The Awesome Potential of iPhone In-App Purchases

June 11, 2009
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Peter Farago
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The ability for developers to offer in-app-purchases within paid iPhone apps, as part of iPhone OS 3.0, creates exciting new revenue opportunities. At the same time, the option to sell virtual goods, additional game levels, subscriptions and other forms of micro-transactions, creates more complexity around how to best monetize a given application. Developers who can quickly and effectively measure and optimize the impact of these new pricing options will emerge as winners in the next phase of the iPhone economy.

To date, selling an iPhone application required a few simple decisions: developers could either give an app away for free or charge for it. The two most common business models to emerge were free-to-paid and ad-supported, with some companies opting to ship only paid version of their applications. The decision to offer a free version seems correlated to whether a developer has recognizable brands. For example, EA Mobile, which boasts The Sims 3, Tetris and Scrabble tends to release more paid-only versions. By contrast, companies with more original, less-recognizable titles like Digital Chocolate, which makes Crazy Penguin Catapult, Brick Breaker Revolution and Tower Bloxx frequently go to market with free trials of their games to entice consumers to try-and-buy. Overall, much of the learning in the market has centered on what price to charge, when to drop price and whether ad-supported apps earn more revenue than paid apps.

Already, there are several iPhone apps well suited to micro-transactions. To stay relevant, well ranked, and retain consumers, developers have been adding extra content and features via updates. Pocket God by Bolt Creative* is an example of an app that has strong micro-transaction potential. They have already successfully trained users to expect regularly released content updates that keep the gaming experience fresh (personally, I like the spear used to fight off the Tyrannosaurus Rex). As a result, Pocket God has been ranked among the top paid apps for several weeks. However, they have been collecting a mere $0.99 for the initial download of the app and then giving away a steady stream of additional content after the sale. While their current strategy has earned them users, they should weigh this approach against maximizing revenue through micro-transactions. A risk to keep in mind is that users who have been receiving content updates for free may resent paying for updates going forward. This could be mitigated with a combination of free updates and optional in-app purchases.

To further this example, listed below are some ways Bolt Creative could consider applying micro-transactions:

Experienced publishers and developers will tell you that testing and measuring is the best way to focus on the right parts of your business, especially when it comes to your product and how you price it. As it relates to micro-transactions in the App Store, think about the content you are offering and whether it's well suited to micro-transactions. Then test launch different kinds and amounts of content, at different price points, from within different points of your app and at different intervals. Compare how these perform using your analytics service of choice and tweak your approach. With this kind of testing, learning and tuning, you'll be reaping the rewards in the next era of the impressive iPhone economy.

* Bolt Creative is not a Flurry customer and the business model options explored in this blog post are for illustrative purposes only.