Ever since smartphones became mainstream and app stores started gaining prominence, mobile apps and games have exploded. Both Android and iOS have made it easier for developers to create and lunch their app or game at little to no cost and provided development tools, APIs to take advantage of recent OS updates, and app stores to publish and host. This also gave developers access to a large user base of people using smartphones powered by these OS, which by default came with the app store. They also made it easier to monetize their apps and games ( which of course came with a price tag), which enabled them to make money off their work. 

Currently, Android’s Google Play Store has over 3.5 Million apps. And iOS’s App Store has over 2 Million apps. Around two-thirds of these are games.

One thing common across all these mobile games is, that more than 90% of them are free. So how do they even make money if they’re practically giving them away for free? Let’s find out.

 Ads

So the one common tried and tested method of making money, is to put ads in the app/game. But ads are a double-edged sword, especially in games. They hamper user experience because no one likes distracting ads that interrupt in the middle of a game. And if the ads are repetitive or misleading or too personal or sensitive, users are more likely to ditch the game. This reduces user retention.

 Also, ad revenue is based on the type of advertiser, the number of impressions, and clicks the ad made. So if your game is not that popular, you get only cheaper advertisers which result in lesser revenue.

Here comes the In-App purchases model to better monetize the games to avoid the above hurdles and also make the game more successful.

In-app purchases

 This is the model where you can make purchases inside the game to acquire additional features, that are otherwise not available to free users, also sometimes called the freemium model. These can be things like additional downloadable game content, skipping levels, character customizations, and game currency like coins and gems.

And the numbers are quite evident when we look at individual games. Pokemon go which launched in 2016, made a whopping 550M USD, despite being a free app in the very first year of launch, and has been consistently making more than 700M USD every year. And King games, which made Candy Crush Saga has made close to 2B USD every year, spawning more and more games of the same type. PUBG, the infamous multiplayer shooting game, has raked more than 3B USD since its inception.

And this in-app purchase revenue generation is slowly becoming mainstream due to its larger adoption and user response. This has been specifically more prevalent in action and casino games, which have 77% of their revenue coming from in-app purchases. 

But how and why would anyone spend money on a game?

Social Identity and Validation 

Users see these in-app purchases as having a better experience than others. So having that custom jacket on your game Avatar, when playing with others who don’t have it, gives a sense of validation and unique identity.

Hindered Progress

Some games sneakily make some levels or challenges harder to win or longer to complete, and you would have to pay for those powerups or boosters to complete them. 

Let’s say you’re on an Extremely Hard level on Candy Crush Saga, and you would need 2 moves to win but you only have one move. And you have tried and failed at that level some 100 times. So you’re more inclined to buy that Lolipop power-up to get ahead in the game. Let’s say you are playing Farmville and cows take 1hr to give milk, but you can cut down time using gems. 

Weird conversion rate

The virtual economy in each game is different and has odd conversion rates. 7 gems in the game may cost 99, but for 199 you might get 20 of them. So it’s difficult to ascertain what each gem costs, as the conversion isn’t straightforward. There are also combo offers, say 7 gems, 500 coins, and 2 boosters for 399, which make the conversion rate even harder to arrive at. Some games may put layers in purchasing, say you have to buy gems first with money, and these gems are further used to buy coins and cards. So users may spend more actual money unknowingly as the conversion is weird and hard.

But what about players who don’t buy anything at all?

Less than 2 % of players only pay for in-app purchases, which looks tiny. And your business model is such that, out of 100 people you gave away your product for free, only 2 people pay for it. This looks like a business model that is doomed to fail. But that isn’t true. These tiny percentage of people spend larger amounts and often frequently. And the non-paying players spend hours on the game making it better for those paying players through their active gameplay.

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