$200 billion. That’s how much the worldwide in-app advertising (IAA) market is expected to generate in 2021 — no less than double since 2017.
This means tons of potential, but also that the market is crowded and hyper competitive.
Today’s app economy is dominated by free to download apps, where only a small (~5%) portion of users make in-app purchases (IAP) and generate revenue for apps.
Sure, many apps can make it on IAP alone, but just as many if not more rely on ad revenue from in-app advertising (IAA) as a critical revenue stream.
There is the temptation to maximize revenue from IAA by showing more and more ads to end users. However, advertisers have to strike a delicate balance of serving the right ad at the right time in a way that enhances the user experience instead of damaging it with overexposure.
In this guide we will explore what in-app advertising is, how it works, its different pricing models, creative formats, and some best practices to help you make the most out of this important source of income for your app.
What is in-app advertising?
In-app advertising is a revenue stream for mobile apps that seek to leverage their real-estate to show ads to their users. In other words, ad buyers pay them for displaying ads within their app.
Genres such as Gaming, Social, Utility, and Entertainment rely heavily on IAA (alongside IAP revenue).
There are a variety of ways to display and measure the performance of these ads, which we will discuss later on.
The in-app ecosystem – how does it work?
There are a number of players within the mobile ecosystem, each with their own specific role. Let’s break it down.
The ecosystem is split into two sides, the buy side and the sell side.
On the buy side are the stakeholders buying the ads, such as app developers and agencies. On the sell side are apps selling ad space, known as publishers.
In the middle is the ad network that acts as a broker selling the publishers’ in-app inventory (available ad space) to the advertisers.
The app wishing to display an ad makes a request to the ad network which uses advanced algorithms to identify the highest paying advertisers.
Working alongside the ad network is the ad exchange, a platform that behaves much like a stock exchange. Instead of just selling impressions by the thousand, the ad exchange allows advertisers to pick their desired audience and bid on them.
There is also the Demand Side Platform (DSP) that allows advertisers to access the inventory of multiple ad exchanges, and the Supply Side Platform (SSP) that allows publishers to place the ads in front of their selected target audience.
Remember that Mobile Measurement Partners (MMPs) fall on neither the buy or the sell side, but are an independent part of the ecosystem that help advertisers know which ad networks are delivering their most valuable users.
What are the benefits of in-app advertising?
We live in a mobile-first world. So much so that in North America, 26% of total media time, and 88% of mobile time is spent in-app. That means there are huge gains to make if you can use IAA effectively.
Let’s discuss a few of the benefits.
1. It’s a key revenue stream in the freemium app market
Most apps are free to download which means that unless they are built using a subscription model like Netflix or Spotify, they rely on two main revenue streams. The first is IAP and the second is IAA.
For some verticals, particularly Gaming, most app owners won’t be able to generate enough revenue from IAP alone. This is true mainly for the softer genres like Hyper Casual and Casual games which have relatively low rates of IAP (the former is often based solely on IAA).
Furthermore, the UX of Gaming apps lends itself to IAA as one can insert ads between levels and during transitions as a way to drive engagement. Compare this to a Shopping app, for example, where the goal is to get the user to purchase and the slightest distraction could thwart the process and lead the user to bounce.
Realizing the value of their in-app real estate amid rising media costs, app owners can generate significant revenue with IAA.
2. Boost user engagement
Placing the right ad in the right place at the right time will encourage users to engage with the ad, which will in turn increase engagement, retention, and ultimately revenue.
This is the case for Gaming apps. For example, rewarded videos give users rewards (usually in-game currency) for watching ads. They are highly effective because they are completely user initiated, and can increase engagement as they often require a user to play on consecutive days to receive their prize.
Additionally, as an app developer, you have the power to place an ad in your own app at the point you think it will be the most effective. The ability to blend the ad into the flow will create a less disruptive and overall better user experience.
3. Increase in-app purchase revenue
We mentioned that the two main revenue streams are IAA and IAP. Being able to link the two (i.e. an ad that leads to an in-app purchase) is gold for app owners.
Research shows that users who engage with in-app ads go on to view 4.2 times more products per session compared to organic users who may be looking for something specific. That’s 4.2 more opportunities to convert a user into a paying customer.
The challenges of in-app advertising
In-app advertising isn’t as simple as placing an ad and watching the money roll in. There are a number of hurdles that need to be overcome.
1. Standing out from the crowd
According to research, over two-thirds of brands (68%) primarily use IAA to help build brand awareness. That means there are a lot of ads being served within the app experience.
Ensuring that your brand gets noticed within such a crowded market, where the user is more interested in skipping the ad and continuing their user journey, is a challenge.
To combat this, you need to ensure your ad is relevant to their experience, well timed, and engaging.
