The term “in-app purchases” refers to the ability of users to make purchases within a mobile application, such as acquiring additional content, or goods, or subscribing to services.

What is the meaning of in-app purchases? In-app purchases (IAPs) enable users to buy consumable or non-consumable items, as well as subscriptions, directly from within an app. These purchases are made using real currency, typically through the respective app store or an integrated payment system, rather than in-app currency or rewards.

As the majority of apps are now available for free download, app owners heavily rely on in-app purchases as a primary source of revenue. According to a report by data.ai, global consumer spending in apps was projected to reach $33.9 billion in the first quarter of 2023. Although revenues from in-app purchases are still lower compared to those generated from in-app advertising, they can significantly impact the overall financial performance of an app.

Different Types of In-App Purchases In-app purchases (IAPs) can be categorized into four distinct types. Let’s delve into each type for a better understanding.

Consumables in-app purchases

Consumables are products that can be used or consumed once and then repurchased multiple times.

Examples: In gaming apps, consumables often include extra lives or in-app currency like tokens. Dating apps may offer the purchase of additional swipes or profile boosts, while eCommerce apps allow users to order physical items.

Non-consumables in-app purchases

Non-consumables are products that are purchased once and remain permanently available within the app, with no expiration date.

Examples: In gaming apps, non-consumables could include unlocking a new level or purchasing specific features like upgraded tires for a racing car. Other examples include purchasing an e-book within a Kindle app or a bundle of workout videos in a fitness app.

Auto-renewal subscriptions (IAP) – in-app purchases

Auto-renewal subscriptions involve paying for products or services on a recurring basis, providing developers with a steady income stream.

Examples: Streaming services like Netflix and Spotify operate through auto-renewal subscriptions. Popular meditation apps or storage allowances from platforms like Apple or Google also utilize auto-renewal subscription models.

Non-auto-renewal subscriptions (IAP) – in-app purchases

Non-auto-renewal subscriptions run for a fixed period of time, requiring manual renewal once the subscription expires. These subscriptions often have a longer duration and higher cost compared to auto-renewal subscriptions.

Examples: Non-auto-renewal subscriptions are commonly used for magazines (print or digital), physical products (such as three months of wine or coffee deliveries), or access to specific sporting events through streaming platforms.

By offering various types of in-app purchases, app developers can provide users with different options for enhancing their app experience or accessing premium content while generating revenue through these transactions.

Pros and cons of in-app purchases

Pros of in-app purchases:

1. Increased revenue: In-app purchases help generate revenue for app developers, especially since a large percentage of apps are available for free download.
2. Alternative to ads: In-app purchases offer an alternative or complementary revenue source to in-app advertising, allowing users to purchase desired items instead of being solely reliant on ads.
3. Improved engagement and loyalty: In-app purchases provide users with customization options, enhancing their app experience and increasing user engagement and loyalty.
4. Customer insights: Purchase data obtained from in-app purchases provides valuable insights into customer preferences, pricing preferences, and opportunities for enhancing the user experience.
5. Easy payment process: In-app purchases offer a convenient and user-friendly payment process, with small transactions often perceived as more manageable and less risky.

Cons of in-app purchases:

1. Limited user base: Typically, only a small percentage of app users make in-app purchases, which can pose a challenge in terms of revenue generation. It may take time to accumulate significant revenue from these purchases.
2. Finding the right balance: Determining the appropriate benefits to offer, pricing strategy and timing of approaching users for in-app purchases may require trial and error to strike the right balance and maximize conversions.
3. Security issues: Easy payment processes can lead to accidental or fraudulent purchases. It is important to ensure the security of the payment system, closely monitor transactions and promptly address any issues that arise.

Understanding these pros and cons can help app developers make informed decisions and implement effective strategies to leverage in-app purchases as a revenue stream while mitigating potential challenges.

Payment mechanisms – methods of making IAP (in-app purchases)

1. App Store payments (Apple App Store or Google Play): In this method, users connect their credit cards to the app store, allowing them to make purchases within the app with a simple click. The payment is processed through the app store’s payment system. It’s important to note that both Apple and Google charge a commission to the app owner for in-app transactions:

• Apple charges a 30% commission on each in-app transaction (excluding physical purchases like ordering a taxi or a pizza). For subscriptions, the commission is 30% for the first year and reduces to 15% thereafter.
• Google charges a 15% commission on auto-renewing subscriptions and the first $1 million in earnings per year, with earnings above that incurring a 30% commission.

2. Direct in-app payments: Some apps offer direct payment options, allowing users to input their credit card details directly into the app itself. This enables users to make payments within the app without going through an app store. Examples include paying for a taxi ride on Uber, ordering a meal on GrubHub, or purchasing clothing on ASOS.
3. Third-party payments: With third-party payments, users are no longer restricted to providing payment details within the app or app store. Instead, users are redirected to the app’s mobile site to complete their purchase using an external payment processor. Payment issues or refunds are handled through the third-party provider (e.g., PayPal or Stripe), rather than the app or app store.

It’s important for app developers to consider the payment mechanism that best suits their app’s needs and the preferences of their target users. Each method has its own advantages and considerations, such as commission fees, security, and user experience.

In-app purchases in iOS vs. Android

When comparing in-app purchases between iOS and Android, it is evident that iOS users tend to spend more per user despite Android’s larger market share of 72% in the operating system market.

One contributing factor is that Apple devices are generally more expensive, attracting affluent consumers in developed economies. Additionally, Apple’s access to the Chinese market, where Google Play is not available, further enhances its revenue potential.

