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Last update: August 2020

4 mins to read - 2020/08/17

What Is an In-App Purchase (IAP)?

The nature of mobile apps – and in particular mobile games – has changed drastically in the past few years. With the popularity of free apps and free-to-play (F2P) or “freemium” games, developers have had to explore alternative monetization strategies. There are a large number of ways app developers have boosted revenues, but the most widespread is enabling in-app purchases (IAPs) in your app’s core code. IAPs make up 50% of the monetization strategies for non-gaming apps, with that number spiking to 79% for gaming apps.

in-app purchases ecommerce

What Are In-App Purchases?

Essentially, an in-app purchase is extra content or services you can pay to access within a mobile app. For example, in a battle royale game, you can access free gameplay in which you have a basic avatar and access all the standard levels. By spending money on in-app purchases, you would receive a more premium gaming experience. Perhaps you would have access to to more customizable avatars, or more powerful weapons and skill sets. Or you might unlock bonus levels or longer gaming sessions.

The prevalence of IAPs has revolutionized the apps industry by creating a lucrative market for free apps. Users can download the app for free, and, if they enjoy the experience, they can pay small amounts on an ongoing basis to improve it. This not only incentivizes users to download it, by removing the risk that they might spend money on something they won’t enjoy. But it also sets up potentially endless streams of revenue for developers.

For apps downloaded from the App Store or Google Play, where users have credit cards associated with their accounts, in-app purchases can be streamlined and instantaneous. For parents concerned with children racking up hefty bills on their phones, you can disable IAPs by going into Settings.

in-app purchases gardenscapes game
Image Source: Gardenscapes screenshot

Different Types of In-App Purchases

As the mobile industry has evolved, so have in-app purchases. Obviously, different types of IAPs work best for different types of app. But for the most part, they can be sorted into 3 categories:

Unlockable

An unlockable is an app feature or service that once you pay for it, you have permanent access. For example, a magical blue hat in Fortnite or other cosmetic upgrades to your avatar. It can also be something that has a more direct impact on your experience of the app, such as bonus content or an expansion pack to your game.

Loot boxes would be an example of an unlockable feature. A common feature in mobile games, they are unlockables that users pay to open. They then receive a randomized reward, which may or may not offer them the value-for-cost ratio they had been hoping for. Because of this, and because of their addictive nature, some countries are moving to classify them as gambling.

Consumable

With many free-to-play games, this is the main monetization strategy. This refers to app users paying money to purchase an in-game currency that lets them buy bonus features or extra playtime. Normally, the game rewards players organically with small amounts of the currency. But if players want to bypass wait times and access bonus features immediately, they can do so for a fee.

One example of a game that does this is Gardenscapes, where players play the core game loop of swapping flowers and berries until they use up 5 hearts. Then they have to wait 30 minutes per heart until all their hearts are recharged. However, in the Garden Store they can purchase gold coins, which lets them buy more time in trying to complete a difficult level, thus letting them preserve their hearts for longer. They can also purchase bombs and other in-game tools that make gameplay easier.

in-app purchases gardenscapes game
Image Source: Gardenscapes screenshot

Subscriptions

Subscriptions refer to payment to access bonus or a premium tier of gameplay that lasts for a set amount of time. They usually renew automatically. The battle royale phenomenon Fortnite breathed new life on the practice of app subscriptions with their Battle Pass. They began to release subscriptions on a rotating cycle of 10-week seasons, each of which has its own unique range of cosmetics and emotes.

This bumped Fortnite up into the top mobile game earner on iOS, with $450 million in revenues earned in 2018.

Is the “Freemium” Model Viable?

Why go through all the rigamarole though? Why market something as “free” but then nickel and dime your user over the course of their life cycle with your app?

Clearly, the “free” label entices a lot of users to download the app to begin with. People love a bargain, after all. It can appeal to some users that they can choose how they want to use the app or play the game. Would they rather invest 5 hours into beating a certain level, or $5?

This model, offering app users an a la carte app experience, has proven its success rate. According to a report by Sensor Tower, the app revenues generated by the App Store and Google Play amounted to $39.7 billion in the first half of 2019 alone.

As of yet, there is no regulation around how or how much developers can work in-app purchases into their apps. So there is a vast potential for revenues in this model. However, one possible area of contention is that platforms like the App Store and Google Play that facilitate IAPs also charge a commission. For example, Apple earns 30% of all purchases made in-app on iOS devices.

In fact, this was the root of the recent Fortnite controversy, in which Epic Games filed a lawsuit against Apple for removing the game from its App Store. This is due to Fortnite implementing a discount for V-Bucks, the in-game currency, if players buy it directly in the Fortnite app rather than the App Store, thus undercutting Apple’s 30%. Apple clearly states in their guidelines that all in-app purchases must pass through the App Store platform.

Whatever the outcome of the lawsuit, it makes it clear that in-app purchases are a vital form of revenue in the mobile app economy. And many apps simply wouldn’t be financially viable without them.

If you’d like to learn more about how to maximize revenues for your mobile app or game, get in touch with one of our experts to talk about your mobile engagement strategy.

Calculate how much your revenue would increase per month using OpenBack:

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