2. Measuring in-app ad revenue post iOS 14
Apple’s AppTrackingTransparency (ATT) framework requires app owners to ask users to opt-in to sharing their user identifier – the IDFA – rather than opt-out.
The impact of ATT has been substantial, but it mainly impacts install attribution — in the context of in-app advertising it means advertisers have more difficulty attributing ad revenue to a user acquisition source.
However, from a publisher perspective, if there is no consent to tracking, the Mobile Measurement Partner (MMP) and the mediation platform see the same IDFV (identifier for vendors) and are therefore able to measure ad revenue.
3. Fighting fraud
Typically, fraudulent activity revolved around fake installs. However, as fraud detection has improved and fraudsters have become more cunning, there is a trend to fake higher value in-app events down the funnel such as watching an ad, completing a level, registration, and making a purchase.
Without identifying and stopping these kinds of fraudulent activities, advertisers will be blind to their ads’ true performance. Such a misunderstanding could lead to advertisers favoring a fraudulent network as it delivered more “quality” users.
Advertisers must be aware of the trend towards in-app activity fraud and be alert to unusual trends, even after the event.
Why in-app ad measurement and ad revenue attribution matter
As we mentioned earlier, accurately measuring campaign performance and effectiveness can be a challenge to mobile marketers.
If campaigns are not measured and attributed correctly, marketers have no idea which channels or creatives are delivering high value users, and equally which campaigns do not and require optimization.
Successful in-app campaigns require a balance between the right ad network, reaching the correct target audience, and being on-point with your creatives and messaging. If even one of these is off, then the campaign will most likely fail to deliver on its promise.
However, by measuring each element separately you can see where the holes are and work to rectify them. It may be just a small fix but without granular measurement you can’t drill down to the specifics.
Likewise with ad revenue attribution, when a user’s IAA activity is attributed back to the network that originally brought the user. For example, a UA campaign delivers a user that generated $2 in IAP, but the same user also generated $1 from viewing ads. The cumulative value of this user is $3.
Remember that post iOS 14, in-app measurement has undergone a momentous shift to safeguard user privacy. If app developers want to measure their campaigns for non-consenting users they will have to use SKAdNetwork, Apple’s aggregated attribution mechanism. SKAdNetwork has several limitations that reduce both the quantity and quality of LTV and ROAS data.
Ultimately, user-level data is the richest form of data as it has information on the individual user. It doesn’t matter whether it is in the volumes available with Android, or a smaller cohort of consenting users, it can be extremely valuable in helping to inform strategy for the larger cohort of non-consenting users (on iOS). For more information on attribution in the age of privacy check out this guide.
In-app pricing models
There are a range of pricing models varying in risk and reward for both the publisher and advertiser. Let’s explore some of the benefits and drawbacks.
Cost Per Mille (CPM)
The CPM is the price an advertiser pays a publisher for every 1,000 (mille) times the ad is displayed.
Publisher pros: CPM is great for the publisher because they only need to show the ad in order to get paid.
Publisher cons: The margins for CPM are slim, and if the publisher is hitting the right targets they could be missing out on the more lucrative click revenue.
Advertiser pros: The price is low relative to other models.
Advertiser cons: There is no guarantee that by showing the ad they will generate clicks or conversions.
Recommended for buyers when trying to increase or improve your brand’s visibility.
Cost Per Click (CPC)
With the CPC pricing model, the advertiser pays the publisher only when an ad is clicked.
Publisher pros: Depending on the campaign goals, the publisher may be able to demand a higher price per click.
Publisher cons: The publisher may have to serve more impressions in order to generate the desired number of clicks, meaning they may have to work harder for the money.
Advertiser pros: CPC is a fairly good model for the advertiser as they only have to pay for a real signal of interest – in this case a click.
Advertiser cons: Some clicks may be accidental meaning you would end up paying for something and receiving nothing in return.
Recommended when: Your goal is to drive traffic to your app and you have a specific budget in mind of how much you are able to spend.
Cost Per Action (CPA)
The CPA pricing model requires the advertiser to pay the publisher when a click leads to a specific, pre-defined action within an app (registration, purchase, etc.).
Publisher pros: With good audience targeting, publishers can deliver promising results in a short period of time, making it an efficient revenue stream as they can charge high CPA rates.
Publisher cons: CPA poses a higher risk for publishers as the requirements are more specific. They may be able to generate lots of impressions and clicks, but there is no guarantee that a user will follow through on the desired action.
Advertiser pros: CPA offers a low-risk, pure performance option when there is a specific action in mind.
Advertiser cons: There aren’t many cons given how specific and measurable it is with the exception of potentially finding it difficult to scale. That being said, advertisers can become laser focused on performance and ignore additional factors such as brand awareness.
