Understanding In-app Purchases and How They Work

Ever wonder how brands can afford to launch and maintain free mobile apps? The answer, a lot of the time, is in-app purchases.

Mobile app users spend over $380 billion on in-app purchases. This makes up approximately 48% of all mobile app revenue.

The huge earning potential from in-app purchases allows developers to get their apps in front of a wider audience, by making them free to initially download and use.

The puts the focus on getting value long-term instead of up front (such as by launching a paid app), which can turn out to be extremely lucrative.

Read on to learn all you need to know about in-app purchases, and how to utilize them for your app.

What Are In-App Purchases?

In-app purchases are digital goods and services sold inside of a mobile app. These are used to provide additional value or functionality within the app.

An in-app purchase is essentially an upsell, or a premium upgrade to the regular version of the app (which is often free). Most of the time they are optional, giving users the choice whether to use the basic, free app features, or pay for more.

For apps distributed via the App Store (for iOS) or Google Play Store (for Android), the marketplace takes a share of all revenue generated by in-app purchases. They’ll also make it clear to a user before they download an app if it contains in-app purchases, with a badge on the app store listing.

What Can Be Sold With In-App Purchases

Anything that provides additional value to an app can be made into an in-app purchase. These are particularly ubiquitous in mobile gaming apps, which often allow users to buy special items, features or upgrades to games that are initially free.

Here are some examples of common in-app purchases:

• Premium content
• Downloading songs or audio
• Removing ads from the app
• Access to premium features or unlocking full access to the app
• Digital items
• Higher/unlimited usage limits
• Bonus game levels
• Allowing users to skip game levels
• Extra lives in a game
• Boosters or power-ups
• In-app currency or in-game currency
• Content upgrades or downloads (e.g. e-books or videos)

Different Types of In-App Purchase

We can group in-app purchases into four categories:

• Consumable
• Non-consumable
• Renewable subscriptions
• Non-renewable subscriptions

Consumable purchases are most common in mobile games. A consumable in-app purchase includes things like in-game currency, credits, and boosters, which are consumed once used. These can generally be purchased multiple times.

These might also be referred to as expendables. Expendable or consumable in app purchases are limited to the mobile device they were purchased on.

Non-consumable purchases are usually permanently added to the user’s app or game. This is more common for unlocking extra features or content upgrades. We might also call these purchases unlockables.

Renewing subscriptions are purchases that give you access to the app or to advanced features for a set period of time, and generally renew automatically at the end of each period (most often a month or a year).

In-app subscriptions today are a staple of news apps, which offer users the choice to pay for unlimited or premium content.

Non-renewing subscriptions are the same as the above, but don’t renew automatically. This could give elevated access for a set time frame (e.g. a season pass to a game), or it could be a one-time payment to get premium features.

Examples of Apps with In-App Purchases

Here are a few mobile applications using different kinds of in-app purchases:

The Medium app uses in-app purchases in the form of auto-renewable subscriptions, which gives access to premium articles.

Candy Crush offers in-app purchases for in-game consumable items, and options such as skipping levels or extended use once your free time has run out.

The Way of Life app is free, but gives unlimited habit tracking for a one-time payment. This is an example of a non-renewable subscription.

iOS vs Android In-App Purchases

In-app purchases work mostly the same between iOS and Android apps.

For both platforms, purchases are charged to the user’s linked account - their Apple ID or Google Play account.

And both iOS and Android apps have to display a badge on their app store listing to indicate they have in-app purchases (even if they’re completely optional).

Each marketplace takes a cut on all in-app purchases. For single purchases, the Google Play Store charges 15% for the first $1 million USD in a year, and 30% on all earnings above $1 million. For automatically renewing subscriptions, it’s a flat 15%.

The iOS App Store is very similar. App purchases and in-app purchases have a 30% commission - for subscriptions, this falls to 15% after the first year. If you make under $1 million USD per year, you can apply to their App Store Small Business Program, which reduces fees to 15%.

Benefits of In-App Purchases

In-app purchases have a lot of huge benefits for app publishers, which is why they're so common today. Here's a rundown on these benefits:

• They allow you to offer your app for free, which will get considerably more downloads than a paid app.
• It’s a low-risk and low-friction monetization method.
• There’s huge revenue and profit potential, as digital products don’t require physical stock or overhead.
• It allows you to charge relative to how much people use your app. You can extract more revenue from your power users.
• You’re not limited to only using in-app purchases for monetization, and can combine this with other monetization strategies.

Disadvantages of In-App Purchases

There are some downsides to enabling additional purchases with your app. Let’s take a look at some of them:

• A large percentage of users will never purchase something through your app. You need to account for this, and it can lead to unstable revenue.
• Each marketplace takes a fairly significant fee on in-app purchases.
• Many people have a negative view on in-app purchases, especially if they’re required for key app features, or targeted towards children.
• There’s the potential for unauthorized purchases (such as a child on their parents’ phone), which can lead to refunds and chargebacks.

Alternatives to In-App Purchases

There are a number of other ways you can monetize your app, outside of relying solely on in-app purchases.

Ads

Many apps utilize in-app ads to make money. Often this is done in combination with, not as an alternative to, in-app purchases. You can use ads as an incentive for people to pay for the premium, ad-free version of your app, while still making revenue from free users.

Paid Apps

You can also make your app a paid app. Instead of being free to download, and look to extract revenue from your users later, you require them to pay up front to download it.

This is a more predictable revenue model, since you know exactly how much you’ll make from each user. It also allows you to provide a cleaner, less cluttered UI, since you’re not showing ads or trying to push people towards a purchase.

Paid apps, however, are much harder to sell than free ones (obviously), and don’t offer the long-term earning potential of apps with in-app purchases.

Avoiding In-App Purchase Fees

When you launch your app and start making money from it, you’re probably going to come hate the 15-30% fees coming out of every transaction. So is there a way to get around these fees?

It’s possible to offer subscriptions that are paid and managed outside of the app, which will thus not incur the App Store’s commissions. This is only possible (in the iOS App Store) for “reader apps”.

Reader apps are apps that allow users to view or access previously purchased material - such as books, audio and video.

Examples of these types of apps include Netflix, Spotify and Kindle. These apps are able to offer purchases and subscriptions, but as they take place outside of the App Store, they aren’t charged commission.

Apple is currently loosening regulations on how apps can contact users and facilitate payments outside of the App Store, as a result of a legal battle with Epic Games.

However, it’s not quite a free-for-all just yet. You may get your app removed from the App Store if you try to circumvent the fees on in-app purchases.

And while Apple may be loosening up, the Google Play Store is doing the opposite. They just began enforcing tighter rules on apps that use purchases outside of the Google Play Store, including the Amazon Kindle App.

It’s best to think of in-app purchase fees as a cost of doing business. You get a ton of discoverability from being in app stores, so you should expect to pay something for this. In-app purchases remain an extremely lucrative revenue source for app publishers.

Wrapping Up

Whatever your app monetization strategy, it's likely to include an in-app purchase here or there.

There are so many ways to incorporate in-app purchases into your Apple or Google Play Store App and earn a lucrative income.

The potential of in-app purchases is also just another reason why it makes sense to convert your website into mobile apps, with MobiLoud. MobiLoud includes everything you need to monetize your app, be it with a subscription or freemium model, or by showing ads.

Click here to get a free demo and see what MobiLoud can do for you.