How is it possible to make a profit off of iPhone apps?

Question

Question: How is it possible to make a profit off of iPhone apps? I ran the math and I don't see how it's possible. What am I missing? What is a successful strategy?

Background: Yesterday I started to do some basic numbers for a possible iPhone app, and I realized that work in this field looks really difficult if you want to obtain profits. My numbers are as follows.

If we take into consideration that Apple takes 30% of each purchase, and with the asumption that 30% of the customers are going to demand money back because they are not happy with the product (you have to give back Apple's 30% comission from your profits), gives us that for each purchase, you get a margin of 40% (not counting other expenses, like servers, programmers salaries, etc).

So if you sell an app for 1$ per license (one app per user), you obtain a profit of 40 cents (0.40$ per user). It means that to achieve, for instance, 50.000$, you need a minimum of 125.000 happy customers. And we all agree that to build up a quality application, you will need a minimum of one designer, one IOs developer, one system engineer and one web app developer (at least for the back-end if you plan to build up some kind of social app), and is obvious that they have to have a decent salary that could give us an average of 35K$ year/developer (and we could only recruit decent developers with that numbers, not top ones).

If we multiply 4 developers x 35K$/year = 140K$ year (let's asume 150K$ if we include extra expenses like servers, etc).

So if we make a summary, we can deduce that we will need 375.000 happy customers purchasing our product per year just to pay bills (not profits).

Am I lossing something, or programming & selling iPhone apps is not that easy? I could even say that is impossible. Only super hits like WhatsUp for instance can obtain that amount of purchases, and we all agree that is almost impossible (or there are very low probabilities) that you could achieve that number of clients.

I hope somebody can give me a clue about selling products for iPhone (or mobility in general) and feasibility in real scenarios.

What question? and where do you pull the 30% return number, which looks awfully high.
I agree, it needs to be restructured to make the question more obvious. But I think what he/she is saying is "How can people make a profit off of iPhone apps? I've ran the math and can't figure it out."
When you say "We all agree" (twice, at least) who are you referring to?
THis question (if it is one) is so broad and general and basically asking someone else to make a business plan for them. It is impossible to answer except for giving proof by existence response. There are examples of companies that made lots of money on iPhone development. There are even more that do not make money on iPhone apps. Period. This doesn't warrant keeping the question.

rbwhitaker · Answer 1 · 2012-02-06 19:22:30Z

Making iPhone apps, profitably, is not an easy task. Neither is making an Android app, or a Flash game or all sorts of other things.

Many people who make apps like this do it because it's fun for them.

A couple of things that you may be skipping over:

You don't need to sell your app for just $1. You can sell it for much more. (And if you have 4 people on your team, you basically need to.)
Many apps are only made by 1 person. You're right, getting enough sales to make up for four people is going to be tough. I'm not sure why you feel like you need a team of four. Maybe for a more complicated app, but for many of them, you don't need so many people.
Most iPhone apps can be made in less than 1 year. That means you can make more than one, and make less profit on each one in order to be profitable.

But it is a tough game to play. There' a good bet you won't make a ton of money with an iPhone app, unless it's really good.

To point out a few potential errors in the specifics of your math:

30% refund rate? That seems really high. Most people who buy won't want a refund. They just won't purchase it in the first place. Do you have some sort of source to support that?
$35K for a developer doesn't seem like very much. Most developers I know get paid in the $50K-125K range, and depending on where you're at, it may actually be more.
I think, even with your numbers, you should be getting 49% profits, not 40%. Maybe I'm missing something, but if Apple takes a 30% share, you'd get 70%. If people ask for a refund, don't you pay that out of the 70%, not out of the full 100%? Doesn't Apple also refund their portion, or do you have to pay theirs too? For illustration, let's say you have a 100% refund rate (that would be very bad, I know). If people pay $1, Apple gives you $0.70. When they get a refund, they need their $1 back. But you wouldn't pay all of that back would you? You only got $0.70. Apple would also pay back their money. So the refund percentage should come off of your profit, not the full $1. 30% of 70% is 21% of the original. So Apple takes 30%, and with a refund rate of %30, you'll end up making $0.49 per sale on average, not $0.40. I don't know if that makes any sense, but I think it's right....
Perhaps profits aren't something to pay much attention to. If you're paying your salaries and your bills, and you're working on something you love, isn't that good enough? Knowing how hard it is to make iPhone apps, if you're pulling this off, you're doing just fine.

