In-app Purchases: How Developers Are Making the Sale

Mobile users rang up $970 million worth of in-app purchases in 2011, says the research firm IHS. That’s impressive, considering that the firm estimates about 96 percent of all apps downloaded in 2011 were free.

Even so, that’s pocket change compared to predictions for 2015, when IHS expects the annual tally to hit $5.6 billion. But grabbing a piece of that market is just an obvious reason why more developers need to start adding support for in-app purchases to their apps. Another less obvious reason is that the business model of charging up front for the app itself may be less and less viable.

“In 2012, it will become increasingly difficult for app stores and developers to justify charging an upfront fee for their products when faced with competition from a plethora of free content,” IHS said in a January research note. “Instead, the apps industry must fully embrace the freemium model and monetize content through in-app purchases.”

$10K a Day?
Some developers are already making a significant amount of money from this model. “All of our games have included in-app purchases,” says Baudouin Corman, Gameloft vice president of publishing for the Americas. “Today, more than 50 percent of our revenue is coming from advertising and in-app purchases. In-app purchases are an extremely powerful monetization model.”

Not surprisingly, the revenue potential varies by the type of app. For example, when an app is highly engaging or plays a major role in users’ lives, those users will be more willing to purchase additional features or content.

“A lot of successful gaming publishers would be making tens of thousands of dollars a day from in-app purchases -- probably even more if it’s Words With Friends or something like that,” says Derek Ting, co-founder of Enflick. “Social games tend to perform well. If there’s not a lot of traffic, then it’s difficult to make money from in-app purchases.”

Some developers caution against restricting an app’s functionality in order to goose in-app purchases. For example, a free game might be fully functional to get users hooked enough that they’re willing to purchase optional weapons or additional levels. That strategy can help build a buzz.

“Players that are not using in-app purchases are still very important because they’re a big community, and all of the games have more and more of a social aspect,” says Corman. “They talk about the game with their friends. When using in-app purchases, it’s key to make sure that these players that might never purchase anything can still enjoy the experience.”

Don’t Overlook Overhead

Keep in mind that royalties and support costs will consume part of the revenue. For example, Apple takes a 30 percent cut of in-app sales, and that’s in addition to the 30 percent royalty up front if users have to pay to download the app.

Also, when users pay for something, they expect at least some level of customer service. Depending on how many users an app has, that could mean staffing up. “It’s key to be as informative as possible before the purchase because it means that it will limit the number of questions a support team will have to handle,” says Corman.

The app store’s policies may also affect support costs. “We have support more for technical issues rather than billing issues,” says Ting. “Because Apple manages all of the billing for you, there’s not much you can do from a billing level. It’s very nice. You don’t have to worry about any billing issues or payment gateways and all that. All you have to worry about is supporting the functionality of the product.”

Operators as Distributors

Besides app stores, some mobile operators also do “billing on behalf of,” or BOBO: This allows users to have in-app purchases added to their phone bill instead of paying the developer directly with, say, a credit card. One example is Sprint, which works with BOKU, BilltoMobile and Google to enable BOBO.

“Any developer who leverages Google Play for distribution of the application can leverage the Google Play in-app billing SDK to enable in-app billing, which, for most Sprint subscribers, includes carrier billing,” says Jenny Walsh, a Sprint spokeswoman.

“In addition, Sprint has partnered with BilltoMobile and BOKU to offer a simple, secure payment option that requires no registration, no setup and no association with other financial instruments such as credit or bank cards,” says Walsh. “Purchases are completed using a two-step authentication process, and customers don’t have to expose any sensitive account information while using the service.”

by Tim Kridel