In Part 1 and Part 2 of this series, The App Economy and The User, we explored the how the App Economy’s focus on growth has wrecked the user experience for many apps, and how an over reliance on paid advertising in order to generate new downloads creates a negative cycle that is difficult to break.
In Part 3 we recommend an alternative approach that is win-win for users and publishers. But first, we should talk about monetizing growth…
Five years after the introduction of the iPhone, just 35% of American adults owned a smartphone according to Pew Research. Fast forward to today, and ownership has skyrocketed to 81% in the US. Across the globe, smartphone ownership is on the rise in both developed and emerging markets.
It’s no surprise that over the same period of time, app publishers (1, 2, 3) have experienced rapidly growing install bases with tens of millions of downloads. With so many installs, it’s understandable that monetization strategies focused on audience size have become en vogue.
According to AppAnnie, mobile accounted for 62% of digital advertising spend in 2018; a $155 billion market. Many of these “mobile first” ads promote the installation of other mobile apps and have become an essential part of app publishers’ user acquisition strategy as discussed in Part 2 of this series.
Monetization through ads is a volume game. Individual ad impressions are worth little to nothing except in the rare case a user taps on an ad. Sadly, many ads are poor quality and end up disjointing the user experience rather than harmonizing with it.
In today’s era of Super Retina displays, it's shocking that agencies publish display ads which represent their brands and look lousy on high resolution displays.
Apple famously tried to improve the quality of mobile ads with their 2010 acquisition of Quattro, which was the basis for Apple’s iAd network. However, that effort was shuttered in 2016 as Apple shifted focus to app search ads on the App Store.
Unfortunately, it’s not merely the look and feel of mobile ads that is a problem for end users. Ad frameworks that app developers thoughtlessly integrate into their apps in order to serve ads can do as much or more harm to user experience than ugly creative.
Ad frameworks employ advanced targeting algorithms to serve ads to users. Most frameworks collect data about users under the guise of showing more relevant advertising. Relevancy sound great, but most users are unaware how much data an app is harvesting, especially apps that serve ads. How would you feel if an app was selling your data to the highest bidder? This is exactly what’s happening.
Even if an app isn’t serving ads, it may very well contain a framework that harvests your data.
Of particular concern are apps that use your location, such as weather apps. You may agree to share your location in order for the app to give you a relevant experience, but, unbeknownst to you, the same app might also be sharing your location with an ad targeting framework. With this data, ad technology companies can map your movements and quickly figure out where you live and work.
It’s not just the display ad providers, however, that are interested in data collection. The entire marketing and advertising technology ecosystem thrives on your data. Many of these companies view mobile as a key source in building immense data clouds full of rich user profiles.
Luckily, Apple continues to be focused on end user privacy, giving users more control about how and when their data is shared with apps. Apple has also made data collection much more transparent to the end user, especially with location sharing and Bluetooth access.
Furthermore, Apple’s App Store review guidelines continue to evolve, encouraging app publishes to focus more on end user privacy. While some apps have been updated to be on par with the new standards, others have gone above and beyond, offering a truly user-centric experience.
Governments are also playing a role in setting the tone for the collection of user data. New regulations such as the European Union’s General Data Production Regulation (GDPR) and California’s Consumer Privacy Act (CCPA) have put companies on notice to be more thoughtful about data.
Wouldn’t it be great to build a real business around your app that customers are willing to pay for? It seems like such an obvious approach, but it’s not entirely that clear cut.
The app ecosystem has evolved a lot since the App Store launch in 2008. Several changes have challenged app publishers to embrace new monetization tools. Great apps can be expensive to build and maintain. App publishers need a reliable, viable means to make their investments worthwhile.
Let’s take a look at three common monetization approaches:
Paid apps were the primary monetization approach in year one of the App Store. As the number of apps increased, however, publishers found themselves in a race to the bottom on price. A one-time price of $0.99 in a growing-but-nascent market was clearly not a recipe for sustainability.
Apple introduced in-app purchases in 2009, originally restricted to paid apps and available to free apps later that year. This created a new avenue for monetization with inexpensive, and later free, apps attracting larger audiences and offering in-app purchases.
This model has become ubiquitous in games. A consumable resource such as virtual coins can be sold to players to be used to buy virtual commodities, unlock features, or speed up the progress of a game. Monster money maker like Clash of Clans provides in-app purchases that allow players to remain competitive against the legion of other players across the internet who are doing the same, culminating an in-app purchase arms race of sorts.
