The inside story of how mobile app developers acquire new customers

Mobile app companies have a wide range of options when it comes to generating interest in--and downloads of--their smartphone apps. They can spread the word through Twitter and Facebook, they can generate publicity through press releases and news articles, and they can spend money to advertise their app.

But which of these mechanisms is most effective? And how much money should up-and-coming mobile app developers expect to spend on getting users to their apps?

Obviously the answers will vary based on the size of the developer and the type of app. For example, Rovio's Angry Birds Space enjoyed massive sales largely because of the previous success of Angry Birds--the company had a built-in market of potential customers. Meantime, Instagram's app caught fire due to its rabid fan base and social networking strengths.

Obviously, though, most apps won't enjoy these special circumstances.

The average mobile app user costs $1.26 to acquire

Analytics company Fiksu tracks the amount of money its clients spend to acquire new customers and publishes this figure regularly:

Source: Fiksu

Fiksu's Jo Wightman, director of the company's client development, offered details on these figures. She said Fiksu's numbers cover only free apps offered by the company's customers (which include Groupon, VH1, Barnes & Noble and Hearst Magazines), and do not include downloads obtained through free mechanisms such as getting promoted by Google (NASDAQ:GOOG) in its Play app storefront. She also said Fiksu's numbers count both direct app downloads obtained through paid advertisements as well as downloads obtained as a result of paid advertisements. (For example, if a user downloaded an app due to an advertisement, and then recommended the app to a friend who then downloaded it, Fiksu would record both those downloads in its figures.)

Fiksu's Wightman said that most app developers have to pay to obtain customers at some point. She said app companies typically rely on PR efforts and social networking to generate interest in their apps when they first launch those apps. However, she said in the months after an app's initial launch, most developers see a steep decline in the number of customers downloading their apps.

"It's not a solution they can really build a business on," Wightman said of PR and social networking promotional efforts. "It's not scalable and reliable."

Thus, she said, most developers eventually decide to spend money on mobile ads in order to sustain the flow of new users to their app.

How mobile app developers can spend their marketing dollars

Wightman said there generally three types of mobile advertising that mobile app developers can engage in. These three types of advertisements are typically displayed inside apps (via Apple's iAd, for example) or on mobile websites.

     1. Banner ad networks. This is the simplest and most comment type of advertisement. It's just a standard ad displayed on a mobile website or inside an app. Apple's (NASDAQ:AAPL) iAd, Google's AdMob and Millennial Media are examples of mobile ad networks.

     2. Incentive programs for app downloads. These are typically used by mobile gaming companies. TapJoy and Fiksu's FreeMyApps are examples of incentive programs, which reward people for downloading apps with coupons, premium in-game  content including power-ups, and other digital goodies. However, recent actions by Apple to prevent such programs have put a damper on this type of advertising.

     3. Real-time bidding exchanges. This is a relatively new method of buying ads. Wightman said such exchanges pair users with ads in real time, thereby giving advertisers complete control over how many potential customers they push their ads in front of. Fiksu offers a platform in mobile for real-time ad impressions. In the online world, Google's DoubleClick and [x+1] offer real-time ad exchanges. "Typically we're seeing ad dollars shift to this type of model," Wightman said.

Case studies: How Gameloft, Zynga and Glu Mobile acquire new customers

Fiksu's figures offer an insight into the average amount of money that mobile developers can spend to bring new customers to their apps. But it's also worth looking at some of the top names in the mobile business to see what they're saying--and spending--on customer acquisition.

In an interview with FierceMobileContent, Gameloft's Baudouin Corman said there are three pillars to Gameloft's customer acquisition efforts. Corman, vice president of publishing for Gameloft in the Americas, said the company's first pillar is social media. He said the company counts 5.5 million fans on Facebook and 300,000 followers on Twitter, and that the company's YouTube channel gets millions of views every month. Corman said the company actively advertises through each of these channels.

