Mark McDonald

Mark McDonald: build it and they don't always come.

Come up with an idea for an app, develop it, put it on the App Store at 99c a pop – and wait for the millions to roll in.

If turning an idea for an app into a successful business were this easy we'd all be doing it.

“A lot of the time the problem isn't actually making the app, it's actually building a sustainable business model and something that can scale,” says Mark McDonald, one of the founders of app developer and investor Appster. “A lot of people think that building an app is just this thing you do and suddenly it makes money on the app store.”

Josiah Humphrey

Josiah Humphrey is an app developer veteran.

Along with his business partner Josiah Humphrey, McDonald has developed more than 80 apps, including one for radio personalities Hamish & Andy and one called BlueDot that allows motorists to pay tolls with their mobile phones instead of using an e-tag.

“It's really about building a company as opposed to just making an app,” McDonald says.

“The apps that are successful are those that are run like a start-up – they actually have people working full-time driving them, they have a marketing plan, they have a business development plan and they're constantly seeking investment.”

With over a million apps available around the work, the sector is very competitive, so new apps need a professional approach if they're going to get traction and build a user base.

For those who get it right the rewards can be significant, as it is one of Australia's most profitable industries. Business forecaster IBISWorld says 45 per cent of the revenue earned by app makers translates directly to profit.

App development in Australia has grown from almost nothing five years ago to an industry forecast to earn $176 million in profit from revenues of a little under $400 million, IBISWorld says.

It expects strong growth to continue over the next five years, driven by increased smartphone take-up and more online shopping.

Australia has traditionally lagged countries such as the US in terms of the “ecosystem” for developing apps and web businesses, in entrepreneurial spirit and the willingness of investors to put money into new and unproven ideas.

But Benjamin Chong, a founder of Right Click Capital, which invests in early-stage internet businesses, says Australia is catching up. “There are more people who I've come into contact with who are interested in at least exploring the possibility of joining a start-up and there are more programs around that can help support founders and I'm also seeing people who are prepared to invest in this,” he says.

Chong says that when investors consider apps, they want to see a business that has the potential to be global, not one that's tied to a particular geography.

Matthew Macfarlane, investment director at the $40 million Yuuwa Capital venture capital firm, says investors want to see an app that will generate ongoing revenue, not just make one-off 99c sales.

“Unless there's in-app purchases or some kind of subscription component in the app, it's very challenging to excite investors like venture capital firms,” he says. “As long as you've game play or some kind of value proposition that continues to makes customer continue to engage and pay then it's all fine.”

Macfarlane says almost all apps already have competitors when they launch, so app makers need to test the market before launch to ensure their product is sufficiently differentiated. “It doesn't have to be a unique idea, but it has to be extremely well executed,” he says.

App businesses need to build an “addictive” app that will keep customers spending, and Appster's Mark McDonald says this is more science than art. Half of apps are actually abandoned after the first use, denying the owner of any chance of future revenue, says McDonald.

Part of this is trying to build a “habit pattern” into the product, using scientifically tested psychological ploys like needs, hooks, triggers and rewards.

“For instance, Facebook targets people who want social interaction, so they have a hook, but they also have a trigger action – something with which they can grab attention – like a notification or a photo's been commented on,” says McDonald. “Then they have some sort of reward. In the case of Facebook it's a social reward – the validation that someone's liked your post.”

Another key to success is to ensure that the app has a feature so that users can tell others about the application and invite them to use it, so that the users themselves effectively take on much of the marketing effort, says McDonald.