Free apps make money through a combination of advertising, in-app purchases, subscriptions, freemium upgrades, and data-driven targeting. Most free apps use more than one of these strategies at once, and the mix depends on the type of app and the size of its user base. Here’s how each model works in practice.
In-App Advertising
Advertising is the most visible way free apps generate revenue. The app joins a mobile ad network as a “publisher,” gives the network permission to serve ads inside the app, and earns money each time users see or interact with those ads. You’ve encountered this model every time a banner pops up at the bottom of a game or a full-screen video plays between levels.
App developers get paid in several different ways depending on the ad format:
- Cost per mille (CPM): The developer earns a set amount for every 1,000 ad impressions displayed, regardless of whether anyone taps on them.
- Cost per click (CPC): The developer gets paid only when a user actually taps on an ad.
- Cost per view (CPV): Used mainly for video ads, paying the developer each time a user watches a video ad.
- Cost per install (CPI): The developer earns money when a user installs another app through an ad.
- Cost per action (CPA): The developer gets paid when a user completes a specific action the advertiser wants, like signing up for a trial or making a purchase.
CPM rates vary widely. A casual puzzle game with millions of daily users might earn just a few dollars per thousand impressions, but the sheer volume makes it profitable. A niche finance or health app with a smaller, high-value audience might command much higher rates per impression because advertisers in those categories pay more to reach those users. The math is simple: the more time people spend in the app, the more ads they see, and the more revenue the app generates.
Freemium Upgrades
The freemium model gives you a basic version of the app for free while reserving premium features for paying users. Think of a photo editing app that lets you crop and adjust brightness at no cost but charges for advanced filters, or a project management tool that’s free for small teams but requires payment once you need more storage or users.
The premium version can be structured as a one-time purchase or an ongoing subscription. Either way, the free tier serves as a massive funnel. The goal is to get as many people using the app as possible, demonstrate enough value that a fraction of them want more, and convert that fraction into paying customers.
That fraction is smaller than most people assume. An analysis of more than 80 SaaS companies found that the average freemium conversion rate ranges from 2% to 5%. That means for every 100 people using the free version, only two to five will ever pay. Exceptional performers like Spotify and Slack have pushed their conversion rates above 30%, but those are outliers. For most apps, profitability depends entirely on building an enormous free user base so that even a small percentage of upgrades generates meaningful revenue.
Subscriptions
Subscriptions charge users a recurring fee, typically weekly, monthly, or annually, for continued access to content or features. This model has become dominant in categories like streaming, fitness, meditation, news, and cloud storage.
Most app subscriptions are auto-renewable, meaning you agree to billing terms upfront and your payment method is charged automatically at the start of each cycle until you cancel. Some apps offer non-renewable subscriptions instead, where access expires at the end of the period and you’d need to repurchase manually. A health app might sell a one-month plan that unlocks everything but doesn’t automatically charge you again.
Subscriptions are attractive to developers because they create predictable, recurring revenue rather than relying on one-time purchases. They also align incentives: the app needs to keep delivering value month after month, or you’ll cancel. For the user, the barrier to entry is low since the app is free to download and often includes a free trial of the premium tier.
In-App Purchases
In-app purchases cover anything you buy inside an app that isn’t a subscription. In mobile games, this means virtual currency, extra lives, cosmetic items like character skins, or power-ups that help you advance faster. In non-gaming apps, it might be individual content packs, premium templates, or one-time feature unlocks.
This model thrives on a small number of heavy spenders. The gaming industry often refers to the highest-spending users as “whales,” players who may spend hundreds or even thousands of dollars on a single game. The vast majority of users never spend anything, but the revenue from the small group that does can be enormous. Games like Candy Crush and Clash of Clans built billion-dollar businesses primarily on this model.
Data Collection and Targeted Advertising
Even when an app doesn’t charge you or show you ads directly, it may still generate value from your data. Free apps routinely collect information about your behavior, preferences, location, and device to power targeted advertising, either within the app or by sharing data with third-party ad networks.
The FTC notes that companies track users through several methods: cookies and tracking pixels that follow your activity across sites, device fingerprinting that identifies you based on your browser’s unique settings, and advertising identifiers built into your smartphone. Companies also track activity across multiple devices, linking what you do on your laptop to what you do on your phone.
This data lets advertisers show you personalized ads based on your browsing history, location, and interests. If you browse running gear in one app, you might see ads for running shoes in a completely different app. The app developer benefits because targeted ads command higher prices than generic ones. An ad network will pay significantly more to show a running shoe ad to someone who’s clearly interested in running than to show it to a random user.
Privacy regulations have tightened the rules around this. Platforms now require apps to ask your permission before tracking you across other apps and websites. When users opt out of tracking, the data becomes less precise, and ad rates drop. This shift has pushed many apps to rely more on first-party data, information you provide directly within the app, rather than cross-app tracking.
What App Stores Take From Developers
One important detail that shapes how free apps monetize: the app stores themselves take a cut of every dollar spent on in-app purchases and subscriptions. This commission reduces what developers actually keep and influences which revenue models they choose.
Google recently restructured its Play Store fees, lowering its standard commission from 30% to 20% on in-app purchases, with some developers qualifying for a 15% rate through specific programs. Subscription commissions dropped to 10%. Apple’s App Store has historically charged 30% on most transactions, with a reduced 15% rate for smaller developers and for subscriptions after the first year.
These fees explain why some apps try to steer you toward paying outside the app store, through a website, for example, where they can avoid the commission entirely. It also explains why ad-supported models remain popular: ad revenue flows directly from ad networks to developers without passing through the app store’s payment system.
Why Most Apps Combine Multiple Models
In practice, few successful free apps rely on a single revenue stream. A music streaming app might show ads to free users, offer a premium subscription to remove those ads and unlock offline listening, and use listening data to improve ad targeting. A mobile game might show rewarded video ads (where you watch an ad in exchange for in-game currency), sell virtual items, and offer a monthly subscription for bonus rewards.
This layered approach hedges risk. If ad rates drop during an economic slowdown, subscription revenue provides stability. If only 3% of users ever pay for anything, ad revenue from the other 97% still contributes. The apps that generate the most revenue tend to be the ones that thoughtfully match their monetization strategy to how people actually use the product, making the free experience good enough to attract millions of users while offering paid options compelling enough that a meaningful slice of those users will open their wallets.