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:
- Content Packs: Charge $0.49 (UPDATE: $0.99 is currently the lowest price that Apple will allow for any transaction in the App Store) for each content update going forward. Over time, measuring the micro-transaction conversion will allow Bolt to tune the amount of content, how often they offer new content and types of content. These could be new maps complete with common-themed sets of items. Imagine a moon map with all sci-fi items, for example.
- Individual Items: Bolt could test whether selling individual items for $0.25 (UPDATE: $0.99 until Apple allows lower price points) such as ant spray, shark repellent, blueprints to build a shelter, etc. yields higher total revenue per user.
- New features: Offer new features like sending a post card to a friend and challenging them to play a turn-based version of the game, charging $0.99 for these as in-app purchases.
- Subscription: Convert to a subscription billing model, charging $0.99 per month going forward. It goes without saying that the amount of regularly offered content needs to satisfy subscribers to keep them engaged and paying.
Of course with each of these pricing changes, Bolt could lose users. However, if they can find the right model and sweet spot of monetizing the new content they are currently giving away, they could stand to increase revenue significantly. It's really about finding that balance to increase revenues, even if it's with a smaller user base. Either way, it will be key to measure how changing their pricing model affects new user adoption, retention and monetization. All of this can be measured with a robust analytics package like Flurry.
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.