Market Research: iOS Digital Magazines and Content Delivery with Subscription Business Model Through App Store In-App Purchases.

Mauro Dalu on


Why should we look into in-app purchases?

Most of the top grossing apps in the iTunes App Store are now driving revenue with in-app purchases. Of the top 20 grossing game apps, 12 (60 percent) drive revenue with in-app purchases – nine (45 percent) of them are free apps with the only revenue source being in-app purchases; the others use a hybrid model (according to the iTunes Top Grossing App Chart, March 4, 2011).

Looking at App Sore in-app purchases, iPad app revenues have jumped from 12% to 29% during the last 6 months of 2010, and iPhone app revenues increased from 36% to 49% over the same period of time (according to Certext.com).

The so-called “freemium” business model is seen as the alternative to the ad-supported business model. In the ad-supported apps, the free app becomes a container to sell ads and you as the app owner pocket a small profit on the ads that are served through your app. The awful truth is there is very little money in mobile ads unless the app goes viral (think of Angry Birds vs. any other app’s ranking in the store).

With an “in-app” purchasing strategy, you provide your customer with the information/content/feature they require, or a sample of it, and then offer them more options on how to take it to the next level (for a fee). If you provide something meaningful to the user experience, your brand gets noticed, the customer gets what they want, and your company makes a profit on another sale.

In other words, in-app purchases allow the developer to monetize user engagement instead of monetizing downloads. Ngmoco CEO Neil Young comments, “We made the shift to free-to-play games and that really made a huge difference to our business…from monetizing downloads to monetizing usage” (Ngmoco sold DeNA for $403 million). Purchases of virtual goods are projected to be $7.3 billion in 2011 and $14 billion by 2014.

4 Types of In-App Purchases

There are four different types of In-App Purchases: non-replenishable, replenishable, subscriptions, and auto-renewing subscriptions.

Non-replenishable In-App Purchases are items that only require you to purchase them once, and can be transferred to multiple devices authorized with the same iTunes Store account.

  • Bonus game levels
  • City guide maps

Zynga took this model to the bank in its Facebook games, selling virtual goods and racking up revenue of approximately $850 million in 2010, generating about $400 million in profit.

Replenishable In-App Purchases are items that have to be purchased every time and cannot be downloaded again for free.

  • Extra health
  • Extra experience points

Dolphin Play, an iOS game developed by Recharge Studios, allows a user to install free apps in order to earn the virtual currency needed to buy virtual goods that enhance their game experience.

Subscriptions are one-time services that must be purchased again once the subscription period expires.

  • One-month subscriptions
  • Location service subscriptions

Auto-Renewing Subscriptions are services that can be purchased with different renewing subscription durations.

  • Weekly newspaper subscriptions
  • Weekly magazine subscriptions

How do In-App Purchases work with Automatic Renewed Subscriptions?

  • You can implement renewable subscriptions from iTunes Connect with the new Auto-Renewable Subscription type.
  • You can set the price and length of subscriptions that you wish to make available (weekly, monthly, bi-monthly, quarterly, bi-yearly or yearly).
  • Customers are automatically charged based on their chosen length of commitment.
  • They can review and manage all of their subscriptions from their personal account page, including canceling the automatic renewal of a subscription.
  • Subscriptions purchased from within the App Store are sold using the same App Store billing system that has been used to purchase billions of apps and in-app purchases, with the developer keeping 70% of the revenue.

Can I Offer Content to New and Existing Subscribers outside the App Store, i.e. through my WebSite?

  • If you offer Auto-Renewable Subscriptions, you can also use other methods to acquire digital subscribers outside of your app. You can sell digital subscriptions on your website or provide free access to content for existing subscribers. In these cases there is no revenue sharing since Apple was not involved in the transactions. Developers keep 100% of the revenue.
  • If you would like to make a subscription offer outside of the app, the same (or better) subscription price must be offered inside the app for users who wish to subscribe from within the app. In addition, you may not provide links in your apps which allow the customer to purchase content or subscriptions outside of the app.

Controversies

The main reflection points about in-app purchases come from Camera+ developer Tap-tap-tap. Here are the considerations from their blog that are worth to keep in mind:

  • With the volatility of the App Store, our fortune could change in a heartbeat. The one thing you learn to count on as an iPhone app developer is not to count on future sales based on past performance.
  • When we released Camera+ 2, we added the “I ♥ Analog” effects pack as an in-app purchase for 99¢. While it provides some nice supplemental income, it ultimately is only purchased by around 5% of Camera+ purchasers on a given day.
  • We don’t aggressively push the effects pack very hard in the app.
  • There are companies with free photography apps that are trying to have their business models revolve around selling effects via in-app purchases, but it’s very unlikely that this can be an effective business model.

Is Apple’s App Store for iOS and Mac OS X a good In-App Purchase Platform?

  • The platform gives the user one option only for payment. Sharma says that 93 percent of iOS users have iTunes accounts with credit card info, which makes it easy to impulse-buy apps (could not find a great source for this stat).
  • The purchase experience is very easy and straightforward for the user. The platform does not communicate explicitely to the user when a transaction is completed, because as far as I can tell some transactions are delayed and get invoiced to the user together even if they happen at different times.
  • The platform includes popular game titles and free games, it is currently bigger and as supported by developers as mainstream console systems Xbox, PS3 and Wii. The installed base is much bigger then Nintendo’s (only 7.1 million units Wii were sold in 2010 vs. about 45 millions iPhones and over 15 millions iPads).
  • The App Store does not offer the analytics needed to optimize users’ conversions. You need to rely on external services such as AppFigures and Flurry to get the stats juice out of your user base.

