App store analytics providers have been telling us that almost all of the growth in app revenues in the last year has been through in-app purchases. However is that just because the model has become more popular? Or because revenue has been concentrating at the top of the market where the strategy is very popular (particularly in free-to-play games)? Probably a bit of both but it’s also the case that subscriptions and in-app purchase do produce the highest overall revenues. If you exclude the developers of top apps (anyone earning over $50k per app per month on average and with over 500k active users) then it turns out that aside from apps that provide enough value to justify a subscription model, the important thing is acquiring users and keeping them engaged. The average revenue for an active user is fairly constant, regardless of the monetization method.

How much do you think is an active user worth? Take the Developer Economics Survey and have your say!

For the purposes of our survey, freemium could be a limited free app with a separate paid version promoted by the free one, or a free app with a premium upgrade via in-app purchase. In-app purchases can be any content, features or virtual goods purchased in the app, which itself can be paid or free. Paid downloads, advertising and subscriptions are hopefully self-explanatory. Note that it’s possible (and indeed quite common) for developers to use multiple revenue models, either on separate apps or within the same app – e.g. freemium with advertising in the free version. The average number of revenue models per developer in the sample above was 1.7. However, if we only look at developers using a single revenue model, the pattern is very similar (and average revenues are lower across the board).

Make the core functionality free if you can

For the majority of developers, an active user is worth around $0.04 per month. All other things being equal, unless you have a sufficient reputation or well known brand association that you can get paid downloads in large numbers, then it’s better to avoid the user having to pay directly for the core functionality of your app. This results in more downloads and a larger user base. Freemium comes out badly here, it seems that the free trial may get lots of downloads but overall slightly fewer active users (and paying users) than a straight paid download. Advertising and in-app purchases had almost identical user bases and overall revenue. Subscription apps had the smallest active user bases but by far the greatest revenue, however, this revenue model requires some kind of ongoing service that is external to the app, which will have associated costs.

In-app purchase beats advertising at the top end

The picture is a little different if you include the highest earning apps. At this point paid downloads fall far behind, both in terms of ARPU and overall user base and revenues. This is not to say you can’t have a very high grossing app with a pure paid download approach (Minecraft is a great counter-example), just that the probability of doing so is much lower. Subscriptions still come out on top but not by so much. The lower ARPU for subscriptions at this level suggests that the top subscription apps have a very popular free tier. Freemium does slightly better than paid downloads for active user base size and significantly better for revenues, suggesting that top quality paid apps with a higher price may sell better with a free trial of some kind. Finally, in-app purchases and advertising both generate the largest active user bases by offering their core functionality for free but a well designed in-app purchase scheme beats advertising for monetization by some distance.

Beware service costs eating all your revenue

In addition to revenue model selection there are also implications here for apps which connect to backend services. The average monthly revenue from an active user needs to exceed the costs of providing the service significantly to make a profit. If the majority of developers are only making $0.04 per user every month on average then say a Kinvey (purely because they price per user for iOS and Android, making the comparison easy) BaaS at $0.03 per user (for 200-5000 users at current pricing) does not leave much for the developer.

In-app purchases or ads?  Take the Developer Economics Survey and have your say! You may win awesome new gear.