The App Developers Guide to IAP

Strategies to monetize Apps using In-App Purchases

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Foreword
As this is the first publication of its kind that we have released publicly at Apptopia, we wanted to take a brief moment to express two heartfelt opinions. The first is a trend a long time in the making. Despite the constant flood of seemingly high quality content available a cross the internet, a large portion of what is available, particularly around the nascent mobile industry, is either not actionable or it is designed with the goal of supporting one particular action or conclusion. We are not interested in that game of consensual deception. If youd like to learn more about Apptopia, we certainly encourage you to do so, but that is where the sales pitch ends. Beyond that these publications will always serve to support the democratization of success within mobile. Second, and equally important, we have a problem with advice that isnt actually advice. We get this feeling when reading a lot of info on mobile like we just pulled to the side of the road to ask a man where the nearest gas station was, and he responded by telling us that gas prices have increased by 12% since last year, and there are 920 gas stations within 100 miles. Okay, thank you. Those are useful and potentially accurate pieces of information, but weve got about 50 miles left in the tank, so where is the nearest place that will actually sell me gas without filling the tank with sugar. These reports will always end with at least one direct path of action. Occasionally we will refer back to prior publications for the sake of not being boring and repetitive, but if you feel that I have failed to do one of those two things, email insights@apptopia.com and we will post a specific clarification on our site.

2012 Apptopia All other trademarks and copyrights are the property of their respective owners.

Table of Contents
In order to support improvements in monetization within the iOS and Android app ecosystems, this guide is intended to provide a clear deconstruction of the choices that every development team needs to make when implementing In-App Purchasing (IAP) within their portfolio. It covers strategies and insights drawn from an extensive review of market data as well as best practices as seen in top performing applications.

An Overview of IAP

Designing for IAP

Selling Your IAP

4 Market Strategies
Subscription Transactions When to Divide & Conquer Innovation in IAP Execution

The State of IAP IAP Offering Classes Revenue Timelines

Impacts of IAP on UI/UX Mastering User Onboarding Stickiness & The Disney Effect

Reconciling Offering Prices The Value of High Price IAP Android: IAP vs mCommerce

5 The 5 Key Takeaways

State of IAP
As both the iOS and Android marketplaces mature, heavy competition as well as changes in consumer buying habits has driven a general shift away from paid app sales. To fill this void, In-App Purchasing has risen as both a viable alternative and a supplement to paid download based direct revenue. Over the past year, IAP has risen from contributing just over half of direct app revenue to nearly 70%. Growth in IAP sales accounted for nearly all of the 51% growth in direct revenues experienced across iOS from January to November of 2012. Total IAP revenues are up 96% over the same period, while one-off sales for paid downloads have remained flat. For developers and publishers, the beauty of IAP is that it can be implemented with high levels of sophistication as either the sole source of revenue for an app or in combination a number of other strategies. Doing IAP right isnt easy, especially if you link a number of third party services and get clever. As with ad integration, the degree to which IAP implementations mesh with app UI/UX heavily impacts both core monetization metrics and overall user retention. When done well, IAP can be incredibly effective as a primary driver of app revenue, empowering publishers to segment their user base and heavily monetize engaged and price inelastic consumers. It is important to understand the key differences between IAP and other monetization strategies.

IAP as a % of Direct App Revenue

IAP monetization increases the importance of customer relationship management; developers should integrate analytics to create a dynamic sales process driven by usage and milestones. Based on the unique nature of the IAP revenue curve, it is critical that the user onboarding experience drives early engagement, minimal conversion occurs within the first few sessions Apps that do not manage customer expectations and those that are overly aggressive in the sale of IAP risk heavy consumer backlash, introduce IAP offerings gradually and strategically IAP can be used to consolidate offerings, aggregating functionally compatible and thematically relevant content into a single app to drive higher rank by funneling all traffic to a few properties.

Overview of IAP Types

While there are a several important distinctions in how in-app purchasing is handled and managed on Google Play and the App Store, as of the recent release of V3 in-app purchasing on Google Play, the core offerings are now extremely similar across the two platforms, with each offering the following:

In-app products Consisting of consumable content that can be purchased repeatedly and expended and non-consumable content including features and unlocks that are purchased only once. Each platform provides a tool for the management and restoration of non-consumable IAP purchases; including options utilizing iCloud on iOS and managed IAP on Google Play.

