Lets say I’ve written some downloadable software and I want to make some money from it (‘monetize it’ in the ghastly common parlance). Should I charge people for using the software or should I give them the software for free and make my money from ads?
Lets look at some numbers.
The typical conversion rate for downloadable software is around 1%. That means that about 1% of the people that visit your site will typically buy your software. So, for each $1 of your sale price you will make around $0.01 per unique visit. Downloadable software is often priced around $30, so lets say $0.30 per unique visitor. Some software sells for less than $30, and some for a lot more. Also I haven’t taken account of the lifetime value of a customer (e.g. upgrades) – which will increase the value per customer; or payment processing and advertising costs – which will reduce the value per customer. It is just a ball park figure.
How much money could I make from advertising if I give the software away instead? I have been doing some research for a while on this. Based on various data I have gleaned from the BOS forum and blogs, advertisers typically pay per $1-$2 per 1000 impressions (CPM). Some data points:
- A well known ad network offered me a $2 CPM (-19% commission) to put ads on this blog.
- Dating site plentyoffish.com reported making $10k/day from Adsense off 200 million pages per month in 2006, which is a CPM of $1.5
- A sample of 8 Facebook app developers were averaging less than $1 CPM.
- “If a site like Stack Overflow, which does almost a million pageviews a day, can’t make enough to cover even one person at half time using Google AdSense, how does anyone make a living with AdSense? Does it even work?” (Stackoverflow blog)
- “Charging your end user isn’t the only way of pricing software. You can choose to give it away for free and then make money by, for example, charging for consulting, installation and training; or selling advertising. The latter, although a common model for web sites, is extremely hard to make work. CPM – the cost per thousand impressions – can be as low as a dollar. In other words, to generate one thousand dollars of revenue you might need to serve up as many as a million pages. To generate enough revenue to support a team of three or four people, that means having ten million page views per month. Most web applications simply aren’t going to attract that sort of traffic.” (p57 of “Don’t just roll the dice”)
So, taking a ballpark CPM of $1.5, I would be making $0.0015 per page impression.
Obviously I am comparing apples (unique visitors) and pears (impressions) here. How many impressions does 1 unique visitors equal? My own table planning software averages around 2 impressions per unique visitor (many visitors bounce out after reading 1 page, even those that buy might only visit the home, download and purchase pages). So, assuming this is typical, the product based site described above should be making around $0.15 per page impression. Based on these (admittedly rough) numbers an ad driven site needs approximately 100 times as many page impressions per day to make the same money as a product driven site. To make around $100k per year the product site would need about 900 visitors/1,800 impressions per day. To make the same amount the ad driven site would need around 90,000 visitors/180,000 impressions per day. But it is worse than that because the ad driven site is going to have significant hosting fees and potentially many more users to provide support for. I know which business model I prefer.
So why not get the best of both worlds – sell the software AND put ads on the site? Because then you are sending out all sorts of bad vibes (“this software isn’t good enough that they can make a living off it”) for a measly 1% extra income from the ads. I’m confident the presence of ads will lose you >1% in product sales.
An ad supported model is only viable when you have lots of traffic. Most downloadable software (or web apps) won’t be able to generate that sort of traffic, even if it is good and you give it away for free. If you really want to run an ad supported business, you are probably better off basing it around forums and user generated content than free software.
In the final analysis if you are creating software I think it makes more sense to create something of value, grow some balls and charge for it. Rather than giving it away and selling eyeballs in the hope that someone else will take their money and throw you some scraps. Think balls, not eyeballs.
Successful Software 
$30 is too low to take as the average price. Also, if you web based recurring type of software like I do, advertising is out of the question altogether.
I dont even put ads on the blog part of my website. If you develop a mass market game on the other hand, advertising may just work. But advertising is really hard work..
Another option could be affiliate marketing, I’ve seen a lot of people do this. Give the software away for free but recommend a hosting company or another related software as an affiliate and you still make decent money.
Just my 3 cents :)
>$30 is too low to take as the average price
I had to pick a number and it seemed as good as any. The fact that the difference worked out as x100 was fortuitous, not consciously planned.
Interesting analysis, Andy. Seems to make sense, given the assumptions you’ve made on the numbers.
Excellent post as usual. I agree on all points. I have been running my business based on hard one-time lifetime license fee only. No banners, no ads. I stopped using AdWords recently as well.
>one-time lifetime license fee only
Please tell me you aren’t promising free upgrades for life.
Thanks again for sharing some really interesting and useful information, and the more valuable back end analysis. We’ve never contemplated taking this approach, and this insight will make doing so a tough sell.
With around 500 visits per day, I’ve only managed to cover a little bit more than my hosting expenses ( dedicated server ) with ads. But even to get this I’ve had to sell myself the ads. I’ve tried AdSense (who by the way cancel my account and didn’t pay the 50 EUR I had in there), flattr, amazon and I only got peanuts.
Definitely, if you want to make some money sell a product!
Good post.
But what about embedding the apps in the downloadable software – do you have any numbers for this?
It seems to be a popular option for the various mobile platforms, but is it worth anything for standard downloadable software?
I don’t have any numbers for embedding ads in an app. But I suspect the results will be similar to putting ads on the website.
Thanks, great article. As my product is roughly in the $30 bracket, and my turnover is low, I had wondered about other ways to ‘monetize’.
