The IAP vs Ad Revenue Debate Isn’t as Black and White as You Might Think

The mobile app industry offers plenty of good opportunities for making some serious moolah, regardless whether you’re a developer, advertiser, ad network, or a monetization platform. When trying to generate a solid and steady income from their products, app developers have several monetization methods at their disposal, with some more successful than others (hint: IAPs and ads).

More often than not, they will face a dilemma – whether to focus on IAPs or ads as the main method of monetization. But the question is, do they have to choose at all? While some statistics are strongly in favor of the latter, especially in terms of revenue, things aren’t that simple. Let’s clear out the basics out of the way first and see how exactly these methods pay off:


Using IAPs to monetize apps

In-app purchases refer to all the virtual and tangible items a user can buy within an app and pay for it with real money, and in some cases even cryptocurrencies. Such things usually include some sort of in-app currency, additional characters and boosters in a game, upgrades, customizations, extra lives, more chances to play, or app merchandise like plush toys.

This monetization method is popular among users and publishers alike as it makes things more interesting, increasing engagement and enabling longer sessions. Users are also more likely to return to an app in which they have already purchased content.

Using ads to monetize apps

Advertising is a monetization method that is taking over IAPs both in terms of revenue and popularity growth. A developer who wants to monetize their app in this way can partner up with an ad network. It will then connect the developer with an advertiser who wants to place their ads in the said app and complete the process of ad placement. This way, the app also becomes an advertising platform, profitable to all involved parties.

There are multiple types of ads that you can employ inside your app – rewarded videos, banners, interstitials, push notifications, playable ads, offerwalls… Of these, rewarded videos stand out in their appeal, leading on the users’ popularity scoreboard. 

Users love them and click on them more often than on other kinds of apps because they know they’ll get something in return. Also, advertisers get more impressions, and publishers get more profit from advertisers. It’s a win-win situation for all.

Ads vs IAPs in numbers

As I said, the popularity and revenue of mobile ads has skyrocketed in the past few years, slowly but surely taking the throne away from IAPs. A research from 2018 found that ads are responsible for more than 50% of revenue across multiple categories, especially in the hyper-casual genre – the addictive, quick games with basic mechanics. This particular genre heavily relies on ads as the main, if not sole, source of income. In fact, at least 70% of the revenue in hyper-casual games is driven by ads.

That said, the report I’m citing has observed quite the opposite in midcore & strategy genre, where 70% of all revenue is still generated by in-app purchases. However, ad revenue is showing growth in this genre as well, increasing from 26% in June 2018, to 30% in November that same year.


Ads + IAP = more revenue

Although ads have started to generate more revenue than IAPs in some apps, they are still widely underused in apps that have traditionally relied on purchases. The main reason is the fear of ads cannibalizing IAP revenue. But this couldn’t be farther from the truth. 

When combined, contextually relevant advertising and IAPs can result in the perfect monetization mix. This was observed by Rovio, the Finnish video game developer studio which found that players who regularly watched ads and installed other related games not only had higher retention rates, but they also spent more money on IAPs.

A real success story combining these two methods comes from a Chinese developer which started implementing rewarded ads in some of its apps, while at the same time maintaining its IAPs. The result? One of its mobile games saw a 40% increase in ARPU, an 18% increase in IAP revenue, and a 20% increase in session length. They have employed the same strategy ever since.

Finding the perfect balance

In order to make the strategic decision in the right amount of IAPs and ads, we need to go back to the basics – think about the genre, the mechanics, and what works best for the specific type of app and in what quantity.

Incorporating rewarded ads is a great idea as long as you don’t overdo it. You don’t want your audience to only watch videos without any chance to spend anything, do you? Lots of apps put a limit on how many rewarded videos can be watched in a specific period. If the user wants to continue playing, they should be able to purchase additional chances.


Learn what your users prefer

If you’re still struggling with balancing the two, you might get a solution soon enough. According to Entrepreneur’s Saurabh Bhatia, the need to employ these two highly lucrative monetization models harmoniously will result in consolidation where companies providing ads will also start offering in-app purchases (and the other way around). “This will allow developers to unify revenue management and get a single, in-depth insight on each user to maximize monetization effectively,” he writes.

In terms of revenue, things need to be observed from several different points of view. The situation varies not only depending on the genre but also on the geographical location, the platform used.

For instance, statistically, Apple users are in the higher income group, so they’re more likely to purchase items inside your app as well as pay for apps in general.

Another highly valuable category are the so-called whales, a small group of users that is responsible for generating the most revenue in apps, be it ads or in-app purchases. Soomla can help you not only segment the users into groups, but also discover these elusive whales and adjust your monetization strategies accordingly, showing ads to their lookalikes.

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