Recommended when: You have a specific action you want the user to perform, such as a purchase or registration.
Cost per Install (CPI)
As the name suggests, this pricing model requires the advertiser to pay only when the action results in an install.
Publisher pros: The margins are much higher, and competitive markets demand premium price tags meaning it can be a very lucrative model.
Publisher cons: Requires time and skill to deliver the necessary results. Campaigns need to be closely monitored and continually optimized.
Advertiser pros: For an advertiser who has a niche audience, it means you only end up paying for those users who actually want your app.
Advertiser cons: CPI can’t tell you if a user is engaged with your app. They may download, launch and delete it the next day, meaning you are essentially paying for nothing. There may also be a temptation to go for lower cost installs but be aware that these will attract lower value users and potentially, fraudulent installs.
Recommended when: Your goal is to increase the number of installs, or looking to promote and distribute apps across a broad audience.
Deciding which monetization strategy could vary between apps, or even different campaigns within an app. It’s important to test out which one works best for your campaign.
In-app ad formats
There is a huge range of different ways to display an ad. Some are subtle, whereas others purposely disrupt, or require interactivity.
Banner ads are probably the most familiar to users. They appear usually as text accompanied by an image at the top or bottom of the screen, alongside the app content. They usually include a visual, text, and a call-to-action button.
Video ads are usually short video clips that often appear before another video (think: the ad before you get to the video you want to watch on YouTube). They are highly engaging and enjoy strong click-through rates.
Rewarded video ads
These are often used in Gaming apps and have a clear value exchange. You watch an ad, we’ll give you a reward. Rewarded videos can be good for user engagement, especially if the reward increases when you watch on consecutive days.
Interstitial ads are sometimes called full screen ads. They are considered to be less intrusive than other ads as they usually appear during a transition in the app, so for example between levels in a game. They are rich forms of content and can be either static or video ads.
Native ads appear in the regular flow of content, for example in a social network’s news feed, or in the form of an ad generated by a content recommendation engine that’s woven into the content of an app/website and marked as sponsored content. Their goal is to blend into the look and feel of the app, while catching your attention while you scroll.
Playable ads give users the opportunity to ‘try before you buy’ by playing a mini version of the game before they decide to install. They are fun and interactive, which is why they demand some of the highest CPM rates for Gaming apps.
Similar to the rewarded video, the offerwall ad is typically a page with a list of incentives. The user can choose the offer they want to go for, which may include in-app currency such as lives or coins. These ads enjoy high engagement rates as they are completely user initiated and can help to extend session time.
In-app advertising best practices
When it comes to IAA there are a number of tips and tricks to help drive success.
Test, test, test
Understanding what combination of factors delivers the best results is a delicate balance. The answer is to test, test, and test some more.
Test which ad format works best for each campaign. Test different pricing models and see which is most suitable for your app. Finally, experiment with different ad networks and see which ones deliver the highest CPMs.
Make sure you adhere to privacy guidelines
Changes to the rules and regulations surrounding consumer privacy have been nothing short of monumental. It’s important you keep on top of the guidelines and ensure your app is working within the requirements.
Try to bring in users who will engage with your ads
If IAA is a key revenue stream for your app, then make sure your UA efforts target users based on how well they will monetize with advertising.
Invest in your creatives
Advertisers have an estimated 1.7 seconds before a user loses interest or skips your ad. Having eye-catching creatives which capture the attention and imagination of the user are a great way to boost engagement and return.
According to guidelines set by the Media Rating Council, a mobile display ad impression is only considered viewable if it meets certain criteria relating to pixels and timing.
- Pixel requirement: 50% or more of the pixels in the ad were in view.
- Timer requirement: The time the pixel requirement was met must be at least one continuous second, post ad-render.
Without these two requirements your ad won’t “count”, so it’s crucial you test and make sure you are meeting these thresholds.
Don’t over advertise
By segmenting your audience correctly, you can divide users into those who have installed or purchased, and those who haven’t. Try to show ads to non-paying users instead of those who have converted.
Once a user has converted be sure to change the messaging and target them for re-engagement.
In-app advertising is a critical revenue stream for advertisers, especially in the freemium dominated market. To capitalize on the benefits of IAA remember that:
- The pricing model you choose should reflect the goals of your campaign – if it is pure performance then CPA might be the right fit, but if you’re looking for increased brand awareness then maybe CPM is more appropriate.
- Try out different ad formats to see which deliver the highest engagement – remember not to over advertise as this may turn customers off and lead to churn.
- Stay alert to fraudulent activity and trends – you don’t want to be investing in what you think are quality users but are in fact fraudsters.
- Measuring your in-app ad revenue and attribution is a key component to understanding the success of your campaigns. It’s important to work with an independent MMP to help analyze results and deliver insights.