Furthermore, Apple’s implementation of heightened privacy rules under ATT (App Tracking Transparency) has made it more challenging to target mobile advertising effectively. As a result, in-app purchases have become an attractive revenue stream for developers on the iOS platform.

In-app purchases and engagement metrics

The correlation between engagement and in-app purchases emphasizes the importance of measuring and focusing on in-app engagement metrics.

Consider a scenario in a dating app where a user actively swipes, likes, and messages on a daily basis. This high level of engagement indicates a likelihood of the user being open to purchasing additional features, such as more swipes, to continue connecting with others.

Engaged users also hold significance for apps utilizing in-app ads, as every view contributes to revenue generation, regardless of whether it leads to a purchase.

Several metrics can be employed to measure app engagement and optimize revenue:

DAU and MAU

• DAU (Daily Active Users) represents the number of unique users engaging with the app on a daily basis.
• MAU (Monthly Active Users) denotes the number of unique users engaging with the app within a month.
• Analyzing the DAU-MAU stickiness ratio, which is the ratio of DAU to MAU, provides insights into user retention over an extended period.

 ARPDAU

• ARPDAU (Average Revenue Per Daily Active User) measures the average revenue generated per user on a daily basis.
• Monitoring ARPDAU helps assess user reactions to different campaigns or creatives and their impact on daily revenues.
• Spike in revenues resulting from positive user engagement with a specific campaign can inform future campaign strategies, while a drop in engagement and revenues prompts investigation and optimization for improvement.

Average session length

• Average session length provides valuable insights into the level of engagement your app offers.
• Longer sessions indicate higher user engagement, increasing the potential for them to progress toward making in-app purchases.

Retention tates

• User retention is a measure of long-term loyalty.
• It’s important to differentiate between users who display intense activity for a short period and those who consistently engage with your app over an extended period.
• Users with higher retention rates are more likely to make in-app purchases throughout their lifetime as app users.

By focusing on these engagement metrics, app developers can effectively gauge user behavior, optimize monetization strategies, and drive revenue growth through in-app purchases.

In-app purchase fraud

Unfortunately, the presence of money often attracts fraudsters, and in-app purchases are no exception. As a developer, it is crucial to remain vigilant even after a purchase is made.

Fraudsters employ various tactics, such as using stolen IDs and credit card details to make unauthorized purchases. They may also engage in deceptive practices, including faking payments or manipulating your app to gain access to paid content for free.

Cost-per-action (CPA) campaigns, which involve advertisers paying for specific actions like clicking on an ad that results in a purchase, are particularly susceptible to fraudulent activities due to the potential for generating high revenues. Additionally, subscription events in entertainment apps and gaming apps, especially in the social casino and hardcore genres, can attract fraudsters seeking monetary gain.

How to protect against in-app purchase fraud?

Safeguarding your app against fraud is essential to protect both your revenue and your users. Consider implementing the following measures:

1. Backend data and logic: To enhance security, it is recommended to store sensitive data and logic on your backend infrastructure rather than bundling them within the app. This reduces vulnerability to hacking attempts and unauthorized access.
2. Server-to-server notifications: Utilize server-to-server notifications to detect and flag any suspicious activity. These notifications can help identify potentially fraudulent transactions, allowing you to take prompt action to mitigate risks.
3. Chargeback Monitoring: Monitor chargebacks, where users request to cancel or void a purchase, as they can indicate fraudulent behavior. While some chargebacks may be legitimate due to user errors, others may be indicative of scams or hacks. Ensure that all transactions are clearly labeled, and provide receipts for transparency and accountability.

By implementing these strategies and maintaining a proactive approach, you can strengthen your app’s defenses against in-app purchase fraud, safeguard your revenue streams, and provide a secure environment for your users.

How to increase in-app purchase revenue

1. Offer rewards to boost engagement: Provide timely, relevant, and personalized rewards, deals, and discounts to keep users engaged and encourage purchases.
2. Use rich in-app events for deeper insights: Track user actions such as level achievements, tutorial completion, invites, and social shares to understand user preferences and shape your marketing strategies.
3. Remarket and re-engage: Re-engage existing users with reminders of what they’re missing out on and offer relevant incentives to entice them back.
4. Personalize the experience: Create a personalized app experience by addressing users by name, allowing customization options, and tailoring messages to make them feel valued.
5. Nudge at the right time: Deliver customized offers at the right moment, such as birthday discounts or reminders for abandoned cart items, to prompt users toward conversion.
6. Focus motivation of users: Identify the characteristics and motivations of users who make in-app purchases and allocate your marketing spend accordingly.
7. Don’t neglect free users: Provide a positive experience for non-paying users, as they may eventually become paying customers.

Key information about IAP (in-app purchase) to remember

• In-app purchases can be consumables, non-consumables, or subscriptions and offer benefits such as revenue growth, engagement building, and customer insights.
• In-app purchases can be made through app stores, directly in-app, or via third-party platforms.
• Apple users spend more through in-app purchases, despite Android having a larger market share.
• Engaged app users are more likely to make purchases, so it’s important to measure engagement metrics and optimize retention.
• Prevent in-app purchase fraud by keeping sensitive data separate, monitoring transactions, and providing clear transaction records.
• Increase in-app purchase revenue by focusing on users who are most likely to spend, offering a personalized experience, loyalty rewards, and customized offers to boost engagement.