Business models – Are mobile ads an alternative or an additional revenue source?
Free, purely ad-funded service
There is no proof that it will work. (One of the best online email and social aggregators – Threadsy – just went bust because the ad-funded model did not pay for the servers. And that was web.) Based on the verifiable volumes, it is actually likely not to work. Some will argue that the app-stores with the ad-funded free apps should be proof enough, but it is a different model. Once the app development is done, there are no ongoing costs. Once it is up and selling, it will generate revenue even if there is no development or maintenance.
But as a service provider, you have ongoing, recurring costs, such as hosting, that are not related to product development so the ads would need to pay for those costs on an ongoing basis, and also for the profit and further development. So an ad-funded product and an ad-funded service are two different kettles of fish. Finally, without doing proper promotion, not even a free service is going to take off.
Limited ad-funded service, with subscription based premium service that is fully functional and ad free. This creates a bit of technical overhead if you had not implemented it from day one. But once done, it allows for service segmentation. Offering the same quality of service with and without ads will simply kill the subscription model as people will just learn to ignore the ads. So there needs to be a significant functional improvement for people to make the leap into paying. People will not pay for ad-free, they will only pay for better. Freemium conversions hover around 5-7%, so it means that 93-95% of the end-users would not be able to use the full functionality of the service, which makes it a less than highly attractive proposition. Do you really want 95% of your subs to think that you have a mediocre service?
Subscription based service with additional ad revenue
If your subs have already agreed to pay for licenses, offering an additional advertising layer with the product would give you an additional revenue source not an alternative one. Subscribers who have signed up already have an idea how they would finance the service, so you are looking into a way to increase your revenue without having to increase their prices.
This is a way to make you more competitive. In this model, everyone gets the revenue agreed and there is potential for additional revenue as well. Users have access to all the features. If one of your competitors comes up with a cheaper business model and competition increases, you have the room to redo the maths, and you also have the infrastructure already in place to go for a more ad-heavy version.