Subscriptions Recurring, auto-renewable in-app purchases for access to either scheduled distributions of non-consumable content or access to a continuously available service or content catalogue. While both platforms offer tools to provide users with free trials, the iOS implementation of subscriptions offers a slightly more robust set of controls including features to support price changes and an excellent user notification system.

While In-app product offerings have existed in both markets for longer than subscriptions, the recurring nature of subscriptions has recently demonstrated the ability to drive strong grossing numbers. While not present to a significant degree within the dominant gaming category, subscription based apps have become increasingly prominent within the ranks of the top grossing charts, specifically in the iPhone and iPad markets.

The Revenue Curve

It isnt just about downloads anymore. IAP only monetizes the users you engage and hold onto. The rules have changed. IAP can increase your revenue per user, but only if those users are drawn in by your app, and compelled to shell out for more after the first few sessions. Think of the stock feature set as half a tryout for a space on each users device and the other half a sales pitch for the paid upgrades. It isnt ads, which start working for you the moment a user opens the app. Part of what makes IAP so powerful is also what makes successful implementation a challenge. Your approach to an IAP driven monetization strategy should differ based on your specific goals and app type. At an early stage in monetization design, clearly define your goals and the primary demographic you expect to serve. While the obvious goal is to generate as much revenue as possible for as long as possible, it is important to understand how the nature of your specific app will ultimately impact your approach. Does your app require a minimum number of users overall or in a specific market in order to function properly? Apps benefiting heavily from a strong network effect should utilize IAP implementations that optimize retention among non-paying users (NPU) while driving conversion among paying users. Do you intend to release and promote your app globally, and in what categories? Monetization strategies vary significantly from market to market. Each market is driven by a unique combination of behavioral and business factors. Review the market data available for the countries you are targeting most heavily for insights on purchasing habits and price elasticity. Does your app deliver valuable recurring content or serverside services? Though incredibly valuable in certain cases, Subscription IAP works best with features that users attach a high value to, want now, and expect to want in 6-12 months.

One of the really interesting differences between IAP and traditional paid and ad supported apps is the shape of the lifecycle monetization curve. The curve represents a depiction of revenues over time for an average user, assuming they dont delete the app or become inactive. The shape of this curve differs significantly based on monetization type. Paid DL Only: All revenue is incurred at the initial point of purchase. If a user deletes the app shortly after downloading (excluding situations where a refund is requested), there is no impact on the total lifetime revenue generated from that user, and as a result no impact on the apps LMC curve. Free + In-App Products: With no initial purchase, the LMC for this app type apps starts near zero. Conversions tend to be very low during the first few sessions, as consumers evaluate the core functions of the app. From this point, IAP conversion will increase as user engagement and loyalty is established, reaching its maximum revenue before declining as user interest trails off, with only heavy users continuing to make purchases. Paid + In-App Products: For apps that both cost money to download (generally at the $0.99-1.99 price point) and offer consumables via IAP within the app, the LMC shows a one-time spike for the initial purchase, followed by an immediate drop. From this point, the curve largely mirrors that of Freemium IAP apps, with the exception that conversion rates tend to be slightly higher based on the psychological impacts of sunken cost and the fact that all downloads come from paying users.

$/user

Lifecycle Monetization Curve

Free w/ Subscriptions Paid w/ Consumables Free w/ Consumables Free w/ Ad Support Paid DL Only

days 30 60 90

Free + Subscription: The LMC for a subscription monetized app should reflect stable, consistent revenues commencing shortly after download. The exception to this rule is situations where the app has core functionality that does not rely on the underlying subscription, such as a navigation app that provides subscription based traffic data. In these cases, initial user acceptance will cause the LMC to mirror that of Freemium IAP apps, ultimately stabilizing and remaining flat. Free + Ad Support: Aside from variations driven by shifts in CTR, Fill Rate, and demand for ad space, the monetization curve for free apps is directly proportional to user engagement. Adjusting for variants in eCPM, all sessions of equal length should result in an equal amount of revenue, regardless of when they occur relative to the date the app was downloaded. Generally speaking, users engage most with an app in the days immediately after download, so the LMC begins at or near its maximum value and trends downwards with decreased session length and frequency.

