Published on November 14th, 2024
In-app purchases (IAP) and ads are two of the most common ways for marketers and businesses to generate revenue from their mobile apps. Together, they contribute to over 60% of the total mobile app earnings.
Similarly, there are other differences too that make the two relatively different despite being both monetization techniques. In this blog, let us learn more about in-app purchases vs ads.
What are In-app purchases?
An in-app purchase (IAP) refers to the action of buying items within the app. These items may include products, services, features, or extra functionalities that you can purchase directly within the app using its built-in payment gateway.
Certain applications have their own integrated payment gateways; however, there are others that rely on third-party app stores like the Apple App Store and Google Play Store to facilitate the transaction by charging a commission of approximately 15-30% of the total amount. In-app purchases have emerged and become one of the key monetization methods for many gaming, social media, and other entertainment platforms, that tend to employ in-app purchases for monetization purposes.
Some examples include gaming apps such as Candy Crush Saga, dating app Tinder, music streaming platform Spotify, and video streaming services like Amazon Prime and Netflix.
In both scenarios, the reasons for the rise in IAPs can be attributed to the growing demand for better content and services within apps for free, and enhancing the user experience.
What are App Ads or advertisements?
App ads, or advertisements within mobile applications, refer to promotional content displayed to users while they interact with an app. These ads can appear in various formats, including banner ads, interstitial (full-screen) ads, video ads, and native ads that blend with app content.
As a proven monetization strategy, app ads help companies drive revenue while reaching targeted audiences effectively. By integrating ads into mobile apps, businesses can boost brand visibility, promote new products, or offer incentives, providing app developers with an essential revenue stream that complements in-app purchases.
As a monetization technique that companies often use to promote goods and services, ads play a major role in the modern business landscape. And for all the good reasons!
Apart from being a potent revenue generator, advertisements can be easily implemented across your existing networks in various formats like banners, interstitial advertisements, videos, and special reward programs.
Speaking of which, ads are particularly beneficial for app developers, as they can earn revenue every time a user clicks on an ad, makes an in-app purchase, or even simply views the ad. Like YouTubers who get paid for each ad view, app developers can also monetize impressions, boosting their earnings with user engagement.
Widely adopted by the entertainment and information industry, some of the rather well-known examples of add-based apps include the video giant YouTube and the social networking platform Instagram.
Now, let us learn about in-app purchases versus ads.
Pros and Cons of In-App Purchases vs. Ads
Depending on your audience base, type or complexity of the app, and business goals overall, in-app purchases (IAPs) and ads are two of the main ways to make money for your app.
Here’s what each of them offers:
Pros of In-app purchases vs. Ads
Here, we have compared the advantages of in-app purchases and ads, regarding the main goals of app monetization.
1. Higher revenue and Conversion rates
In-app purchases can generate a more stable and often higher return on investment (ROI), especially from loyal customers who want premium features. Users who pay for in-app items are often more committed to the app.
On the other hand, ads provide a better way to generate revenue from non-paying users or those who don’t use the app too frequently in the first place.
2. Better access to premium content
Access to premium services and content is yet another major benefit of in-app purchases that is almost too impossible to achieve with advertising alone. A prime example of this is in-app features such as gaming currency and subscriptions that are only unlocked once a user has reached a particular level.
In contrast, ads can be showcased in a wide range of formats to entice customers to buy products and services separately, whether they use the app directly.
3. More Flexibility
Being available to a wider audience, ads happen to provide more flexibility to users, especially, those who do not use the app but would still like to purchase your products and services.
Similarly, in-app purchases offer lifetime value (LTV) to existing customers, as they can opt for features and upgrades that they would like to have without getting bombarded with non-stop ads.
4. Greater User experience
As such, in-app purchases lead to higher satisfaction and customer retention on any given day than ads that users usually tend to skip or ignore.
This is the reason why it is important for advertisers to place their ads such that they leave no impact on the user experience. For example, placing ads in non-intrusive places such as the edges or corners of the screen.
Apps That Implemented In-App Purchases SuccessfullyÂ
- Candy Crush Saga – Boosted revenue by offering power-ups and extra lives
- Pok̩mon GO РEnhanced gameplay experience through the purchase of items like Pok̩ Balls and incubators.
- Tinder – Increased user engagement with premium features like “Super Likes” and “Boosts.”
- Spotify – Converted free users to paid subscribers with ad-free listening and offline access.
- TikTok -Encouraged user spending with virtual coins for gifts and donations during livestreams.
Apps That Failed Due To Disrupted In-App Purchases Strategy
- Angry Birds GO – Excessive in-app purchases alienated users and hurt retention rates.
- Zynga’s Farmville – Failed with high reliance on microtransactions, causing player frustration and churn.
- EA’s Dungeon Keeper Mobile – Heavily pay-to-win model pushed users away due to poor player experience.
Cons of In-app Purchases vs Ads
Here are some of the disadvantages of in-app purchases vs Ads:
1. Implementation challenges
Implementing IAPs as well as ads in an organic way is one of the biggest challenges faced by developers and advertisers alike. For instance, app developers need to be wary of pushing the IAPs too aggressively or for every service, as it can push the users away.
Similarly, advertisers must keep in mind not to disrupt the flow of users’ journeys by prompting too many ads in between. Or else, there are tons of ad blockers that users can get their hands on to say No to your ads entirely.
2. Inconsistent/ Lower Revenue
Things such as these can eventually lead to lower ROI, whether it is the ads or in-app purchases.
In general though, as we mentioned above, in-app purchases tend to have a higher ROI than ads on any given day, but it depends on various factors.
For instance, in the case of IAPs, apps require a higher engagement time and more paying customers than ad clickers.
In other words, while ads largely depend on users’ interaction with your products and services after clicking on the ad, IAPs need customers who are willing to pay for advanced functions and features.
3. User experience
At the end of the day, both in-app purchases and ads have substantial potential to turn off the users, especially, if not done the right way.
For example, using pop-up notifications and advertisements to entice customers to make in-app purchases can bother or frustrate users and make them leave the app in no time.
Quite similarly, when ads are shown intrusively or disruptively, especially when the user is in the middle of something, it can seriously alter the user experience by reducing their interest in your brand.
In-app purchase vs Ads: Comparison Overview
| Factors | In-App Purchases (IAP) | Ads/ advertisements |
|---|---|---|
| COST | Higher initial cost due to transaction complexities. | Lower initial costs but higher cost of marketing. |
| REVENUE (ROI) | IAPs account for over 42% of overall mobile earnings. | Ads bring about 14% share of the total app’s earnings. |
| AVAILABILITY | Include one-time purchases, subscriptions, and consumables like in-game currency and premium features for existing users of the app. | Ads can be shown as banners, videos, rewards, and promotional offers across a wide range of platforms such as search engines, social media, and video streaming services. |
| USER EXPERIENCE (UX) | Being value-based with no ads whatsoever, IAPs offer an enhanced user experience with higher customer retention. | Ads can disrupt the user’s flow and may induce frustration in them, especially, if they are intrusive or too much in volume. |
Conclusion:
When it comes to choosing the right app monetization strategy, both in-app and purchases and ads offer different user bases and revenue strategies. In-app purchases can offer higher revenue and improve the user experience for loyal users, while ads offer opportunities for earnings from non-payers or occasional users. Ultimately, the choice between the two depends on the app’s goals, target audience, and desired user experience. By carefully balancing these methods, app developers can create a sustainable monetization model that aligns with their app’s value proposition, ensuring long-term growth and engagement.
