Sunny Cha
February 27, 2018
In 1906, management consultant Joseph M. Juran paid homage to Italian economist Vilfredo Pareto by coining the term “Pareto Principle” in reference to a unique relationship he observed in the business world. He found that in the vast majority of firms he analyzed, 80% of the sales came from 20% of the clients. For the past 100+ years, this same phenomenon has been observed in the fields of science, software development, sports, and even occupational health and safety. Most recently, it’s been found in the spending habits of freemium mobile app users.
Experienced app developers, especially those that publish freemium mobile games, have found that this power law reaches new extremes when it comes to monetizing mobile user bases. Multiple studies report an average industry-wide conversion rate somewhere between 1.5% and 2%, with less than half of those users completing more than one purchase. This represents a significant drop from the early 2010’s when conversion rates hovered around 3-4%. Publishers have since had to figure out how to get the most revenue out of the few users that convert. The target metric for monetization professionals is average revenue per paying user, or ARPPU.
ARPPU plays a pivotal role in calculating bottom line IAP revenue for a freemium app. Multiply the number of converted users by your app’s ARPPU and you’ve got your total IAP revenue. Add that to any ad revenue or e-commerce spending to find your app’s total gross revenue. With conversion rates shrinking, there’s more pressure than ever on monetization professionals to maximize ARPPU in order to keep growth marketing efforts net-positive. It’s easier said than done, but there are a few consistently effective strategies that publishers can turn to.
Remove Revenue Ceilings
Freemium apps can hamstring their own success by limiting how much users are able to spend on in-app purchases. For power law monetization to be effective, the most engaged users need to be able to spend indefinitely. The alternative is leaving money on the table, putting more pressure on your app’s conversion rate to make up for the deficit. Betting on high conversion is never ideal, especially considering its recent downward trend. While these sorts of design decisions should be taken into consideration as early as possible in development, there are ways to remove revenue ceilings retroactively. It will almost certainly require an update to your app’s core design, but as we’ll explain later, that’s not necessarily a bad thing.
Value Your Time
The most common way to remove revenue ceilings and increase ARPPU is to monetize time. Mobile games have done this for years, adding incrementally greater delays to their core mechanics, giving players the option of waiting out the clock or spending real-world money on premium currency that can be used to speed things up. This strategy works just fine for games, where the value for users is abstract and depends on their enjoyment of a virtual engagement loop, but things can be a little more challenging for other verticals like commerce and/or media applications. In those cases, offering a breadth of purchasing options is a publisher’s best bet for maximizing spend.
Keep Your Offering Diverse
Keeping the widest possible variety of purchasing options available to your users is the best way to ensure a compelling and profitable shopping experience for your super fans. Whether your app offers media content, real-world products, or gated interactive experiences, find ways to keep your offering plentiful and diverse. Even a seasonal back-catalogue can be appealing to your brand’s most devoted followers. Publishers dealing with order fulfillment infrastructures should find ways to minimize overhead costs in order to keep products in the market for as long as possible. All of that said, be sure you have spending data to back up your decisions. There’s no point in keeping a SKU on the shelves if nobody’s buying it.
Keep The Content Coming
Even super fans can get tired of your app’s core offering. To combat fatigue, set an aggressive content release schedule and stick to it. Be sure to include an equal balance of content that engages both paying and non-paying users. This could be anything from a new line of real-world products to holiday-themed events in your mobile game. Known among game publishers as the “games as a service” approach, regular content updates have been shown to benefit performance metrics across the board, especially when users are given the option to purchase larger content packages up front. In an interview with [a]listdaily, CEO of games industry research firm Newzoo, Peter Warman, explained how these sorts of season passes benefit retention, as they “tie players to the game longer by forcing them to make an initial investment.”
Distribute Content Through App Store Updates
New content, when distributed as an update to your app via the app stores rather than through a CDN, has the added benefit of reactivating your user base. Despite the recent addition of automatic updates on both iOS and Android, many mobile users still prefer to manage updates manually. Releasing a new update adds your app to the list of those awaiting approval in the updates section of a user’s app store. This serves as yet another way of keeping your app top of mind and creates an organic path for users to log back in and explore your latest features, providing a lift in DAU and in-app spending.
Celebrate Big Spenders
Take every opportunity to make your most valuable users feel appreciated. For those managing freemium products, high-value users are your most precious asset, and there’s no shortage of other publishers hoping to steal their attention away. Keep them engaged and feeling special by posting their achievements on your social channels, including them in your newsletters, having them participate in playtesting sessions, or even inviting them to real-world events. White-glove service for your most valuable users is almost always an ROI positive initiative.
Make It Social
Shining a spotlight on your most valuable segments can have even greater benefit when your users are able to interact. Give users the option to characterize themselves to each other, even in the smallest ways, and you’ll be well on your way towards building a thriving brand community. Even the most basic peer-to-peer communication system exposes users to each other within the app and adds a myriad of motivations to support ARPPU positive behaviors.
IAPs remain the primary method of monetizing mobile user bases. All contemporary evidence suggests that power law monetization is here to stay, and that publishers will continue relying on a crucial few users to keep their projects ROI positive. This is all the more reason for publishers to prioritize ARPPU early and keep it top-of-mind even after launch. Your app portfolio’s bottom line will benefit from it.
