Editor’s Note: Praveen Alavilli is the technical evangelist at PayPalX (X.com). PayPal will be having their PayPal Singapore Developer Open House on March 18th.

Well before I start let me clarify one thing – “Chase your dream, money will follow” – is an important principle that every entrepreneur should follow. It is very important to build the product/application right and build the audience first – if not monetization is irrelevant.  That said, it is also important to keep monetization at the back of your mind if not from day 1, from day 2 at least. Though building and running an application seems to be pretty cheap nowadays (with all the Cloud Computing services you can literally run for a few pennies), there is no such thing as a zero cost application, and moreover, a successful and profitable application needs a solid monetization strategy. Without one you wouldn’t be able to sustain the costs associated with growing your application for a very long time.

Unfortunately, most of the applications today rely heavily, in one way or the other, on “advertising”. In this model, the application and services/functionality offered by the application are provided for free to the customers, while you charge advertisers for providing the “eye-balls” of your customers to them through their ads. When the customer does something more than just look at the ad, for example clicking on the ad or buying the product/service through the ad, you would get more revenue than the typical impressions (CPI, CPC, CPM, CPA, CTR, etc.).  But as we all know, the revenues based on advertising are declining, simply due to the increase in the supply. Contextual advertising might yield better revenues but at the risk of losing customer confidence in some cases (e.g. privacy concerns).

Fortunately there are other models that have been implemented and proven to be successful in generating revenues in different kinds of applications and products.

• A subscriptions model is where you charge your customers a flat membership fee (often charged weekly, monthly, yearly, or for lifetime) to use your application, services, or content.
• A pay as you use model is where you charge your customers based on the usage of your application – time, content, resources used, etc. without a fixed flat fee. Amazon Web Services (AWS) is a good and very successful example of Pay only for what you use.
• A free to use, pay to Services model is where you provide your application for free but charge your customers for services like customization, training, and other value added services. A good example are the companies that provide value added services for the Open Source software (ex. Linux Operating System, Drupal, MySQL, Java, etc.).
• A freemium model is where you give away a basic version of your application for free and charge your customers for an enhanced version of your application that provides more extended feature set or content. There are several good examples of using the freemium model in the industry. Flickr, Skype, Newsgator, Trillian, Google App Engine, etc..
• And last but not least the traditional eCommerce model which is usually about selling of products (digital/physical) online through your applications. Obviously we are not talking about selling products at the scale of big retailers (like Amazon & Walmart) out there, but most of the applications could provide ways for its customers to buy products (digital or physical) that are related to the application or content or services it is offering. A good example is a social gaming application that could provide merchandise like T-Shirts, Coffee mugs, Photo frames, etc. with its brand name on it. As your application grows its audience base and as its brand becomes more known among customers, you can generate revenue based on your brand in this way too.

As you can see, in most cases the monetization model really depends on what your application is providing. Also in some cases it is very important (as your monetization strategy gets more closely bound to the functionality – for example as in the pay as you use model where you would want to keep track of everything the customer is doing) to start thinking about the way you are going to monetize in the future during your application design and implementation phase itself. Otherwise you might be forced to redesign and/or re-implement your application when the times comes to turn the monetization switch on. And when you add different platforms and devices on which your application is being offered, it would obviously turn into a very costly affair.

Another important aspect of monetization, as you might guess, is the payments platform itself. There are several online payments platforms and solutions available out there in the industry and it becomes vital to choose one that not only provides the payments functionality in the way that you would want but also is economical in terms of the transaction and monthly fees.

PayPal as you might have heard recently, has opened up its Payments Platform (called PayPal X Platform) that provides the flexibility, security, fraud and risk management, better transaction fees (micropayments, services, etc.), and moreover, the stability, performance and availability all across the world that every application, no matter how big or small it is, requires. We strongly believe that empowering the developers with APIs that can be adapted into their applications and function in the way they want will help them come up with better monetization models that help not just to chase their dreams but to achieve them. Please visit www.x.com to learn more about PayPal X Platform, the various Adaptive APIs offered by the platform, and the information about how to get started.

Happy monetizing your application !