Optimizing UX for IAP

Want top performing IAPs? Engage early, establish stickiness, and only then introduce premium content. What you should take from the different Lifetime Revenue Curves outlined in the previous section is that your monetization strategy should have a strong influence on the overall UI/UX of your app. Monetization methods can be combined in order to smooth out your app LMC, but keep in mind that there is a right time to sell users on your core app and times when you can rock the upsell via IAP. All apps benefit from higher user retention, from both a revenue generation perspective and in terms of value when acquired, but low retention and engagement are most detrimental to IAP revenues. If you dont frequently get users to 10, 20, and 60 session milestones, you should expect low conversion numbers and anemic per user revenues. Users take nurturing to get to a place where they are willing to make the crucial first IAP conversion. Candy Crushing: Mastered onboarding An excellent example of extremely effective onboarding mixed with delayed IAP introduction, Candy Crush Saga has demonstrated how the right early stage approach, combined with an app that has broad market appeal and an excellent design, can seriously deliver. The app pulls off a top grossing hat trick, maintaining a top placement on iPhone, iPad, and Google Play. Make learning how to use the app opt-out. Dont make users ask for help by offering a tutorial section, explain how gradually within the core user experience. Candy Crush kills it at nurturing users through the early learning process, more importantly; they dont shove IAP options at the user until after they have already established engagement. If you know almost no users will make IAP purchase in the first few minutes of progression, dont risk losing their interest by selling it. The impact of effective onboarding can be seen clearly in the relationship between the apps rank on the iOSiPhone top free and grossing charts, included on the next page from our friends at App Annie.

Download Rank

Grossing Rank

Notice the important divergence that occurs between downloads and rank. Despite a decline in the actual volume of downloads, two key factors combine to drive the grossing chart upwards. First, as introduced previously in the Lifetime Monetization Curve discussion, there is a delay in the impact of downloads upon revenues on free apps funded exclusively through consumable IAP. The

second driver to this trend is a result of the apps strong user retention. Retention in this case is driven first by an effective onboarding process, avoiding choke points based on user confusion, and subsequently by the overall stickiness of the app gameplay and the effectiveness of IAP introduction.

Hobbit: Stickyness & the Disney effect

Make your app a polished salesman not an in your face hawker. Introduce offerings gradually. Going beyond the graphical tutorial approach implemented by Candy Crush, The Hobbit:Kingdoms addresses a major issue of highly complex, time intensive game play by heavily structuring the initial user experience. The game utilizes an early reward system that precedes the core goals of the game in order to heavily influence the steps taken by users to reduce drop-off. The app begins with a clear checklist driven roadmap that provides frequent positive feedback to create a sort of training wheel system, mitigating the impacts of early choke points. While this strategy directly addresses the major risk of early disengagement created by the apps intricate gameplay, the real brilliance of the app is in its implementation of the Disneyworld effect. If you think back to the last time you were at a Disney property, youll probably remember almost constantly finding yourself in a gift shop or next to a vendor. When done properly, the beauty of this effect is that there is enough going on that you dont really notice it, but it slowly builds a sense of need that ultimately results in higher conversion rates.

To do this, the game utilizes its virtual currency in order to integrate a passive sale of the primary consumable IAP throughout the in game experience, with free and paid options constantly placed side by side. Early on, users receive a small amount of the games virtual currency to develop acclimation to the experience of spending it, but for non-paying users, this early taste of virtual currency is the last theyll experience. Despite that, Hobbit does a phenomenal job walking the line, delivering balanced gameplay that allows paying and non-paying users to exist within the same ecosystem, while creating strong incentives to convert. The games extremely effective time acceleration offerings fit like a glove with its real-time gameplay. These offerings are supplemented by performance augmentation consumables that mesh well with the games socially driven massively multiplayer

environment, and leverage the desire to compete with the players building cities around you. While all of these constructs do an excellent job of driving conversion, the real takeaway from a best practices perspective within this app is in the nature of the IAP sales process. Over the course of the first few sessions, not only are the shortcut and performance boost purchases entirely unnecessary, they are actually visually minimized within the user experience. As users progresses further into the game, paid options slowly become more ubiquitous. The driving concept is that users are more likely to convert and less likely to disengage based on aggressive attempts to market IAP once stickiness has been established and users feel that they have too much invested in the game to stop playing.