How should Apps for In-App Purchases be planned, designed and developed?

In-app purchases give users more choices – unlimited access vs. ad-hoc access in content delivery apps, limited play value vs. complex play value in games. It is much easier to design the in-app purchase model into the app from the very beginning. Here are some things to consider:

  • Create meaningful context.
  • Offer users something free (virtual currency, content samples, basic features).
  • Create demand for premium content.
  • Offer new content at a range of price points and urgency to buy.
  • Make it easy to purchase; give the user options, but not too many.
  • Be careful: never give something away for free that you required other users to pay for. This will upset your user base.
  • Be extra careful if your app is marketed to children.

Giving consumers the right amount of options should get every segment of your target market population satisfied, and turn them into recurring paying customers – the final result/target is to build a steady, more predictable revenue stream then you can get with downloads alone.

Mobile Apps Users, who are them?

Of the 82% of U.S. adults who are now active cellphone users, 43% now have apps on their phones, and more than two-thirds of them use those apps regularly. In other words, 24% of the U.S. adult population actively uses apps (according to a september 2010 study by Pew Internet Project).

Mobile app users tend to be younger, male, more educated and more affluent compared to the rest of the population. App users had an average of 18 apps on their devices and a median of 10, indicating that there were a number of users with a disproportionate number of apps on their phones. This was especially the case with young adults, the study found.

As SVP and Head of Research and Insights for Telecom Practices at Nielsen Roger Entner observed, “This is a pretty remarkable tech-adoption story, if you consider that there was no apps culture until two years ago.”

Yet adoption still has a long way to go. Kristen Purcell, associate director for research at the Pew Internet Project, noted that “many cell owners do not know what their phone can do.” 11% of those surveyed were not even sure if their phones had apps. “The apps market seems somewhat ahead of a majority of adult cellphone users”.

Games make up by far the most popular genre of apps, both in terms of number of downloads and ratio of people who have downloaded them. 60% of those who said they had downloaded an app in the last 30 days said they had also played a gaming app during that period, followed by news/weather (52%), maps/navigation (51%) and social networking (47%). Shopping was much further down the list at 24%.

Games and social networking were more popular with women (63% vs. 58% and 53% vs. 42%, respectively), while productivity (29% vs. 21%) and banking/finance apps (32% vs. 25%) were more popular with men.

2 in 3 Apps users said they use their apps daily, and 1 in 4 use their apps for more than 30 minutes per day. Most (71%) use their apps alone, while roughly half use them while waiting for someone or something, or while at work. Another 36% use their apps while commuting.

Consumers value the ability to organize their apps for easy accessibility, the study revealed, noting that 59% of app users had rearranged their apps so that the most frequently used were more accessible. 56% said they delete the apps they don’t use, most within two weeks of downloading them.

Who are the existing users of the iOS platform?

160 million cumulative iOS device sold (2007-2010); In the last 3 months of 2010 Apple sold 16.24 million iPhones (a new record for the company) and 7.33 million iPads — over 3 million more than last quarter. Apple also sold 4.13 million Macs and 19.45 million iPods during the quarter. The Mac sales were also a new record and were up 23 percent year-over-year.

Nielsen released the results of its October 2010 survey of mobile phone users. It found that the iPhone was “most desired” among likely smartphone upgraders in the U.S., ahead of Android.

But Android found its greatest share when the results were viewed by gender: 32.6 percent of male respondents said they wanted an Android smartphone, while 28.6 percent of men opted for the iPhone. Women, on the other hand, strongly prefer the iPhone, with 30.9 percent opting for Apple’s handset, while 22.8 percent of women said they want a device running Google Android.

For both men and women, BlackBerry came in third while Microsoft’s Windows Mobile took fourth.

In terms of age, the iPhone led in all demographics except ages 35 to 54. In that range, 27.4 percent of “likely smartphone upgraders” said they would choose Android, more than the 26.3 percent who said the iPhone.

Among users planning to get a new smartphone, current smartphone owners preferred the iPhone with 35 percent choosing Apple, versus 28 percent for Android. Consumers who own “feature phones” were less decisive, with 25 percent unsure what they would buy.

Differences between iPhone, Android and Blackberry users

iPhone owners are different in many ways from owners of other smartphones, they are typically younger than other smartphone owners (especially BlackBerry owners) and tend to be earlier adopters with activities like buying things with their iPhones and watching TV online. They rent more movies from Blockbuster (23% more likely than Android owners) and are more likely (22% than Android owners) to not even know what kind of TV they have than their Android and BlackBerry counterparts.

Android owners own more of the techier type gadgets like netbooks and e-readers than owners of other smartphones. They use fewer GPS devices in the car as well. On the other hand those Android owners may be so involved with technology that they don’t have time to read books or recycle their old gadgets with 25% more likely to not read books and 20% not caring about recycling.

BlackBerry owners come across as more normal and “old fashioned”. For example, the Gadget Census found that BlackBerry owners were more likely to still use a CRT as their primary TV and get their music from the radio and less likely to buy things with their phones. They are 15% more likely to recycle their gadgets than Android owners.

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