In-app purchase (IAP)
An in-app purchase (IAP) is extra content, goods or services that a user can buy within an app on a mobile device.
What are in-app purchases?
IAPs allow users to exchange real money via the relevant app store or other payment method in exchange for consumable items, non-consumable items, and subscriptions.
The majority of apps are free to download and therefore app owners rely on in-app purchases as a key revenue stream. In fact, in Q3 2021 alone, global consumer spending in mobile apps and games was $33.6 billion.
How does an in-app purchase work?
There are four types of IAPs. Let’s discuss them in more detail.
Consumables
Consumables are products that can be used once (hence consumed) and then repurchased multiple times. They are most common in games, for example buying extra lives or in-app currency like tokens. You might also see consumables in dating apps to buy extra swipes or unlock extra features. When it comes to eCommerce apps, the purchase of a physical item via an app would also be considered a consumable item.
Non-consumables
Non-consumables are products that you purchase once, have no expiry date, and remain permanently available within your app. In gaming this could include unlocking a new level, buying specific features like a new set of tyres for your racing car. Other examples could be an ebook on your kindle app, or a bundle of workout videos on a fitness app.
Auto-renewal subscriptions
Auto renewal subscriptions are products or services that you pay for on a recurring basis. Think access to Netflix, Spotify or even storage allowances from Apple or Google. There is a growing trend for app developers to choose the subscription based model as it guarantees a steady stream of income. Additionally, Apple and Google recently dropped the cost of their commissions on subscription apps, making them even more attractive.
Non auto-renewal subscriptions
Non auto-renewal subscriptions are for a fixed period and are usually for a longer period of time. They may also be of a higher value than the auto-renewing subscriptions and therefore require a user to manually renew.
Non auto-renewal subscriptions can also be a useful tool for content providers, for example offering a fixed subscription to access streaming services for a specific sporting event.
Payment mechanisms
Aside from the type of payment, there are also three options for the mechanism behind the payment.
1. Via your app store (Apple or Google Play)
The user has the option to connect their credit card details to the app store and make purchases within the app. The payment is then made through the app store’s payment system. This is typically done in subscription apps and games where for example, a user may want to buy credits at the click of a button.
Apple and Google charge a commission to the app owner of 30% per transaction. For subscriptions Google and Apple recently reduced their commission to 15%, though for Apple this is only applicable to the first $1 million of sales, after which it returns to 30%.
2. Directly through the app
Direct payments can be made by loading your credit card details into the app itself, for example paying for a taxi ride on Uber, your takeaway meal on GrubHub, or making a purchase on an eCommerce app for a physical item.
3. Third party
Until recently, app owners were forced to use one of the above payment systems. That was until Epic Games brought a lawsuit against Apple in August 2020. Epic challenged Apple’s restriction on the lack of in-app payment methods available in Apple’s store and had previously complained about the 30% commission that Apple took for each transaction.
Apple was found to be in violation of the California Unfair Competition Law as it had stopped developers from informing their customers that other payment methods are available.
As a result, Apple can no longer de facto force app developers to exclusively use the Apple payment system, and instead can offer third party in-app purchase methods, for example, directing a user to the app’s mobile site to complete a purchase.
In October 2021, Apple appealed the decision that was due to go into effect in December 2021.
In-app purchase: iOS vs. Android
Despite Android claiming 72% of operating system market share, iOS users are known to spend far more per user.
According to AppsFlyer data, iOS commands a greater share of paying users in all app verticals, except photography. In Gaming, iOS had a 54% higher share of paying users, and in Shopping and Finance apps, iOS had 39% and 36% respectively.
What’s the reason for this trend? Well, iOS is more dominant in regions where there is a higher GDP such as the US and Japan, compared to Android which enjoys more popularity in developing markets across India, Southeast Asia, Africa, and Latin America.
In addition, the average iPhone is significantly more expensive than the average Android device, and hence correlated with higher income, which translates into higher spend per user.
Another key factor is that Apple is able to operate in China, whereas Google Play is banned. There are alternatives to Google Play in China, which in 2020 generated over $8 billion in revenue.
The connection between engagement and in-app purchase
IAPs are directly linked to in-app engagement, and so if as an app owner you are looking to measure and increase purchases, you need to first look at engagement.
Take for example a dating app. A user who is engaged, i.e. swiping, liking, and messaging on a daily basis is engaging well with the app. On a particular day they run out of free swipes so the app offers them an option to purchase more swipes, which they choose to do. Highly engaged users are far more invested in the app, increasing the likelihood of making a purchase.
If apps monetize with ads, every view drives revenue, which means engaged users can generate significant revenue even if they don’t make in-app purchases.