Introduce Core Gameplay/Functionality

Generate Early Social Value from All Users

Acclimate Users to IAP Consumption

Incentivize Early Conversions

Expand Prevalence of IAP with App Progression

From seeing only subtle IAP marketing, the game shifts to the point where it is basically not possible to see a screen where it is not present either one or several times. The first and last screenshots in the diagram above show the exact same screen earlier and later in the game progression. Both the Buy Upgrade and Destroy options represent faster paid alternatives to the free options, but are not

included until later in the user onboarding process. The success of this strategy in driving conversions within this app is again visible in a strong divergence between free and grossing ranks over time as shown in the charts below from our friends at App Annie. The deviations again signal that a strong percentage of users are being retained well into the Lifetime Monetization Curve.

iOS Top Free

iOS Top Grossing

Google Play Top Free

Google Play Top Grossing

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Optimizing App Pricing Strategy

Reconciling price and traction
App users have lots of options and information moves quickly. Reconcile pricing with what you deliver or you will hear from your customers. There are two core components of pricing as it relates to apps utilizing IAP monetization. The more obvious to potential users is the price charged to download the app. Not only is it the first number users see, but in terms of selecting paid versus free the choice has a direct impact on placement within the app store. Based on the heavily dynamic nature of the app market, and how quickly user feedback can impact your positioning within the market, it is important to reconcile offerings with complete pricing. If, for example, the initial cost to download an app is $1.99, the important question to ask is does the base feature set justify that price, in the absence of any in-app purchases. If you expect the average paying user to convert on two in-app purchases, is the total cost of those purchases plus the initial download within 20% of a price that you believe the market would bear if that is what you charged up front for an initial download of all features included in those three purchases. To be clear, the 20% premium is one of the advantages of IAP. By breaking the purchase into multiple smaller purchases, it is possible to drive the total revenue per user up while selling each user the feature set that they attach the highest value to. A failure to reconcile the total cost of a specific feature set relative to the value of those features can drive significant market backlash, as can an app that is sold as a paid download with an extremely limited standard feature set. While there are a few clear best practices pertaining to the specific price selected and in how to coordinate initial pricing with that of in-app products and subscriptions, it is important to recognize how the specific nature of your app should impact your pricing strategy. First, for apps with a social component, where network benefits provide a significant enhancement to the core user experience, free with in-app is almost always preferable to paid+ Freemium is far more effective at driving a high volume of users, delivering 89% of all app downloads in 2012. From a revenue perspective, this advantage is also clearly present. Freemium revenue growth has far outstripped paid and paid+ models in the App Store and Google Play over the past year, now contributing the majority of all direct revenues on both platforms.

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In certain, isolated cases, there are a few real advantages of the paid+IAP model. First, if you have significant brand equity or access to a distribution channel that allows you to drive a significant number of downloads, with a paid app you are driving revenue on 100% of users. Compared to the 3-5% of users that actually make purchases within freemium IAP apps, the initial purchase can provide a major revenue contribution, even if it is only at the $0.99 level. As important, by releasing as a paid app, you create the opportunity to run promotions and provide your app free 2-3 times a year, a strategy that when implemented correctly and coupled with effective IAP conversion can drive hundreds of thousands of downloads and tens of thousands of paying users

each time it is implemented. These promotions not only drive new users, when done effectively they can drive a significant increase in organic paid downloads afterwards and drive significant improvements in placement on the paid rank charts. At the end of the day though, this is only viable if your app offers something compelling enough to push users beyond the friction point of an initial paid download. In the absence of that draw, you are forgoing both the paid download revenue and the opportunity to drive conversion from in-app offerings.

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Death Rally: The $40 Golden Goose

A recently released macro market study encompassing the purchasing activity of 66 million monthly active users provided significant insights into what users are actually spending money on and how IAP revenue splits across different price points. The results provided validation to the growing strategy of implementing a mix of low and high price IAP content. Even at relatively low volumes, purchases at and above $9.99 mark are contributing a growing share of revenues. Across the study, more than half of all revenues were contributed by purchases priced between $9.99 and $19.99. The study also shed significant light on the variation in IAP purchasing behavior by region. Major titles like Death Rally have seen major advantages from the use of an IAP offering with a serious price tag. Their $40 God Mode feature drives as much revenue as their highly popular $2 speed-up feature. The expensive offering is seen as a way for highly engaged and committed users to show their appreciation for the developers frequent updates and for price inelastic users (read rich or frivolous) to splurge. Death Rally has also showed the value of combining paid downloads with IAP. The app generates about 60% of revenue from download sales, with the remaining 40% provided via IAP.