Across all app genres, in-app purchase are used for countless add-ons from photo filters to recipe bundles to workout routines. They are even used to allow users to remove ads from an app, letting the app publisher trade one revenue source for another.
The 'arms race’ phenomenon, however, doesn’t exist in non-games. Because most non-games lack a linear progression or an endless market of virtual goods, in-app purchases haven’t radically improved the long term sustainability that app publishers want outside of the game category.
After the iPad launched in 2011, Apple introduced in-app subscriptions which were originally reserved for content publishing apps such as newspapers, magazines, video, and music.
Apple’s signature launch partner for in-app subscriptions was News Corp’s The Daily. The Daily was ahead of its time in its user experience and monetization approach, but iPad users weren’t ready and The Daily was discontinued just a year later.
Fast forward to 2016. Four years after the launch of The Daily, Apple reported having 1 billion active devices in use around the world. This incredible milestone meant a renewed opportunity to build strong recurring revenue businesses in the ecosystem.
To do so, App Store subscriptions were overhauled and opened up to apps in all categories and improved its revenue split to be more friendly to app publishers. The original split was 70% to the app publisher and 30% to Apple. The new split was 70/30 in the first year, and 85/15 in subsequent years. This model still exists as of this article’s publication (Oct 2019.)
The in-app purchase model seems to be working. According to App Annie’s State of Mobile 2019 report, consumer spending is up 120% since 2016, largely attributable to growth from subscriptions. The firm forecasts that subscriptions will drive the app economy to grow by another $75 billion dollars by 2022.
It’s clear that we’ve entered an app economy that is fueled by subscriptions.
Building a paid customer base focused on growing recurring subscription revenue is so fundamentally different from focusing on audience growth, where acquiring new users is much of the ballgame. How do app publishers thrive in this new world?
A mindset shift is necessary. In the subscription economy, it’s vital to be at peace with the fact that not all users who visit your website or download your app are going to become paid subscriptions.
In the subscription economy, your job is to identify and encourage your users, and nurture them through a customer journey. Through that journey you’ll understand that your best users have high potential to become your best customers.
The subscription customer journey is not focused on creating hyperactive usage patterns to inflate growth metrics like MAUs. It’s also not a one-size-fits-all journey. Some users need more time to evaluate and consider whether your app serves a need. Others will know right away.
Your job is to make sure your experience isn’t creating artificial roadblocks or messaging users for self-serving reasons. Those retention email and push messages reek of desperation, and will turn users that might otherwise have become paying customers.
The best subscription apps let go of the baggage from the growth era. Rather than spending inordinate time and energy trying to prevent those low-quality users from churning, these app publishers focus on building a great experience that some users will love.
Spend most of your time optimizing your experience to provide unquestionable value to a certain audience, and spend little time focusing on the rest.
In the subscription economy, converting a user to a paying customer isn’t the finish line. Your job is to continue to build and reenforce the value of your product. If you do this, you have a chance to earn an even more profound stage in your app’s customer journey: true fans.
This is an elite club, so don’t expect a large volume of users in this cohort. That’s okay. They are, however, your best customers. Why? They have the lowest churn risk and the highest Customer Lifetime Value (CLTV). They will help your marketing efforts without being asked by recommending your app through word-of-mouth. They will even give you the benefit of the doubt when the inevitable bug is introduced.
Imagine a world where you focus on building a product that is valued by your customers and delights your fans rather than figuring out how to more efficiently coax and nag the millions of users who downloaded your app. Build for your fans and you are one step closer to building a healthy app business.
P.S. Your fans understand the true value of your product so they will likely pay far more than you think you can charge.
Unlike ads and even basic in-app purchases, offering in-app subscriptions is quite a bit of work to not just launch, but maintain over time. This work is further complicated if your app is available across multiple app ecosystems or if you offer a way to purchase on the web.
In addition, once you launch, it's incredibly important to have the flexibility to iterate on your subscription offers, marketing, and pricing so you can optimize revenue and customer satisfaction. Nami's here to help. Our Subscriber Experience Cloud is a complete suite of tools to help you get to market fast, gain insights to help you optimize your subscriber experience which is good for revenue and customer satisfaction.
If you're thinking about adding subscriptions to your app, we invite you to learn more about Nami.
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