In-App Purchases – Mobile game monetization strategy

What tricks do mobile game developers use to determine in-game prices? Which mobile game has recently earned 696,000 USD within a span of 10 weeks? Which exclusive iOS game earns more than a million dollars per day? What is the future of in-app and in-game purchases? Find out in the article below.

In-App Purchases in mobile apps and games

Creating a mobile app is always, in one way or another, connected to finance. Depending on the size and complexity level of a given project, we can sometimes deal with very large sums. Despite that, most apps that are available in the Google Play Store and the App Store can be downloaded for free – and more and more apps follow this trend each year. This does not mean that the mobile app developer has decided to help users solve their problems due to altruistic ambitions. Using the right mobile app monetization model, he can not only cover his costs, but also obtain a significant income, while still offering his app for free.
There are a couple of ways of getting an app to bring income, despite the ‘free’ price tag. Until recently, mobile app developers have often chosen viewing in-app ads. Currently however, this method brings increasingly less income and is usually used alongside other models. The number one method for monetizing your mobile app are IAP (in-app purchases). Compared to all other mobile app monetization methods, in 2017, in-app purchases accounted for almost 50% of all the income of mobile app developers, compared to under 40% for sales of paid apps.

What exactly are in-app purchases?

With monetization through purchases, we usually are dealing with the sale of special, additional content, which is otherwise unavailable or requires fulfillment of certain conditions. The in-app purchase model is most effective in mobile games, where there are possibilities of acquiring additional levels, abilities or in-game currency, for which we can trade within the game. It is important to keep a level of user immersion. The user should complete all tasks and requirements without leaving the mobile app. The first platform to allow for such purchases was Apple’s App Store in 2009 – Google first implemented their solution in 2011. On both platforms we can acquire additional content in both free and paid mobile apps – developers must however comply with the fact that 30% of all profits are taken by the owners of the platform.

Who is this monetization model for?

Apple’s App Store defines the basic in-app transaction types as follows:
Exploitation transactions – transactions which need to be re-bought every time we wish to use the purchase. The sold product can be additional experience or health points or, as mentioned before, in-game currency.
Non-exploitation transactions – transactions, where the purchased good is available for an indefinite number of time after the purchase, such as unlocking the full version of an app or removing ads.
Automatically renewed subscriptions – transactions, which are conducted once, gaining access to certain content for a given time, and at the end of which the subscription is automatically renewed and paid for. The definition is a bit broader, but, looking at the description above should be enough to understand where this model fits in. If our mobile app has functionality which a user would be willing to pay for, and their implementation is not necessary in the free version of the software, this model should almost always be taken into consideration. It is easiest to implement in mobile games, in relation to which it is often called “Freemium”.
In this category, developer studios keep on innovating and implementing new ideas for free software, which includes in-app purchases. Studios such as EA or Activision not only convert their console productions to their mobile game counterparts, but also introduce in-app purchases in full-fledged, high-budget PS4, XBOX ONE and PC releases. Using this model in apps other than games can be a bigger challenge. If our mobile app does not offer content which can be additionally priced, either once or as a subscription service, the way to go could be to charge extra for additional functionality. An example could be a photography app, in which conversion of photos in the RAW format costs an additional fee, while downloading JPG files is free of charge.

How do the statistics of the mobile app market look like?

In 2015 alone, income from in-app purchases amounted to 14 billion dollars. It is estimated that this sum will amount to as much as 37 billion by the end of 2017. This is a huge leap, considering that, as recently as in 2011, approximately 80% of income came from paid software, and income from in-app purchases was almost identical to that of income from ads. Globally, only 5% of users carry out in-app purchases – however, they generate a staggering 98% of income made through the Google Play Store. In 2016, paying users have, on average, spent 9,60 dollars on in-app purchases in every app, which amounts to approximately 0,50 dollars per all, also non-paying users.
In terms of the differences between the platforms, it is worth noting that Apple users spend up to 2.5 times more on purchases than Android users. iOS can also boast a 50% higher percentage of paying customers. An even bigger difference in spending can be seen when considering the region that the user comes from. Here, the leader is Asia, where the average user spends around 0,70 dollars on in-app purchases. The best scorers in this region are mobile games, where Asians, on average, spend 75% more than the global average, with single transactions being up to 85% higher.
According to the research conducted by AppsFlyer (a powerful tool for attribution and analytics), the percentage of paying user for each region is 5,9% for Asia, 5,8% for North America, 5,0% for Europe and 2,4% for Latin America. The statistics will vary depending on the type of apps you are looking at, which however does not change that fact that most apps in the store uses the freemium model – in the case of the Google Play Store, they account for almost 50% of all mobile app downloads.

