How free mobile apps earn money?

There are several ways developers use to earn money from their free apps:

Publish free and paid versions:

It's quite common that developers publish their apps in two forms: free and paid. Paid versions are usually come with Pro or HD in their names. In free version, the authors can put a link to the paid version on iTunes or Play Store.

The free version acts as a "decoy". If users are satisfied with an app, they can buy a Pro version for more features. The main advantage of this method is that free apps tend to be downloaded 10 times more than paid apps.

Money Lover, for an example, is an app published in free and paid versions. The free app has been downloaded 600.000 times, in which about 7000 users decide to buy the paid version (~$5 USD) and $35.000 goes to author's pocket.

In-App Purchase


Optional purchase inside apps is a good way to earn money compared to selling apps with cheap price (e.g. $0.99). 49/50 apps having highest revenue in USA App Store belong to this category. For instance, on average Clash of Clans earns $3.000.000 USD per day in 2013 with In-App Purchase.

Ads

Displaying banner ads in apps is also a common way to earn money in free apps. To earn money with this method, yours apps should have a a lot of traffic. Flappy Birth is supposed to earn about $50.000 USD per day from more than 50k downloads.

Two big ad systems are iAds (Apple) and Admod (Google). On average, authors receive $2 USD for 100 downloads.

CPI (Cost per Install)

This is a quite new method to earn money with mobile apps. Users will see some "pop-up" in games or apps about "Install Now" for other apps. Usually, $0.8-$3 USD is paid for 1 app installation from CPI companies.

Funds

You can also try to raise funds for your apps from donors. If you have a nice idea, you can find funds from companies. In return, you can add companies' logos or names in your apps.