first at all, thank you very much for your long post and time.
Regarding to you answers. 1.Normally, if you want your app to be professional and successul (complicated app), is not common that you are the designer, ios coder and web app developer. So lets say you need a minimum of 3 persons. 2. from my point of view, and at least in my case, i only have one good idea, so at the end, i will be dependable of one app :-). 3. I mentioned 30% of refund to put myself in a very bad case scenario that could be possible.
4. Regarding to refunds, i have read that new Apple policies specify that when an app is refunded, Apple doesn't refund its 30%, so has to be the developer the one that has to refund the 100% of the app. 5. Lets assume your numbers (50% of profits for each purchase), and 50K$ x 3 developers = 150K$ in one year. We still need 300.000 real purchases to pay one entire year (and not counting third expenses). 6. I am so sorry, but i wouldn't enter a risk of 150K$ just for working in something i love :-). 7. So my questions is still on the air (thank you so much for your answer again)
But are you really going to use a designer, iOS coder, and web app developer, full time, for the entire length of the project? They can either move on and start working on the next big thing (point #3) and come back when their help is needed again, or the task can be done by one person who has some skill in all of those areas (point #2). If not, you're probably working on either an app that's doomed to fail, or an awesome app, which will justify more money (point #1).
Hmm... perhaps you misunderstood my last point in my answer. I'm referring to net profit (after salaries and other bills) not gross profit.

Dmitry Chornyi · Answer 2 · 2012-02-08 17:58:10Z

up vote 5 down vote

Here are couple articles on the subject:

Short anwser: your math is correct, and it is not likely that you will make any sizeable profit.

answered Feb 8 '12 at 17:58

Dmitry Chornyi
1512

2

Thank you very much. "Wooden Labyrinth 3D" example was shocking. 10 million downloads. 100 million of iAds served. 1 million of real clicks. Just $30K of revenues. I think that after all of this years of lab experience on apps markets, i really think that the way to evolve is to develop quality apps that deserve being purchased. Or being lucky, create a social community around a free app, so after that you can turn it into a prepayed app.There is a lack of case studies out there. – user1106811 Feb 8 '12 at 19:07

Ryan Doom · Answer 3 · 2012-02-08 05:27:15Z

How do you make money on iPhone apps?

Write apps and work on them in the evenings - don't quit a job and work full time until you have profits to support it
Don't have an entire team quit their jobs until you can support it
Do contract with or find a great UI/UX designer - but you don't need them fulltime for the length of the project
Sell your product for what it is worth, which is often for more then $1.
Find alternate revenue models then the one time app purchase. Ads, In app purchases...
Build and sell more then one app. Plenty of ideas out there. Zynga just steals other people's ideas and they are very successful.
Don't build an app that takes a year... build something you can release v1 in under a month
Provide plenty of information, screenshots, documentation on your product to decrease refunds
Use the right tools for the job. Depending on your app and it's complexity maybe writing it with Appcelerator or PhoneGap would save time / money

My recommendation - Stay employed. Start working on your idea tonight. ;)

Reading between the lines, I do not think this guy (?) is a software developer.
@Ryan Doom, thanks for your tips. Are really useful, and be sure i will take them into consideration. But as i wrotte before, apps store market is really dissapointing from the perspective of bussiness model. App store enviroment is not that awesome for business from my perspective. If you want to build up a team working full time on your product, you need hundred ot thousands of revenues per year, so it means millions of purchases.And we all agree that monthly subscription (the real deal) is very rare on this platforms.

littlerockjim · Answer 4 · 2012-11-25 04:12:33Z

You base your 40% profit rate on an assumption that 30% of purchasers will return the product. Then you use that 40% to support your assertion that you need 125,000 happy customers in order to make $50K. If you have 125K happy customers, then you have 178,571 total customers, and your 'takehome' is 40% of that number, or $71,482. With a 30% 'apple fee' and a 30% return rate (assuming you are right that Apple makes you pay all of this), then your real return on happy customers is closer to 57%.

