What’s an in-app purchase, and how can your business benefit from it?

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If you’ve built an app lately, then you know one of the biggest challenges is turning a profit. You can offer the app on a for-pay basis, but who wants to pay for apps when there are so many free equivalents around? Offering the app for free might seem like a quick way to the poor house, but thanks to a feature called the in-app purchase, it becomes possible to offer it for free but still make money. So what’s an in-app purchase, and how can you put it to work for you?

What’s an in-app purchase?

If you’re wondering what’s an in-app purchase, it’s a way for users to make purchases while in the app itself. There are several forms of in-app purchases available, depending on the kind of app you offer.

One-time purchases

This is especially useful for mobile game developers. Sometimes called microtransactions, one-time purchases allow the user to buy a certain item that changes the functionality of the app. Often used in game apps, one-time in-app purchases can include building materials, more ammunition, or added functionality like extra characters. These one-time purchases are money in the bank for developers.

Cosmetic alterations

This has more wide-ranging use than the microtransaction. Whether you run a game and want to give characters access to new armor and weapons, or you have a more standard app and want to offer the ability to change its layout or color scheme, charging a small amount for the privilege can be a great money-maker.

Unlockable options

This falls under the “freemium” model, and requires you to issue a basic, bare-bones (but still functional) version of your app for free. Additional features are placed behind paywalls that can be unlocked for a fee. There are several options in the unlockable option model — including access to specific content, new features like the ability to post information to the app or print out content — or any of a wide range of others.

Subscriptions

Excellent for content providers, the subscription option allows users to pay a set fee every month for access to content or services. It’s even possible to charge a subscription fee for access to the app’s full range of services. In this it works like the unlockable model, but the unlocked features relock after the term of the subscription ends.

What’s In-App Purchase iPad

Why should I use in-app purchases?

Once you get a handle on what’s an in-app purchase, you can use them for several benefits not found in other models.

Draws (and keeps) a market base

By using in-app purchases, you can effectively subsidize your main app. Between the option to buy an app outright for $10 and have it completely available, or get an app for free that offered its basics but allowed you to augment the app with new features for $10, which app would you go with? The free one lets you try it before buying, which means a reduced chance of buyer’s remorse, and greater engagement of the users who stick around.

Puts “predictable irrationality” to work for you

Dan Ariely, who wrote the book Predictably Irrational, once tested a model built around The Economist’s subscription structure. Said structure offered an online-only version for $59, a print-only version for $125, and a web-and-print version for $125 — and Ariely offered the proposition to a group of students. The end result was, out of 100 students, just 16 went for the web version, not one for the print, and 84 for the combined web-and-print.

Why?

It looked like a better value, so the students pounced. A similar pricing structure can give your in-app purchases that note of “predictable irrationality,” which means better sales.

Opens promotional opportunities

The users have already downloaded the app and are likely using it. Take the opportunity to promote your products therein. Offer discounts for those who upgrade in the next hour, offer special benefits to those who end a trial early and go to the full version — or just use your new customer base to talk about completely new apps. With a market base in place, you can evangelize to that captive crowd and improve your chances of gaining revenue.

What should I watch out for with in-app purchases?

There are some potential risks that should be considered as you’re figuring out what’s an in-app purchase.

Free app is too good, or not good enough

It’s a delicate balance: if the app is too good, there’s no reason to buy the full version since the free version solves the current problems. If the app isn’t good enough, then users are likely to ditch it altogether rather than hope they can improve it by paying perfectly good money.

Disgruntled crowds

Microtransactions, in particular, have come under fire from the user community. They’re seen as a greedy, grasping approach to pull money out of the user base.

It’s all about providing real value.

 

Remember to provide sufficient value at the free level to make customers understand they’re getting more by paying more.

The app store’s cut

Offering in-app purchases does a lot of good, but virtual goods purchased inside an app often come with a loss as the app store takes a percentage of the sale.

Regulatory problems

Back in May, Amazon refunded $70 million to parents whose kids made unauthorized in-app purchases. Stories of kids buying thousands of dollars of in-game gold, potions, Smurfberries — yes, Smurfberries — and more abound. This is prompting governments to look closer at the concept of in-app purchases, and might put app makers in a difficult position later.

How do I start offering in-app purchases?

Once you learn what’s an in-app purchase, the actual process of offering them varies depending on which model you go with. For Android systems, most in-app purchase models can be set up from the Developer Console, depending on the model you end up selecting.

For iOS, you can use Apple’s Xcode and the StoreKit Framework to add in-app purchase functionality. You also need to sign the Paid Applications Agreement and set up your banking and tax information with Apple, and create your in-app purchases in iTunes Connect.

No matter how you set it up, though, in-app purchases represent a great opportunity to take something available for free or just below cost and turn it into a revenue-generator.

Image by: Rob Hampson on Unsplash