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Newsstand & Content Subscriptions

NYTimes: Transactions & Platform Differences
One of the most important shifts in the monetization landscape over the past year has been a rapid increase in IAP driven monetization among Newsstand applications. Between October 2011 and July 2012 alone, revenue from IAP monetized Newsstand apps increased 500%. This trend has been heavily influenced by the widespread acceptance of the subscription class of IAP. Auto-renewable subscriptions are creating heavily valuable consumer relationships and substantially increasing total revenue per download, especially among users in developed nations. The category is also the source of major deviations in the approach taken by publishers in the Google Play and iOS markets, primarily driven by several shifts in the App Store Review Guidelines and how they have been applied. One of the major points of contention related to the expansion of IAP subscription transactions has been the handling of multi-source content rights and subscriptions, or in other words situations where some users enter an app having already purchased a right to access certain content, while other users enter the app and from that point attempt to purchase content rights. Apples current policy for the handling of apps involving outside-source and multi-source subscriptions is to ensure that 100% of subscription sales initiated via the app environment are transacted via the App Store. As always, those transactions are subject to the 70/30 revenue split. Apps that do not transact such purchases via App Store IAP are not permitted to have any links or mechanisms to directly drive such purchases. To support this rule, Apple now rejects any app that attempts to initiate commerce via mechanisms such as browser links or through any other means other than via App Store IAP, starting with the prominent rejection of the Sony Reader in early 2011. The presence of this strict policy on outside commerce within iOS and its absence within the Google Play market is driving radically different approaches as far as the management of mobile originated subscription sales. Lots of publishers, many within Newsstand, have opted to include either in-app credit card forms, PayPal integration or browser links to complete transactions on their Google Play apps. While the substantially more burdensome transaction process creates a major choke point, these publishers clearly believe that saving the 30% marketplace transaction cost is making up a lot of the difference. At least while this is playing out, the difference of approach is set to boost Apples revenue lead, at least in the short term.

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Zinio: When to Divide and Conquer

As a content platform app that allows users to purchase individual issues or subscriptions to content from a large variety of news and magazine publishers, Zinio is a model for content aggregation on mobile. The app brings together lots of content found in dedicated apps elsewhere in the App Store. This makes it one of two very different approaches to mobile content distribution, in the fight of consolidated versus dedicated and heavily focused apps. The road Zinio has taken is one that has been strongly enabled by a growth in IAP adoption, and it creates a major question for mobile developers and publishers. Put your eggs in one basket or throw a big net. When determining strategy, app publishers should start to ask if it makes more sense to release fewer apps that integrate a broad array of different content via inapp purchases or more apps that each targets a specific market niche. There are a lot of tradeoffs that exist, and each is important to realize when building marketing and monetization strategies. Search Positioning On the App Store, iOS6 brought an end to the practice of indexing the names of in-app purchases as a part of the search algorithm. Regardless of whether an app uses subscriptions or in-app products, the content library available via IAP will not drive search discovery. What this means for consolidated content apps is that almost all app market search traffic will come from users looking for an app by name and those looking for a type of content. To be clear, in the Zinio example the type of content would be magazines or news, as compared to specific offerings like GQ or Bloomberg. While there are opportunities to highlight in demand anchor content in a consolidated app via the description on Google Play and in search keywords on iOS, you should not expect IAP offerings to drive search discovery. The tradeoff comes from where an app appears in high traffic search results, and how effectively an app can retain a top rank position and get featured within the App Store. The way earnings escalate in app marketplaces, as a rule an app ranked #10 will generate higher earnings than ten apps ranked around #100. What this means is if consolidation broadens the market appeal and user retention of your app to that degree, it is seriously worth considering.