He said Gameloft's second pillar is cross promotion, which Gameloft can leverage due to its size. He said the company's apps are installed on millions of phones, and that the company can advertise directly to those users for free.

Finally, Corman said Gameloft's third mechanism for customer acquisition is advertising, though he did not provide details or financial figures for that pillar.

Glu Mobile--whose business is focused solely on mobile games--has offered a number of insights into its customer acquisition costs. Much like Gameloft, Glu relies on social networking and cross promotion as well as direct marketing.

In its latest Securities and Exchange Commission filing, Glu said: "Our sales and marketing expenses increased $618,000, or 16.4 percent, from $3.8 million in the three months ended March 31, 2011 to $4.4 million in the three months ended March 31, 2012. The increase was primarily due to a $754,000 increase in marketing promotions associated with our freemium games."

And it appears a large part of that spend was through TapJoy's system. Glu said Tapjoy accounted for 12 percent of the company's first quarter revenues.

Moreover, Glu expects to increase its marketing and advertising spend in the coming months: "We expect our sales and marketing expenditures to continue to increase during 2012, particularly in the second half of 2012 when we will launch the majority of our titles for the year; we expect to launch a total of 23 new freemium titles in 2012, of which we expect to release 18 in the second half of 2012."

During Glu's first quarter earnings conference call, as recorded by Seeking Alpha, CEO Niccolo de Masi offered a clearer look into Glu's customer acquisition costs. He said that Glu is a "pretty modest direct marketing spender relative to a lot of our competitors," and noted that the company puts money into investing in "product quality and titles that sell themselves" so that app store owners like Apple and Google will promote Glu's games.

"So our best margin is often featured placement from the storefront owners," said de Masi. "The rest of our direct marketing spend goes into the same mix of ad networks that we generate our ad dollars from. It's the Mino Medias and the Top Choice and the AdMobs and the iAds, and we also have other marketing mechanisms, social media, Twitter, Facebook and so on. But there's been no change in the overall mix of philosophy in terms of relatively modest direct markets here and spending only where we see a clear ROI per product."

Finally, gaming giant Zynga--which offers games on Facebook and well as mobile--offers a slightly different take on the cost of customer acquisition.

In its SEC filing, the company said: "Although we acquire most of our players through unpaid channels, we also utilize advertising and other forms of player acquisition and retention to grow and retain our player audience. These expenditures generally relate to the promotion of new game launches and ongoing performance-based programs to drive new player acquisition and lapsed player reactivation."

And during the company's first quarter conference call, as transcribed by Morningstar, CEO Mark Pincus said Zynga benefits from being able to cross-promote similar titles like Scramble with Friends, Hanging with Friends and Words with Friends.

Added CFO Dave Wehner: "We've seen very consistent ability to effectively use marketing to grow. We have seen the ability to acquire both on mobile and--both on the web and on mobile at costs that are less than lifetime value of those customers for us, and we continue to see opportunities to do that both in Web and mobile. We haven't seen any negative trends in terms of customer acquisition costs relative to lifetime value."

Will the cost of acquiring new mobile app customers increase or decrease in the future?

Fiksu's Wightman said there are a number of factors that will affect the future cost of mobile app customer acquisition. On one side, she said real-time bidding ad exchanges will help reduce customer acquisition costs. In addition she said that, as the industry matures, smartphone vendors and other players likely will coallese around various standards for app development that will help lower the overall cost of marketing for developers. She also said advancements like Apple's addition of Facebook support to iOS--which will allow users to "like" specific apps--as well as Apple's improvements to App Store searches through its acquisition of Chomp will help reduce developers' marketing costs.

On the other side, Wightman said that mobile advertising is relatively inexpensive compared with online advertising, and she expects the cost of mobile advertising to grow as marketers move into the mobile realm.

Overall, Wightman predicted the cost of mobile advertising--and therefore the cost of acquiring new mobile app customers--will increase in the future.

"In the very long-term I see a very upward pressure," she said.

Sandhya Raman contributed to this article.