Mobile App Monetization Strategy: In-App Purchases

The Big Idea: Avoiding the entry barrier of paid apps, the in-app purchase strategy allows you to generate revenue throughout users’ lifetime.

Apps following the in-app purchase (IAP) strategy, also known as “freemium,” are free to download for anyone. These apps generate revenue by offering goods and services via in-app purchases.

Traditionally, apps offering IAP's come in various forms, including: in-app currency (like "gems" or "coins), premium features (upgrade your account), cosmetics (new character skins), or even ways for users to enhance progression within a game (additional skins). It should be noted that IAP strategy can also includes subscription models.

The key advantage of the in-app purchase model is that it helps you avoid the entry barrier posed by paid apps. By making your app free to download, you’ll be able to reach a wider audience and generate more revenue in the long run.

Also known as “freemium”, IAP became the most-used monetization model in 2022. Freemium apps are more appealing because users do not incur the upfront cost barrier that paid apps do. This has helped them begin to replace paid app income.

According to a study by Buildfire, 98% of app revenue worldwide comes from free apps, while only 2% comes from paid apps. Freemium is now considered the new standard and is expected by most users when downloading an app - with those that don’t offer it being viewed as outdated.

What are the pros and cons of In-App purchases?

In-app purchases make it easy to engage with new and existing users alike without having to worry about an upfront cost barrier. However, IAP can also be tricky to get right. If not done carefully, it can negatively impact the user experience and result in lost sales.

Here are some of the pros and cons of the in-app monetization strategy:

Pros:

• Removes the cost-of-entry barrier for users to download the app.
• Continuously generates revenue throughout users’ lifetime.
• Purchases increase user loyalty and retention through a sense of ownership and investment.
• Developers can use IAP in combination with other monetization strategies (in-app advertising and survey monetization).

Cons:

• Many users may never purchase anything.
• Apple and Google will take a percentage of your revenue from in-app purchases.
• You must create a functional free app without needing in-app purchases, or the user might be dissatisfied with the app.
• It's harder to calculate ARPU (average revenue per user) than for paid apps, which makes estimating marketing ROAs challenging.

Types of In-App purchases

There are three main types of in-app purchases, each providing a different kind of value to the user. They usually fall into one of these categories:

• Consumable
• Non-Consumable
• Feature Subscriptions

Consumable:

Consumable in-app purchases are one-time transactions that can be used up and need to be bought again. They’re generally used for items such as in-game currency, power-ups, or lives.

While these types of purchases may seem less valuable to the user, they actually have a higher chance of being bought because they can be bought multiple times. Consumables also keep users engaged for longer, as they need to keep buying them to progress in the app. Consumables can also be made recurring for users that want to continue using those premium features.

Non-Consumable:

Non-consumables are premium features that are only purchased once and offer unlimited use. They don’t need to be bought again and can give users a lot of value.

Non-consumables are generally used for features such as ad removal, premium content, or un-lockable features. They offer more value to the user but have a lower chance of being purchased because users only need to buy them once.

Feature Subscriptions:

Feature subscriptions are recurring purchases that give users access to certain content or services for a limited period of time. These subscriptions must be renewed in the next period if the user wants to keep the subscription's premium features. Subscriptions are usually charged every month and are automatically renewed.

Subscriptions work well with freemium apps as users can enjoy your app for free and then consider if they want to upgrade with your subscription model. 

A commonly used best practice is to give your users a free trial run for the premium features, which enables users to experience the added value of your premium feature before committing to purchase. This becomes a conversion funnel for your app, as users who find value in the premium features are more likely to convert into paying subscribers.

Which Type is Right for Your App?

Of the three types of in-app purchases, consumables have the highest chance of being bought, followed by non-consumables and then subscriptions. So if you’re looking to generate revenue from in-app purchases, you should focus on these types of purchases.

That said, each type of in-app purchase has its own advantages and disadvantages, so you’ll need to decide which type of purchase is right for your app. If you’re not sure which type to choose, consider these factors:

• The value you’re offering to the user: Is it a one-time purchase or a recurring subscription?
• The type of app you have: Is it a game, a productivity app, or a content-based app?
• Your app’s revenue model: Do you want to generate one-time revenue or recurring revenue?
• Your user acquisition strategy: How will you acquire users for your app?

Based on these factors, you should be able to decide which type of in-app purchase is right for your app.

In-App Purchase Success Story

One of the pioneers of in-app purchases is the game Candy Crush.

Candy Crush is a free app with plenty of premium adds-on and extra features. These include extra lives, special game items, and tools to help you defeat levels faster and more efficiently. Candy Crush's IAP strategy is so successful that it generated over $40,000,000 in revenue and was downloaded over 2mm times (JULY 2022, Sensor Tower).

As you can imagine, game apps do very well using these in-app purchases as it entices users with extra coins, lives, or unlocking new levels. Users are more likely to spend money on in-app purchases when they are engaged and having fun.

Is IAP Right For Me?

Freemium apps with in-app purchases can be highly successful when utilized correctly. However, it is essential to note that your app has to be completely functional without purchasing any add-ons.

While consumables can be enticing, in-app purchases can only carry an app so far. Users may stray away or feel unsatisfied because of the cost barrier if your app requires further purchases to continue using or enjoying the app. Add-ons, subscriptions, or premium features should enhance the user experience rather than require it - so evaluate your app accordingly.

In-app purchases are the most used monetization model because you can drive more revenue per customer and use other monetization strategies. If you’re looking for a way to generate more revenue from your app, in-app purchases may be the right solution for you.

Check out our other articles that explain different monetization strategies!

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