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Seamless Purchasing Especially in iOS, the seamless nature of IAP transactions really makes it a highly compelling alternative to either light and full version freemium strategies or general cross-promotion within a portfolio. Every time a user has to leave your app and consider downloading something new, you are creating another opportunity for a drop off, with a transaction that carries much more friction than a two click IAP purchase. If the user is engaged within an app and they identify a specific type of content that they value, there is no reason to ask them to trust that your other apps will offer a consistent experience. Consolidation should only go as far as to bring together apps that are both functionally compatible and thematically relevant to a given consumer base.

Functional Compatible The same core UI/UX should work well for everything placed within a single app to avoid both user confusion and app performance issues. It is unlikely that it would make sense to offer via IAP a set of childrens games and a series of childrens books unless they actually work in tandem. Thematic Relevance Thematic relevance is defined by the type of content and its primary demographic appeal. The lowest common denominator among content should match the core value proposition as defined in your app description, as well as the keywords that you select on iOS). Competitive Impacts of Consolidation The wider the scope of the core value proposition, the more difficult penetration will be. Expect to add some zeros to your marketing budget as you move up the scale from specific to broad. Consolidating by its nature converts a series of more specific and niche apps into a single and more general bucket of features and content. This means that as a publisher, you need to take a smaller number of larger steps. Instead of ten small marketing budgets it means one large budget.

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Innovations in IAP Offerings

MeetMe: Consumables in Social
There are frequently IAP offerings that fit the core offerings of an app perfectly; things like subscriptions to new Newsstand content or traffic data on Navigation apps. The best solution is not always so clear. As a result, app developers have gotten increasingly creative in order to find innovative non-traditional premium content. MeetMe is an excellent example of this approach within the social category. Taking core insights from IAP executions within the gaming category, MeetMe has deviated significantly from the pack. In the heavily subscription monetized dating app group, MeetMe has used consumables to crack monetization on the Google Play marketplace Top 100 Grossing, a leaderboard controlled almost exclusively by games. The majority of leading dating apps currently on the market are using IAP specifically for subscriptions to their core services. Free dating apps like eHarmony, which require a subscription to utilize the core functionality set of the app, are really providing more of an interactive preview, rather than implementing a true IAP driven freemium model. In the case of apps built as mobile extensions to web based social networking or dating platforms that have already achieved critical scale in core markets online, that model works. It is not the same case on mobile first and mobile only platforms that are heavily supported by a social component. For apps that require a strong network effect to get off the ground, engagement from non-paying users is critical to supporting core platform build out. In order to sustain traction and engagement among both paying and non-paying users, MeetMe has taken a very different approach. The app utilizes consumables that allow users to advance their popularity within the dating ecosystem, creating a mechanism that supports monetization while delivering a core user experience to all users. There are a few reasons why this particular approach is effective. First, it effectively utilizes gamificatin principles to drive conversion while maintaining a balanced ecosystem where paying and non-paying users can compete harmoniously. Second, it leverages the prevalence of paying users within the space while creating the opportunity to absorb users who bounce from competing apps after hitting the initial subscription pay wall. Third, and probably most importantly, it leverages consumer psychology to drive purchases by providing popularity as a heavily quantitative metric, driving users to the conclusion that they will be able to drive real world results from these digital micro-purchases. While the specific approach taken in MeetMe in many ways applies exclusively within dating type social apps, the lesson is not in the specific implementation but the success of non-traditional in-app monetization. Whether it is selling individual paint brush features in Paper, access to specific records on the Ancestry.com app, new workouts on P90X, or Hurricane Tracking on the MyRadar weather app (talk about monetizing a captive audience), success within consumable in-app product sales outside of the gaming category will continue to be driven by innovative implementations within sticky, heavily engaging apps.

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The 5 Key Takeaways

1. IAP conversion occurs most frequently between the 10th and 40th user sessions, with little revenue arising in the first few sessions, increasing the importance of early user retention. 2. It is critical to reconcile direct revenue monetization strategies based on goals and app type; non-paying users contribute heavily to app distribution and support network benefits for socially driven apps. 3. With high value offerings priced at and above the $9.99 price point contributing a majority of IAP revenue, pricing strategy has become increasingly important to the success of IAP monetization. 4. In an increasingly crowded and competitive app marketplace, IAP has replaced lite/full versioning as the dominant freemium model, using consolidation to improve rank. 5. While auto-renewing subscriptions have driven rapid growth in Newsstand revenues on iOS, publishers are circumventing Google Play subscriptions in favor of direct billing on Android.

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