It is also important to notice the statistics regarding the time of purchase. For example, around 80% of users who will install your game will likely only open it once. 18% of the monthly income of apps is a result of purchases made on the first day, which is why it is so crucial to think about user retention and about making the users purchase more. Statistically, 37% of users make a second purchase, but only 15% will make 4.

The pros and cons of this monetization model

The biggest advantage of the implementation of in-app purchases is that the users get the option to download the app for free. Consumers are increasingly more aware and picky, and the sheer amount of apps on the leading platforms is so large that many of them, faced with a ‘blind purchase’ of a paid app, search for a free alternative. This model is also very elastic, since it allows mobile app developers to have the freedom to decide about what should be paid for, and for how much. There is a reason why it is currently the most popular among developers – except the commission of the platforms, they get to keep all the profits – unlike ads, where the settlements are often not in their favor. The shops themselves give all the tools for the implementation of this model – thus, internal integration, which is necessary in affiliate networks, is not required.
The biggest disadvantage of this monetization model is the limitation in its use to only some mobile apps. Sometimes, there is simply no way or a right solution when it comes to implementing this model – and, in those cases, we’re left with paid apps or ads. There are also many users, which dislike the freemium model, and treasure the single payments for a ‘full’, in their understanding, version of a given app. Earning money through mobile apps is also made somewhat more difficult due to the regulations of the platforms themselves, which make it clear from the start that a given app has in-app purchases. Some users have also heard stories about ‘unknowingly using large amounts of money in apps’. Those often concern the youngest, with parents not preparing their device or child in the right way. Hence the cautious approach of some users to such transactions, and even the publishing of guides about how to avoid paying anything when using the Apple Store and Google Play Store.

What exactly is the Decoy Effect of In-App Purchases?

While deciding on what and how much to charge the user for, it is a good idea to take a look at various techniques, which are often described as price psychology. In the case of mobile app monetization, the best way to go is to use the contrast effect. Since the value of virtual goods is subjective, it is crucial to give our users a point of reference. A choice of multiple options, unless there are too many of them, make the decision of purchase simpler and lets him “justify” his purchase.
An example: we offer the purchase of a special currency, used to make transactions in our mobile game. We decide that it will be available in two packs, one – with 1000 “coins” for 2 dollars, and the other – with 10000 “coins” for 10 dollars. Looking at such an example without going to deep into the economics of this imaginary game, it is hard to decide which pack to choose. For comparison, let’s say that a user has three packs to choose from: 1000 “coins” for 2 dollars, 2000 “coins” for 4 dollars and 10000 “coins” for 10 dollars. The additional choice serves as a great point of reference. In this case, the second option seems the least attractive, which justifies the bigger expense, which is buying the third pack and makes us think that the price of the first pack is not elevated. This technique is called a decoy effect.
Mobile Games Developers often use many different types of packs, evaluating them in a way that maximizes their profits from the app. In some cases, the right tests helped developed strategies which brought up to 30% more profits, which is why it is worth it to experiment in this field. Especially considering that implementing this type of change is not time-consuming or expensive. Taking a look at the list of best-earning iOS mobile games in the United States, the top 30 only has one paid title – at the 30th spot (Minecraft: Pocket Edition).
Example wise, the iOS version of Candy Crush Saga, in the United States alone, generates approximately 42 million dollars per month.

Mobile game Candy Crush Saga In-App Purchases –
Approximate data of one of the mobile market analysis systems

Approximate data of one of the mobile market analysis systems

The future of in-app purchases

As we have pointed out multiple times, in-app purchases are an increasingly more popular monetization model, which, at the moment of writing, gives the best results. This can be seen especially in mobile games, where big and well-known development studios are more and more focused on publishing free to play titles, giving up publishing full-fledged, paid game console productions. The huge competition in this market creates a lot of competition for user attention, but also the quality of the apps. A side effect of all this is an ‘industrialization’ of this area of entertainment, which can be a bad thing for many receiver, especially die hard gamers. Mobile app marketing is becoming increasingly more automatized and precisely targeted. The publishers are great at integrating in-app purchases into the apps, make them adapt to the behavior of the user and their experience. Monetization through in-app purchases has also seen some strategies similar to those used in e-commerce. Not only are more products for sale, but they are also bundled into deals, the price models are dynamic – they rely on machine learning and big data, developers can precisely adjust the prices for each individual user, optimizing their profits even further.
Earning money on mobile apps is never a side effect of their sale, but a result of a series of thought-out solution and their optimization and the integration of a number of mechanisms. To reach the right rentability and be able to compete with other mobile app developers, we cannot assume that a good product will defend itself. This is why it is so important to gain and keep clients, giving them additional benefits through in-app purchases. If you do it right, you will be surprised what levels of profit a free mobile app can bring.