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Yankee Group: In-app purchases - fool's gold or pay dirt?

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Raúl Castañón-Martínez yankee group

Raúl Castañón-Martínez

The Web is full of headlines from Internet tech sites that claim almost all app store revenue now comes from in-app purchases within free apps. But like much of what appears on the Internet, it is necessary to take a closer look at the numbers to better understand the story.

Using our December 2013 US survey data, Yankee Group created a visual representation to identify smartphone users in the U.S. who do in-app purchasing. We asked smartphone owners who have downloaded apps to their devices, if these were paid or if they downloaded only free apps. We then identified users that have done in-app purchasing in the last month and how much money they are spending on these. The results show that:

·         Two out of three smartphone owners in the U.S. never spend money on app stores. Thirty percent of users do not download apps at all; an additional 34 percent only download free aps and do not spend money on in-app purchases.

·         Users that download only free apps will most likely not spend money on in-app purchases. Only 12.5 percent of users who download only free apps will spend money on in-app purchases; this represents 5 percent of the total number of smartphone owners in the U.S.

·         Users that download paid apps are more likely to spend money on in-app purchases. Eighty-three percent of users that download paid apps will also spend money on in-app purchases; this segment represents 26 percent of all smartphone users in the U.S.

·         We estimate that revenue from in-app purchases represent approximately one-third of that coming from paid apps.

Data from our research represents usage and behavior trends of the entire online population in the U.S., across all categories; this includes populations that often fall through the cracks in a self-selected sample.

Users who download paid apps are more likely to spend money on in-app purchases, which means focusing on freemium and in-app purchasing might lead developers to misidentify the user segment that brings in most of the app store revenues. These lucrative users also download free apps; our research shows that in many cases, they will download a free version as a trial. This means they follow a different app life cycle as other freemium users. Developers should focus their efforts on the app life cycle as defined by the user to benefit from the freemium and in-app purchase model. Furthermore, we should not be quick to dismiss the paid app pricing model; paid apps still represent a large portion of app store revenues.

Raúl Castañón is a senior analyst with Yankee Group. Castañón focuses on analyzing opportunities around mobile applications and their impact in the mobile ecosystem. Before joining Yankee Group, Castañón was Product Manager at EMOSpeech, developing market analysis in the field of emotion recognition technology to identify strategic opportunities for product development. Prior to EMOSpeech, Castañón worked at Novell, developing product and partner strategy for endpoint management, collaboration and cloud-based enterprise software applications. At Comverse Network Systems, he gained significant experience in product marketing, working side by side with Tier 1 mobile operators to define strategy, pricing and business models for voice and data products. Castañón holds a B.S. degree in marketing and business administration from ITESO University in Guadalajara, Mexico, and an M.B.A. degree from Duke University.

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