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The commercialisation of the Internet has rapidly changed the technology business landscape. In the new mobile economy, one incredibly disruptive innovation has been the incorporation of in-app purchases as a way to monetise digital app products. For the bulk of this article, we shall unwrap the topic of in-app purchases and examine how they have enabled a new profitability avenue for mobile developers.
What Does In-App Purchase Really Mean?
Generally speaking, in-app purchases (IAPs) are a pricing model that encompasses all financial transactions that happen within a mobile application. As such, IAPs are prevalent in the smartphone apps market, in both paid and free apps.
Mobile apps that exploit in-app purchases range from productivity software with purchasable features to mobile games where customers can pay for additional playtime, or the ability to skip ads or difficult levels of a game.
In practice, subscription-based payment services like membership to a service are not considered in-app purchases. Rather, a distinctly defining characteristic is that in-app purchase features are not often advertised, and are never part of the app’s initial basic product offering.
As such, most in-app purchases are only offered within the app, and typically have no programmed limit of the number of times a user can repeat a transaction. Therefore, the amount they can spend on a single app is probably infinite. Additionally, in-app purchases are fully virtual transactions that are facilitated by real money.
Characteristics of In-app Purchases
In-app purchases allow you to purchase an extra mobile app feature(s) or remove banner ads inside a mobile app. They typically cost about $0.99 to $4.99 per in-app purchase. However, in most apps, you can continue using the mobile app without making an in-app purchase if you’re comfortable with the app’s existing limited functionality, or are not bothered by the ad banners.
Overall, in-app purchases revolve around delivering extra content, subscriptions or services, all purchasable inside a mobile application. For example, while one can download the Clash of Clans mobile game for free, users are given the option of purchasing ‘green Gems’, the game’s premium virtual currency within the app itself. Other examples are Instagram’s shopping feature or unlockable characters in many mobile games.
How Do In-App Purchases Practically Work (Use Case)
According to Sensor Tower, estimated global in-app purchases rose by 23.4% to $50.1 billion in 2020, with $36.6 billion coming from mobile games. This growth can be credited to the COVID-19 pandemic as Tinder kept the number one spot as the highest-earning non-game app, making $433 million in spending across Apple and Android stores.
That being said, most of the top mobile applications grossing the most revenue from in-app purchases employ a freemium model.
Freemium is exploited by mobile developers to maximise their profits. A clear testament to this is the fact that approximately 90% of the mobile games on the App Stores are dependent on freemium strategy. Freemium-based mobile game apps, in most instances, offer limited features or limited game items only as developers expect users to spend money on in-app purchases during future usage.
In-app purchases are based on the premise that mobile games are experience goods. Generally, it’s tricky selling experience goods via the Internet since they are intangible, and what consumers experience through the Internet is merely a part of the product. For instance, consumers can’t easily determine the quality of a Hamburger sold through Amazon before they actually eat it.
The same problem applies to mobile games. In practice, game users can only judge whether the game is enjoyable after actually playing the game. Hence, game developers give away a free version of the mobile game to prospective players in order to provide more opportunities to experience their game content and promote purchases.
As such, if the potential users play a freemium version of the mobile game application, their uncertainty level is lowered. This consequently facilitates actual game usage and hence, purchase of in-app purchases of items.
The Candy Crush Use Case
The most notable demonstration of in-app purchase success and profitability is King Digital Entertainment’s mobile puzzle game “Candy Crush Saga”. Between January and September of 2020, Candy Crush generated revenue of $473 million U.S. dollars in the USA alone, solely through in-app purchases.
Despite mobile apps varying in how they implement in-app purchases, Candy Crush employs most standard conventions, which could explain its tremendous success. First released in 2012 on Facebook, Candy Crush is a mobile puzzle game where players swap disparate types of candy on a game board to match three or more of the same type.
In practice, the tile-matching puzzle game is played primarily on smartphones, and players can earn game points by matching tiles of ‘candy’ in a limited number of turns or within a limited amount of time. Ideally, if a player earns enough points to meet a “target score”, they are then allowed to progress to the next level. Initially, the game is relatively easy as target scores are low, and the gameplay is simple. By completing different levels, players can unlock additional levels that gradually introduce new tiles, which are more challenging.
Candy Crush’s in-app purchase model is primarily successful due to the fact that the game mechanics of matching candy tiles is highly entertaining and consistent throughout the entire game. However, unique variation is added to keep players constantly interested and challenged.