Therefore, you want to measure purchases as part of the bigger picture of engagement. There are a number of metrics that can help measure engagement and boost revenues:
DAU and MAU
Daily active users and Monthly active users are the number of unique users that engage with your app on a daily or monthly basis. Defining what constitutes an active user requires you to agree on certain criteria.
You can also look at the DAU-MAU stickiness ratio, which is the number of DAU divided by the number of MAU. The stickiness ratio will help you understand how well you are doing at retaining users over an extended period of time.
ARPDAU
ARPDAU stands for average revenue per daily active user. This is an important metric, especially for Gaming apps, because it helps to understand how your users react to different campaigns or creatives and the effect on your daily revenues.
If you see they engaged positively with a campaign it may cause a spike in revenues and help guide future campaigns. Conversely, if engagement and revenues drop on a certain day you can investigate what went wrong and optimize for improvement.
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Average session length
Average session length helps app owners understand how engaging their app is. The longer the session the more engaged the user, and the more potential there is for a user to progress towards making a purchase or view more ads.
Retention rates
User retention helps to measure loyalty over time. It’s different from the DAU-MAU stickiness mentioned above because retention is about longevity. For example, a user may install a Hyper Casual game and play incessantly for a week but then churn. Compare this to a user who plays every few days but for a year. You could argue that the second player was more engaged, and more likely to make a purchase over their lifetime as a user.
In-app purchase fraud
IAP fraud often happens when there is a Cost Per Action (CPA) campaign tied to in-app purchase events. CPA events can often reach 10x the value of the associated CPI rate as they represent a higher value user and are therefore attractive to fraudsters.
The fraudster can settle for fewer actions as each one is worth more, which means less chance of attracting unwanted attention from anti-fraud systems.
According to AppsFlyer data, subscription revenue among streaming entertainment apps in-app fraud ratio is high, with 1 fraudulent install for every 67 in-app events. This may be because fraudsters target lucrative recurring subscription revenue events.
In Gaming apps, the Social Casino and Hardcore genres suffer most from high rates of in-app fraud with ratio’s of 288 and 256. Here, fraudsters target several potential CPA events across the funnel to maximize efforts.
App owners need to be aware of these tactics and keep an eye on their in-app trends, particularly relating to purchases, even after the event.
How to increase in-app purchase revenue
The ultimate goal of most apps is revenue, so increasing IAPs should be front and center of your strategy. Here are a few quick tips on how to boost your revenue.
1. Offer rewards
Everyone loves something for nothing, or something for less. Offering rewards can help increase engagement and lead to purchases further down the line. Discounts and offers are another good way to encourage purchases and can be delivered in a personalized way or around a specific calendar event.
2. Utilize rich in-app events
Rich in-app events refer to activity such as level achievement, tutorial completion, user invites, and social shares. They can also add context to a purchase. So for example, in a travel app instead of simply seeing that a booking was made, with a rich in-app event you can see that it was a flight, booked from London to Paris, flying business class for the cost of $500.
Having the additional context is very important, as rich in-app events help you go a level deeper which is essential for determining the real value of your users, the performance of your user acquisition (UA) efforts and how you can drive more similar conversions.
3. Remarketing and re-engagement
It is no secret that it’s cheaper to re-engage existing users than it is to acquire new ones. More than that, you know existing users are already familiar with your brand and see value in your offering. It is therefore easier to re-engage a user that has shown a previous level of interest to purchase from your app than trying to encourage a new user all the way down the funnel.
4. Personalization
In a world where users are flooded with content on a daily basis it stands to reason that when content is personalized it is more likely to resonate with a customer (assuming they consented to this form of measurement).
Delivering customized offers at the right time can give that all important nudge from prospect to conversion. For example, giving a 10% discount during their birthday month.
Another example could be in a shopping app where you know that a user has placed a cardigan in their basket. That cardigan is selling quickly so you send a push notification to let them know and not to miss their chance. This creates a sense of urgency and encourages the customer to complete the purchase.
Key takeaways
In the freemium app market, IAP is the bread and butter for app developers. Remember that:
- Purchases fall into one of four categories. Which one you choose will depend on the type of content or service you offer.
- Android may command more of the market share when it comes to devices, but Apple still dominates IAP revenues (which are consumer spend).
- There is a strong correlation between engagement and purchases. If users are engaging with your app they are more invested and therefore likely to make a purchase if offered the right deal at the right time.
- Despite increased awareness around fraud it continues to plague app owners. IAP fraud often happens when linked to a CPA campaign. Although these are fewer in number they are higher in value and so can be harder to spot. It’s important to stay alert and vigilant and review the validity of purchases even after the event.
- Creating a personalized and smooth in-app experience will help increase your IAP revenue. Delivering timely offers based on your users’ preferences can help give that all important nudge from browsing to purchase.