To take home $50K you would need 125,000 total sales (and the resulting 37,500 returns). Seems much more doable now, eh? ;-)

ps if you are paying your developers $35k/yr, that might explain your 30% refund rate. But, I think several other people have already beaten that horse to death...

dave · Answer 5 · 2012-02-07 22:55:43Z

up vote 1 down vote

Making money from iPhone apps is hard enough for an experienced persons and it sounds like you are a bit green. Assuming you are in USA/Canada/Australia etc, $35K will not get you much of a coder. From my experience in software development, the vast majority of coders are pretty average.

The cost of hiring a person is actually a lot more than their salary. To start off with, you'll need to provide an office, hardware, etc. In Australia, you also need to provide superannuation and Workcover. If you are hiring 4 people, you are going to have extra accounting and legal costs as well.

I'd suggest you start small - hook up with an experienced coder and publish a simple application. If you are targeting a $1 app, perhaps that is all you need. You probably wont make much money off it but you can get the experience building a software company.

There are strategies for increasing the profitability of an app. If you sell it for $1, include in-app purchases to extend the application. Even expensive apps offer this. This is all part of the learning process.

If you choose to scale up, your company will probably need to be working on several apps simultaneously. Some will earn nothing but one or two may be successful.

answered Feb 7 '12 at 22:55

dave
1555

	thank you very much for your answer. Maybe i was not that accurate writting my doubt, but its obvious that when you have to calculate your ROI, there are tons of expenses that aren't just the gross salary payments for developers. What i was trying to explain is that even maintaining the app cheap (for instance, outsourcing IOs art designer for fix price in the beggining), the ROI is not going to be under $40-$50K for sure for a minimum viable and quality product.If you sell for $1,you get 50% of revenue (not profits),you will need 100.000 real purchases/customers. And just for ROI. – user1106811 Feb 8 '12 at 10:19
	So from my point of view, achiving 200.000 customers in 2-3-4 years that want to pay for your app (200.000 to obtain just an extra $40-$50K of revenues. And we can agree that $50K in 2-4 years is really dissapointing from the point of bussiness view), looks to me really really difficult. I really don't know how are doing some startups to make it profitable. And there are no stats about real companies that are really obtaining profits for just mobile apps. Or maybe its just a personal perception :-) – user1106811 Feb 8 '12 at 10:27
	@user1106811 - yes, it is difficult and many will not make back their investment. For every "Angry Birds", there will be many with dismal returns. I remember listening to a podcast where one guy was talking about his experiences - after $20K invested, he ended up with only 1000 odd users, the vast majority of which were running pirated versions of his software. That being said, if you can leverage your code-base and expertise, subsequent apps will be cheaper to develop. One app making $20K a year is bad but 10 apps making $20K a year is way better. The production costs may not be linear. – dave Feb 8 '12 at 10:38
	@David, yes, you are totally right. But the real deal is to find 10 ideas (for 10 apps) that are unique, not yet implemented, and, of course, profitable to obtain 20K a year :-). I don't think so this is a real situation for an average studio :-). I am still trying to convince myself ... :-) – user1106811 Feb 8 '12 at 13:45
	@user1106811 - Most of the apps in the App Store are knock offs or minor variations. I sounds like you are trying to put together a business case for starting an app development house but lack either the programming skills or killer ideas to make it compelling case. If you have $100K (say) to invest, then this may not be the best direction for you. – dave Feb 8 '12 at 18:36

bneely · Answer 6 · 2012-02-22 19:49:23Z

up vote 1 down vote

Once you become known as an iOS developer, you can do contract development work for other companies who will pay you up front. There is a lot of demand for talented, experienced iOS developers.