So, as players progress to subsequent levels, they are gradually given the option to use in-app purchases to upgrade their experiences. For instance, if a player doesn’t meet the target score in a level, rather than being forced to restart, they are given the option to continue their current level by paying $0.99. However, if the player chooses to restart the game, they will lose a life, and if they have no lives, they either wait a period of time, ask a friend to share one of their game lives, or purchase additional lives. Additionally, players can also buy in-game products to make their gaming experience easier. For example, modifying tiles in a beneficial manner.
Lastly, after level 35, a player has to either pay $0.99, or ask their Facebook friends for ‘hard to earn’ tickets, every fifteen levels to progress. It’s imperative to remember that a player is not even offered an in-app purchase option until after a couple of levels, because of their ease. Generally, Candy Crush allows players to first enjoy the game, learn how to play it, before even considering monetisation. This is probably a brilliant and subtle way of directing the player’s attention to the initial enjoyment of the game.
In-Application Purchasing as a Transactional Technology
As we have already established, in-application purchases or billing is offered as a way to sell virtual content within mobile apps by all key mobile operating systems (iOS, Android & Windows Phone). Developers are provided tools to easily integrate this functionality within their applications as transactions are typically handled by the app marketplace, which leaves only the developers the task of only curating the products and implementing the purchasing mechanisms.
For example, Apple defines four main categories of in-application purchase item types that can be sold, namely: content, functionality, services and subscriptions. On the other hand, Android defines in-app purchase items by two types: standard in-app products and subscriptions, with the main difference being that the first is sold as one-time billing while the second is sold as recurring automated billing.
Overall, in-app purchase items must belong to one of the following categories: consumables, non-consumables, free subscriptions, auto-renewable subscriptions, and non-renewing subscriptions. First, let’s touch a bit on the core categories:
- Consumables: These products a mobile user can use only once. For instance, virtual money or health points. The products are typically used in free-to-play mobile games where app users can pay to purchase an in-game currency that allows them to purchase bonus features or extra playtime.
Generally, the mobile game rewards players organically and incrementally with small amounts of currency. However, if they want to bypass wait times, skip stages, and access bonus features immediately, they can for a fee.
- Non-consumables: These are essentially app features that users purchase for permanent use, such as, additional capabilities or ad blocking.
- Subscriptions. Auto-renewable subscriptions and non-renewing subscriptions can be offered to mobile users to unlock specific content or functions for a specific period of time.
In-App Purchases in Mobile Games
Mobile games tend to be usually monetised in four different ways:
- Paid only, where players must pay before downloading the game.
- Paid + Free demo, where two different versions of a mobile gaming app are made. Here, the free version compels the player to buy the full version.
- Ads in a free mobile game where advertisers finance the ads.
- In-app purchases!
According to Statista, the mobile gaming sector is expected to reach $79 billion in revenue in 2021, after making approximately $77.2 billion in revenues in 2020, with console games making only $45.2 billion.
A major contributing factor to this year-on-year success is the increasing reliance on monetisation through the employment of a variation of in-app purchases called microtransactions. These are in-game purchases of additional downloadable game content or virtual goods that enhance the players’ experiences in the game. For example, new game modes or virtual items that provide players with a winning edge in the game.
Over the past decade, the microtransaction monetisation strategy has been innovatively and lucratively applied across different game genres and platforms. For example, within free-to-play games (like Pokémon Go) and mobile games that involve an initial purchase price (like Minecraft).
In practice, mobile games typically employ features like: asynchronous gameplay, community, and virtual currency. Asynchronous gameplay enables users to play games without needing other players to play simultaneously. Gaming communities attract players to discuss and share their game experiences, achievements, or photos. While in-game currency enables players to purchase upgrades, achievements or special virtual goods for themselves or for friends. Virtual in-game currency must always be purchased with real-world money as a source of revenue for the mobile company.
The most common approaches for executing in-app purchases for mobile games are:
- To buy time (make stages go faster or letting users pay to move forward to the next level without waiting).
- To purchase the full version within the app, without needing a different version.
- To allow users to pay for hints to help them solve levels faster
- Giving bonuses and customisation items like a character outfit, in-game items, or unlocking dissimilar types of actions users can try (like a special fighting combo for only paid users)
- To buy downloadable content like extra levels, characters, or items.
- To buy consumables, for example, coins, gems, stars or whatever.
- Gaining extra ‘game lives’ so they won’t need to wait to re-do a level
- To remove ads from the game.
- Giving mobile users the option to pay to enter a ranked competition with a reward for the winner.
As has been noted, in-app purchases are somewhat muddled between freemium content and premium versions of the applications. However, it is a highly effective approach that can be profitable with the right app or gaming proposition. Also, most apps that use in-app purchases do not start with a paid model, as it’s important to subtly entice users to commit to make virtual item purchases later.