In app purchases are quickly becoming the dominant revenue stream for mobile applications.
According to mobile app analytics and marketing firm Distimo, the proportion of revenue derived from in app purchases increased from 53% to 69% in 2012.
With almost 70 percent of app revenue coming from in app purchases, it is no wonder many developers are being drawn to this model. This is especially true in gaming where upgradeable options such as better weapons, or access to secret levels, convince users these perks are worth spending additional money.
EA Mobile, for example, which Distimo identified as the top-grossing publisher to both Google Play, and Apple's App Store, has decided to shift its future gaming lineup to the "freemium" model; the games are free, but include in app features and upgrades which gamers can purchase.
"One of our predictions for 2013 is that freemium gaming models (and in conjunction, the availability of in app purchases) will become the norm," said Nick Earl, the senior vice president and general manager of EA All Play, EA's new all-digital label. "The majority of our portfolio is now freemium games —they tend to monetize better than one-time-downloads, and allow us to cater to the consumer demand for premium experiences at little to no cost."
Distimo's report indicates users who pay for upgrades or other extras inside of mobile apps may propel Google Play in its quest to catch up with Apple’s App Store. Google Play outpaced Apple in the last four months of 2012, with 43 percent aggregate growth in daily revenue compared to the App Store’s 21 percent.
In fact, Google recently upgraded its in app billing developer tools to add additional features, such as a more robust architecture and less required lines of code. Version three, according to the official Android Developers Blog, is also planned to reduce the number of purchasing errors when users go to buy their upgrades.
Then again, some publishers will continue to follow, and be successful with a paid-only strategy.
Apple, for example, was the fifth-most successful publisher with its suite of apps, none of which include in app options. Many of its apps are on the higher end of the pricing spectrum, with iWork applications such as Pages and Keynote costing $9.99 and popular image and video editing apps such as iMovie and iPhoto priced at $4.99.
The developers behind Press, a well-received RSS reader app for Android, also chose to go with a traditional pay-upfront model. The developers settled on a price of $1.99.
Press developers Jordan Beck and Jay Ohms said they wavered about how to monetize the application, ultimately choosing an upfront payment model.
"We had a lot of discussions about revenue. Android has a very typical model which is a free, ad-supported version that may or may not be lacking features, and then a paid version with no ads and fully featured," Beck said. "We debated doing something similar, but it just wasn't how we wanted to release Press. And we weren't entirely sure how we would use in app purchases, so that left us with a paid-only app. It's a simple, straight-forward approach."
For some companies, a hybrid approach works better. SwiftKey, which creates a popular alternate keyboard for Android phones and tablets, has benefited from both approaches.
Users can buy SwiftKey versions for phone or tablet outright for $3.99 each. Or they can opt for the free model, which provides a one-month trial. When the time period expires, users then may make an in app purchase to continue using it.
SwiftKey Chief Marketing Officer Joe Braidwood said the two-pronged approach wins over some who are skeptical about the keyboard’s capabilities.
"We found that once people started using the free version of the keyboard, they didn’t want to give it up. So they were more than happy to pay for the full version," he said.
SwiftKey currently holds the second spot in the Top Paid category of applications on Google Play.
If you're watching the App storefront war play out, there still remains a large revenue gap between Google Play, and Apple. It is estimated that the Apple App Store pulls in $15 million on a typical day, with Google Play achieving just below $3.5 million in sales.
Time will tell if Google will be able to parlay the changing dynamics of app revenue into revenue that will tighten the race.