answered Feb 22 '12 at 19:49

bneely
577211

Josh · Answer 7 · 2012-02-09 20:24:16Z

I agree with most of the responses. As a software developer and business owner, I'll give you my opinions:

To answer you primary question, yes it is possible to make a profit with an iPhone application, but I wouldn't create a business plan on it.
I sense that you haven't worked in the software/application development before. I'm guessing that you believe you can hire oversees programmers at the 35K price point. You'll want to research that model, it has many pitfalls even for many well established development shops.
You should contract out the development. iOS development requires a programmer that has experience with Object-C. This has been a niche language, and the small number of programmers that know it, charge top dollar for the skill.
I would also question why anyone would base a whole business model on just the iOS platform. Many commercial applications are extensions/parts of a larger business. Companies justify paying the bucks to build an iPhone application because it supports their core business, opposed to being a core business.

first, thank you very much for your answer. I think you have touched the core of the debate on the 4th point.I understand mobile apps as something that suits as an extension of a larger business, but not being the core business. Although there are examples out there that are "core", like TurboScan or AngryBirds, i am almost sure this is not common. That was the reason i opened this thread: to double check opinions before starting to think seriously to invest on apps business. There is almost no information about profit studies,but there are millions of apps, so it makes me think.

isabel summers · Answer 8 · 2012-02-22 19:08:10Z

I am very interested in the solution to the 30% "Steve Jobs Toll" - The original question is basically good..but it was based on the price of an app. I am much more concerned with the 30% "commission" on the cost of the goods sold. For example: I am selling gift cards to retail stores, music, gift certificates, and ebooks. As a reseller, not a manufacturer of goods, my gross profit margin on these goods is around 10%. If I make $10 on a $100 gift card to Home Depot, how can I give Apple 30%? What if, I was a retail ecommerce boutique, selling shoes & handbags. Again, gross profit margin may be 50% - I buy a bag for $50 and sell it for $100. If Apple takes $30 that leaves me with $20 but overhead,support, merchant services, and other expenses involved in the running of the business cut into that $20. Forget the cost of developers, and servers...this is not the problem!!! The only way to have a retail business is mobile optimized web. Leave the app store for games and tools but not ecommerce.

thanks for your answer.I agree with you, but mobile optimized web doesnt give you the same user experience than a native app. I am seeing mobility as something complementary, but not as the center of the business. 100K purchases just give a salary for 2 or 3 developers for one year. And to me, 100K real purchases is not doable for everybody.

Zuly Gonzalez · Answer 9 · 2012-12-05 16:23:12Z

Wow I don't know where everyone else in the world lives but these numbers are ridiculous. I didn't have to pay developer (besides a $50 deposit) because I gave him a 30 percent share of the company.

With affiliate marketing (revmob and others), you can be making more than you do with a paid app through ads. Sometimes, after it all adds up, you can be making as much as $5.00 per download. The math, at its best, looks like this:

$25 cpm = 1,000 impressions. Average user plays 80 times, plus an average of 2-3 impressions per session. This automatically puts you way over one dollar.

With fast growing cpm's in the affiliate marketing category profits start to make more sense. Along with this, a rigorous business plan (a free one, if your smart enough and you put it enough work), mapping out in each platform how many viewers you are going to reach, you can set your estimates much higher.

We've been developing our business plan for three months now, with vigorous work each day, and we are estimating to hit hundreds of thousands within the first few weeks of the release. I truly think its extremely possible to make a valuable profit off these apps.

Sachin Shekhar · Answer 10 · 2012-12-06 18:36:38Z

The point is: When you enter digital app marketplace such as Apple store or Android Play Store, talk about at least thousands if not millions. If your app is really good, that milestone isn't a big deal.

With an app having that much complexity (which requires high development cost), if you aren't targetting at least one thousand customers, dump your vision right away.

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How is it possible to make a profit off of iPhone apps?

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