Part of my problem is support: although well over 95% of my customers buy and go silent (and presumably happy), I get the occasional one who seems totally unable to use it, and causes me a support headache far in excess of what the $30 is worth (do people think I’m really going to ring *them*, on an international number, 3 times, to help get them working? My site clearly says “email support only”, and the software really is so simple that most people grasp it in literally one minute by themselves. But because of my nature, I *do* ring and help these people, with all the time and expense that entails, often wondering why I bother with the whole thing at that point).
So I had wondered whether giving it away free would reduce the support expectation of these minority of people – probably not, and I’d be losing the revenue of the other 95+% into the bargain, I guess.
>I get the occasional one who seems totally unable to use it
We all get a few of those. Remember that it isn’t your job to teach them IT. Sometimes it is best to just politely refund them.
But are you sure you couldn’t make the software easier to use? Have you done usability testing with not very IT literate users?
Yes, I’m good at polite refunds: It’s really only a handful that have ever accepted, most people either need no help at all, or a brief email. It’s just the three of four nightmare ones that stick in my mind, I suppose (and in those cases, it’s often not my software that’s at fault at all, but their requirements not being properly understood in the first place and hence choosing software that doesn’t solve their problem).
Usability testing: I’ve done a bit, but probably not enough – I’ll give that serious thought, and perhaps let you know how it goes. Hope I haven’t taken the comments too far off-topic; the original post was very interesting.
Andy, your post is interesting and based on my own research (nothing as deep as what you present here) I’ve come to the same conclusions.
There are other common approaches to take into account when providing freely downloadable software that is to limit by license eg: GPL based, AFFERO and so forth and to limit commercial use where the consumer of your product is unable to release their own code without making their own code gpl based, thus forcing them to opt out and buy a commercial license. Sadly this model only works if you have a product that is only useful when integrated inside software that is in turn distributed/sold.
That too, from what I’m seeing and this is based on sales figures as close as zero on my own product (and the quality of the product is quite good imho), I come to the conclusion that even then, providing free open source software that is limited only by a license clause ( so is the case with gpl) is not appropriate and works for VERY few niche products who happen to be the first open source providers to a product that was otherwise unaffordable and required purchase.
Also, lately, the smarter people already understand the risk of GPL and what it implies and either avoid it ( cripping your downloads and traffic and widespread so selling consulation is out of the question) or they look for other alternatives that are even more open than GPL (these people will never buy your product anyway and constitute a majority) while the ones that might, simply don’t understand the licensing limitations and include it in their products without purchase. A complete fail business model. Eventually, in the end, the few that buy aren’t enough to sustain the continued development of the product and your living standard.
Conclusion, if you want to survive in todays market, that is run a sustainable business, do not develop free software. I am now going to release a new closed source product soon and I hope that works out better.
You left out one simple solution — bundling a toolbar with free program. With relatively popular software (1000 installations per day) it should easily generate 2-3K per month.
How much do you get paid for bundling a toolbar? Surely you could still make more by selling the software? Also I wouldn’t want to be associated with a lot of the free toolbars out there – too much risk of malware.
I use Conduit. They pay when users search via their search box, so it depends on the number of users that choose to install the toolbar. As I wrote before — $2000 should be easy to achieve in couple of months.
One thing is missing from your equation, Andy. In most cases it’s far easier to attract traffic to a free program rather than to paid one. I do both, I have paid apps and free ones. As much as I want to say my paid ones do more, the truth is I make a bit more from ads and affiliate commissions from the free ones. And not to mention how much easier it is to collect ad/aff payments than working hard on features and supporting customers.
Obviously it’s different for everyone, and it depends on the type of software, and free also has to be promoted. Just wanted to point out that you are still comparing apples to oranges.
But can you get 100 times the traffic because it is free? In most cases, I doubt it.
You are generalizing too much. Adsense can be *very* lucrative, depending on the demographics of your users, content and click through rate.
I am averaging $70 per 1000 pageviews.
Good content will attract more visitors, and generate more pageviews.
You cannot use the data from your blog targeted at techies. They don’t click on as many ads as the average joe.
Also, it is not my experience that 1% that visit your site will buy your software. 1% that actually *download* and complete the install is more like it.
So there. :)
CPM and conversion rates obviously vary a lot. I believe a $70 is far from typical though. The 1% visit to purchase rate came from a survey of software vendors.
In general, I agree with you, Andy. More software developers should grow the balls and put a price on their software. Though, selling software means a lot of additional work that is usually boring compared to programming.
When there is a good product in your favorite niche, your chance to overtake that niche with a paid product is slim. You can choose another niche, but what if you really like this one? You can become pretty popular in that favorite niche with a decent free software and get a lot of free visitors to your web site. You usually do not get free visitors for paid applications -> you should count in the cost of the advertising into your calculations.
I have some free apps and I make some money from ads and donations – not much, but with 0 ad budget. Plus they attract links to my web site and in turn help my paid applications rank in Google and promote the “brand”.
Though, I also agree that simply placing an ad on the download page of your free app would not make money worth mentioning. It could work for very simple and focused tools – and you would need a lot of them.
An alternative approach is using your free application to promote a web site – make a forum related to the software; make a gallery, where people can share things created in your free app; create a community and the number of page views may be big enough to bring enough money from ads.
Totally agree with you Andy. My first online business venture was an add supported app which totally flopped while I was trying to generate a large user base. My current venture has a product I sell for real money and made so much more the first month. I did this kind if analysis properly only after the first business while setting product direction. Wish I had read about it sooner! With so many people pumping their success with ad supported models, I am sure many others will make the same mistake..
Great analysis. Interestingly, Newegg.com started using Google Adwords on its site. One would think they are successful enough to keep the site clean.