this data can be sold by Google and Facebook to other companies for knowing users and their behaviors in and out (for ‘data is the new oil’). But this is not true. This data can’t be sold for it is their ‘bread and butter’ and losing it to anyone will cost them their business and huge losses in the long run.
At the recent grilling of Mark Zuckerberg for Facebook’s involvement in the Cambridge Analytica scandal, Senator Orrin Hatch asks Facebook CEO Mark Zuckerberg how he can sustain a business model in which users do not pay. While many found this question rather silly, most people often find themselves in the senator’s shoes.
2. Sponsored Content (or Why do I see Instagram stories of people/companies I don’t follow in my feed or what are those unrealistic news stories I see on news websites)
We have already read about the ads/auctions in the first section. This one is a similar strategy where the ad is displayed on the screen. The content is so well placed on your timeline or webpage that it flows seamlessly with the scroll and the user is more likely to take interest because people have now developed a tendency to overlook visibly loud ads. This is a statistically proven fact. This is also called as ‘Native Advertising’
While this is a clever strategy for businesses, the debate of journalistic ethics being compromised remains. It’s often said that these native ads are misleading, and they tend to think of them as actual news on news apps and websites because it’s harder to distinguish facts from ads.
3. Freemium: More features at a price (or Why is Candy Crush, Pokémon GO or even Tinder free)
These companies will make you download the app and try to get you hooked onto the lifestyle/game etc. Once you start using the app/game, they charge you for premium features like extra lives/coins (for games) or extra features/unlimited swipes (on Tinder).
We may, however, say that a very small percentage of users actually pay for these services. But the owners of the Business already know it and their revenue probably comes from 1% of the users (who actually spend $80–100 every year on one app) — ‘I know! But that’s true’. The idea is to increase the denominator so that 1% is a bigger absolute number. This strategy is also known as Whale Hunting.
4. Service Charge (or How do Airbnb, Uber, Ola, redBus, etc. make money)
We often use platforms like Airbnb to book properties for vacations or Uber/Ola for hiring a cab ride or for. The question remains, why would these companies allow their platform to be used so that someone else (property owners, Cab drivers/owners or Bus services) can mint money out of it.
The catch is that we assume them to be free services, but we’re actually charged for them in the form of service charges. For Airbnb, the service charge is 6–12% for guests and 3% for hosts. Uber and Ola take about 35% from the trip price as a cut. RedBus charges bus service providers for directing customers to their services.
You ask why these companies pay these platforms when they already own a business. The answer is simple — it helps them expand their reach and get customers on a regular basis.
5. E-wallet interest (or How does Paytm work for the owners/ Why does Robinhood let you trade stocks for free)
This is a simple yet, intelligent strategy. Apps like Paytm and Robinhood make you keep your money in their E-Wallets and allow you to make transactions or trade stocks. The e-wallet can be treated as synonymous with a bank account and Paytm as a bank. It’s now easy to say that they keep your money and earn interest out of it
6. Borrowed Time (or How do start-ups make money without doing any of the above)
A lot of start-ups begin their businesses with venture capitalist money (or investor’s money) and live on the theory of ‘Grow First, Monetize Later’.
These companies either wait for the product to get traction and then deploy one of the above strategies or later get acquired/bought by a bigger player in the business who can use their product for attracting customers or using for data/behavior understanding etc.
The digital world is always on the lookout for new monetization strategies and even as we read this, we might be unaware of so many new, interesting ones.
