Apps are ubiquitous these days but there is still a lot of confusion about how to bill and pay for goods and services within them, especially on the iOS platform. Brian Coombs takes a look at the problem and solutions available.
The app economy is too big to be ignored these days. Through in-app purchases, ads and subscription services, it has even overtaken Hollywood, some reports
suggest. The IPO of app companies such as Snapchat has only fuelled the conviction in the app model. And thanks to the ever-increasing demand, lots of entrepreneurs are jumping straight into the app economy and trying to solve problems through them directly.
While popular apps such as Spotify and Instagram may have fuelled the rise of the app economy, it is also true that many apps do not generate any significant revenue for their owners. In fact, making money in the app ecosystem remains a big challenge for developers worldwide. Many apps do not flourish because they cannot reach a critical mass of users.
For those who do hit impressive user numbers, generating a healthy Average Revenue Per User (ARPU) remains a big roadblock thanks to the notion that you cannot command a premium for apps unless you have a substantial value proposition. Many others are still confused whether to generate money through ads, value-added purchases or subscriptions.
App monetisation strategies
It is critical to choose the right business model for your app, and it has to be in line with your goals and user experience. Developers essentially have the following options:
- Free model – Generate revenue through ads
- Freemium model – Generate revenue through in-app purchases
- Subscription model – Generate revenue through recurring subscriptions
- Paid model – Generate revenue through app downloads
- Paymium model – Combination of paid and freemium model; monetise through in-app purchases
While each of these models may be effective depending on the nature of the app, subscription business models are proven to offer the best way to monetise the app economy. According to reports
, apps that use subscription models earn 2-3 times more revenue per user compared to apps that monetise through ads or paid downloads. They also earn about 50% more money than apps that offer in-app purchases. In addition, subscription models are a great way to boost long-term engagement and improve sales forecasting. The only catch is that the app needs to generate compelling quality content for users to stay subscribed.
The app billing conundrum
Many of the customers who talk to us about our subscription billing solution
are app providers and often their first question is - “Can I use an external system to bill and pay for items within an app, or does it have to go through the in-app purchase (IAP) route?” The answer most simply comes down to whether you are selling virtual or physical goods and services.
To tackle the easy one first, if you are selling virtual goods and services (such as in-game currency, access to a new feature in an app or cloud storage), you have to use Apple’s IAP to sell on iOS. You can also use this for subscriptions within the app such as a streaming service. The advantage of this is that it’s very simple to set up, seamless for the end user and uses a familiar interface. The downside is that Apple will take a good chunk (30% at the time of writing) of your revenue for those privileges and you cannot get around this through the use of coupons or a hosted payment page, for example.
However, if you sell physical goods and services outside the app, you can set up other purchase methods instead of IAP. This could be credit cards, Apple Pay or even cryptocurrencies like Bitcoin.
Android is more flexible with its app publishing process and has lower barriers to entry for developers. Especially if you want to adopt a freemium model for your app, Android is a much better bet. Thanks to its wider reach, the operating system allows you to reach more users who can download and interact with the app. Once users are engaged by the app, they are more likely to opt for in-app purchases to avoid intrusion by ads and get a better app experience. A lot of the gaming apps have been successful with this approach.
However, just like Apple, Google also demands that developers monetising apps through Google Play must use Google Play’s payment system. For in-app purchases, again developers have to use Google Play in-app billing as the method of payment. For physical products and content outside the app, they can use alternative payment methods such as Android Pay (where available), credit cards or virtual currencies.
Direct Carrier Billing
Another popular option, especially in the emerging markets, is direct carrier billing. As the name suggests, this billing option allows developers to amalgamate the app purchases within their partner mobile network operator’s monthly bills. This is an extremely convenient, secure and simple way to pay for in-app purchases. This option is especially popular among developing economies where credit card penetration and exposure to alternative payment methods is still fairly low.
While Google, Amazon and Samsung have always been supportive of this billing method, it’s only recently that Apple recognised its value
for the emerging markets. By leveraging existing customer relationships, direct carrier billing allows app developers to reduce revenue leakages, mitigate security and privacy concerns, and expand their reach.
Open Source Alternative
In addition to the options above, app developers (excluding iOS app developers of course!) can also use OpenIAB, an open in-app billing solution that allows developers to work across multiple app stores such as Google, Amazon and Samsung, among others. It is great for app developers who want to target multiple app stores.
Choosing the right app monetisation strategy
Picking the right model is critical for the success of your app. Each of the monetisation strategies mentioned above comes with its own share of disadvantages as well. For instance, the free model may not offer the best experience to users if the ads are very intrusive. If your content is not compelling enough for a subscription-based model, your customers may easily unsubscribe at the tap of a button. For paid models, you may not find enough users to generate enough revenue from app downloads. Carrier billing, though convenient, takes the control away from users to a certain extent. The key point being that the right billing strategy is crucial to attract and grow users. You must also make sure that your billing solutions are seamless, convenient and offer a great experience to end users.