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It’s nothing new, we all know that mobile games have dominated app stores for the past several years. In fact, a study recently found that of the top twenty grossing apps, 87% of total revenues came from games. Clearly, they’re doing something right.
It’s logical then that gaming is typically the first category to innovate and implement new app monetization strategies, which are often then taken on by non-gaming applications.
So, what is mobile gaming doing right? And how can non-gaming applications achieve similar success? Let’s take a look.
From premium to freemium
In the 80s and 90s, before smartphones were ubiquitous, gaming companies sold their games on a premium business model where, for example Super Mario was sold at a fixed price (~$50). To play, you needed to purchase the Nintendo 64 (~$200) separately. Then, once you had the N64, you could drag your parents back to the store and beg for three more games.
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This business model lasted years. After all, it worked. So, when mobile devices started becoming more popular, gaming developers naturally treated this new market just as they did in the 80s and 90s. But this time, the console was the mobile device and the game cartridges were the apps, meaning each mobile application was sold for a fixed price on the App Store, typically at $0.99.
In October 2009, things began to change. Apple emailed developers that they’d now be accepting free apps backed by micro-transactions. In 2010, a year later, the percentage of free apps was still low, but steadily growing, with two free apps featured in the App Store Top 50 in January, ten in October, twenty in November, and so on.
It was undeniable, the paid apps model was dying. In recognizing this, most mobile games replaced this monetization strategy with the freemium model. (The only notable game that is still premium is Minecraft.) Still, several non-gaming apps were stuck relying on this same monetization model for quite some time. In 2013, at least half of the Productivity, Medical, Business, Healthcare & Fitness, Navigation, Catalogs, Lifestyle, Photo & Video, Travel, and Weather applications still required a one-time payment.
It took a while to catch up, but today, these numbers are down to roughly 5%. Evidently, gaming developers were on to something.
In-app purchases for all
In 2009, freemium apps – apps either offered as a “lite” version for free or those which offer in-app purchases – slowly became the norm. It was in 2012, however, that this app monetization model really took off. (In 2012, free apps jumped from 80% to 90%.) Suddenly, in seeing gross premium numbers quickly decline, headlines on Mashable, GigaOM, and Forbes declared, “Premium is Dead” and “Freemium is the Most Profitable.”
In a study recently conducted by eMarketer, researchers discovered that just 33% of mobile users in the US are willing to pay upfront for mobile applications, meaning the second consumers see that an app requires a premium purchase, they simply continue scanning the App Store or Google Play for a free version of the same product.
Before long, most apps in the App Store and Google Play were freemium. Today, there are over two million free apps on Google Play, compared to just two hundred thousand paid apps – a huge testament to power of the freemium model.
The rise of in-app ads
It was around the same time, in 2013, that in-app advertising began gaining traction as well. It grew 1.7x from 2013 to 2014. Still, the IAP model was always more popular and lucrative, with revenue growing 211% between 2013 and 2014 compared to 56% for in-app advertising.
Nevertheless, in-game advertising continue to see strong growth. Why? Because, as consumers’ activity and attention increasingly moves from desktop to mobile, advertisers are looking for ways to reach their target audiences on this medium. In-app offers the best chance to do so, with users today spending a whopping 90% of their time on mobile in apps rather than the mobile web.
In addition, because researchers predict that the number of mobile users willing to pay for apps will continue to decline in the next four years, in-app advertising serves as a critical additional revenue stream for developers looking to monetize their apps.
Best of both worlds
Today, we’re beginning to see savvy developers using in-app ads to actually drive in-app purchases, resulting in a hybrid monetization strategy that addresses both paying and non-paying users.
To do this, many gaming developers are using “reward-based ad units,” such as rewarded videos and offerwalls, as a way of allowing non-paying users to access in-app currency. Instead of paying for premium features, they simply watch an advertisement.
Interestingly, users who watch a lot of rewarded videos often end up becoming paying users. In allowing users to continue playing the game for longer, and by exposing them to premium features enabled by in-app currency for “free,” their retention ultimately increases. Once they’re hooked, these users are more likely to make in-app purchases.
This model is very appealing; it’s a way to get the most out of both paying users and non-paying users, two groups that should not be mutually exclusive but are often treated as such.
Given what we’ve seen about the trailblazing role mobile games play in the evolution of app economics, it will be interesting to see how this hybrid monetization strategy evolves moving forward. As of now, we see just a handful of gaming developers (33%) implementing this model, but it’s reasonable to assume non-gaming apps will pick up this monetization model as well.