It's all about giving consumers options so that every segment of the population can be a satisfied, paying customer.
Most of the top grossing apps in the iTunes App Store are now driving revenue with in-app purchases. Of the top 20 grossing game apps, 12 (60 percent) drive revenue with in-app purchases - nine (45 percent) of them are free apps with the only revenue source being in-app purchases; the others use a hybrid model (according to the iTunes Top Grossing App Chart, March 4, 2011)
What Are In-App Purchases?
In-app purchases allow consumers to purchase upgrades, more levels, virtual goods, or complementary features within the app - without going back to the App Store. By making the steps to purchase simpler and shorter, conversions increase along with sales. There are two scenarios: developers create a paid app and use in-app purchases for upgrades or additional content to enhance gameplay, or the app is free and all revenue is generated through in-app purchases. Either way, developers are seeing major increases in revenue. Another advantage of in-app purchases is that it keeps the file size of the app small so consumers have an easier time downloading the app.
In-app purchases allow the developer to monetize user engagement instead of monetizing downloads; a game-changing strategy for app developers. Ngmoco CEO Neil Young comments, "We made the shift to free-to-play games and that really made a huge difference to our business…from monetizing downloads to monetizing usage" (Ngmoco sold DeNA for $403 million). Purchases of virtual goods are projected to be $7.3 billion in 2011 and $14 billion by 2014.
How Is an In-App Purchase Made?
In-app purchases can only be made within the app. When a consumer makes an in-app purchase, she will see a dialog box with the item's name and cost for the in-app purchase. The consumer taps "Buy" to proceed with the purchase and then enters her account and password.
Types of In-App Purchases
There are two types of in-app purchases. The first is straightforward: the consumer pays for the upgrade or content through an account set up in the App Store. Zynga took this model to the bank in its Facebook games, selling virtual goods and racking up revenue of approximately $850 million in 2010, generating about $400 million in profit. The second type of in-app purchases is rewarding users with virtual currency in exchange for relevant ad offers including free apps, online surveys, brand discounts, etc. In this example from the iOS game Dolphin Play, developed by Recharge Studios, a consumer can install free apps to earn the virtual currency needed to buy virtual goods that enhance their gameplay.
Key Things to Look for in an In-App Purchase Platform
Who are the existing users of the platform?
Does the platform give the user options for payment?
Does the platform include popular game titles and free games?
What are the integration requirements? Are they seamless with your application?
Are screens customizable to your app?
Does it offer the analytics needed to optimize users' conversions?
Does it communicate to the user when a transaction is pending and completed?
Develop Apps for In-App Purchases
It is much easier to design the in-app purchase model into the game from the beginning. Here are some things to consider:
In-app purchases give players more choices - time vs. money, mundane vs. cool stuff, unlimited access vs. à la carte access, and limited play value vs. complex play value. It is all about giving consumers options so that every segment of the population can be a satisfied, paying customer. If you have additional tips about using in-app purchases, please leave your comments below.
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Rob Weber co-founded W3i in 2000, growing W3i to be a leader in app user acquisition and monetization. For 42 consecutive quarters the company continues to be profitable and has grown to over 120 employees. For more than a decade, Rob worked to create solutions to increase distribution, drive revenue, and heighten engagement for app developers, such as DeNA, Gree, Kabam, PocketGems, and many other indie and public developers. Under Rob's leadership, W3i recently launched a mobile offer exchange that includes partnerships with leading offer providers.
Rob's business philosophy is to provide a collaborative environment developing solutions that provide value to app developers, advertisers, agencies, and ad networks.
In addition, Rob shares his passion for apps, digital media, and entrepreneurship by serving on the board of several tech companies. Rob recently presented at MobileBeat, GamesBeat, GDC, GDC Online, APPNATION, iPhone/iPad App DevCon, and also judged Start-Up Weekends.
Rob is an angel investor in a number of game, social media, music, video, and mobile app start-ups.
Gartner Magic Quadrant for Digital Commerce
This Magic Quadrant examines leading digital commerce platforms that enable organizations to build digital commerce sites. These commerce platforms facilitate purchasing transactions over the Web, and support the creation and continuing development of an online relationship with a consumer.
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