Are app store subscription models right for your app

While advertising and in-app purchases are the methods of monetization app marketers are probably most familiar with, subscription-based models may be the most overlooked. But subscriptions offer publishers benefits like a predictable, long-term revenue stream, and higher average revenue per user (ARPU) versus ads or IAPs. Subscriptions can also be deeply engaging for users by creating a tidal draw of sorts that keeps them coming back.

Unfortunately, while there is a lot of content published on how to utilize IAP and ads, there’s a relative dearth of information on best practices around subscriptions. That’s surprising given App Store subscription revenue crossed $2.7 Billion in 2016, up 74% year over year. Key to this growth was Apple lowering its cut of subscription revenue to 15% after 12 months - half the normal rate - and finally allowing subscriptions for games. Unsurprisingly, subscription-based models are becoming more prevalent in several app categories.

Netflix, the #1 grossing app in Q2 2017, is the most obvious example in media and entertainment but there are also a number of dating (Match, eHarmony), health (Endomondo, FitStar, Map My Fitness), and business utility apps (Evernote, Trello, Slack) that are finding success with a subscription model.

With a bit of context on the psychology behind them, here’s a deeper look at the potential benefits of subscription based models, and some advice for determining if they are a viable option for your app.

Subscriptions = SaaS

In the beginning, there were TV and movies, and audiences happily sat through a few advertisements in exchange for enjoying some inexpensive entertainment. That’s the still ‘give it away’ school of thought for app monetization - just create something a large volume of people will like, then monetize by dropping non-invasive ads into the experience.

The IAP method is more like traditional commerce in a retail mail - come on in, everyone is welcome, and, if you like, you can buy something once you’re here that will enhance your overall experience.

Subscription-based app monetization models are akin to modern Software as a Service (SaaS) models. Maybe you get a free trial for a month or two, but users eventually have to pay to continue using the service. Venture capitalists, CFOs and shareholders love SaaS and subscription models because they manage a lot of risk out of business plans. Subscription-based revenue is also more sustainable for app publishers, a point eloquently made by Vlad Savov on The Verge

“As iOS matures into Apple’s foremost and best operating system... it’s spurring the development of correspondingly more sophisticated apps. It’s that new software, most of which doesn’t even exist yet, that stands to benefit most from being able to charge for its ongoing development via subscriptions.”

To incentivise users towards subscription models, developers often borrow the SaaS trick of offering discounted rates for longer-term commitments, e.g. a 25% discount for committing to a 12 month deal versus a month-to-month arrangement. This translates to highly desirable predictable income, a bump in user LTV, and, more importantly, offers users something they deeply value: choice.

This is a very different approach than monetizing via ads (which can be targeted or personalized by the publisher or advertiser, or IAPs (which offer choice and bits of value, but do so on a fractional, incremental basis), as compared to subscriptions, which ask for commitment just once or only sporadically.

Subscriptions provide a winning formula

In addition to long term revenue streams and higher LTV, subscription-based monetization models for apps also create deeper engagements.

For example, Tinder, a stalwart of the subscription model, added a second Gold Tier and became the top grossing app on the App Store.

Consumer psychology is predicated on the idea that once we pay for something, we want to continue to get value from it. So, once a user has committed to a subscription, they are more inclined to return to your app on a routine basis, increasing retention, thereby decreasing the total cost of acquiring and keeping a user.

The aforementioned bump in average revenue per user (ARPU) is also a considerable benefit to employing subscription-based monetization models. Understood simply as the user’s total spend in a given period of time, ARPU in apps that use subscription based models is 2x to 3x more than in ad-supported models, and 50% higher than in IAP models.

It’s a Smule world, after all

Smule has a small family of apps for iOS and Android app that lets users create, discover, and enjoy each other’s music. Founded in 2008, today Smule boasts 50 million Monthly Average Users and more than 20 million new songs created every day.

Following the ‘freemium’ model, Smule offers a free version of its apps to users but offers an ad-free subscription upgrade on either a monthly or annual basis, with the annual option providing a 50% discount.

Smule is unique in the subscription-based app realm in that it breaks from the traditional media streaming models of Netflix and Hulu, and the utilitarian B2B value propositions of Trello and Slack, to use what is essentially user-generated content (UGC) to create value and engage their users. Smule is also unique in the fact that they are a hybrid game and music application. While the subscription model is popular with console gamers with Xbox Live and Sony’s PlayStation Plus, Smule is one of a handful of mobile games that leverages the power of subscriptions.

New opportunities for mobile game devs to employ old tactics

The massive success of World of Tanks Blitz and Teenage Mutant Ninja Turtles: Legends demonstrates the efficacy of subscription models for standalone games, particularly in the case of hardcore gamers who see value in an ‘all you can play’ pricing model.

Making its way to market is another form of subscription-based pricing that works on the platform models developed by Xbox Live and The PlayStation Plus, which charge a set monthly or quarterly fee in exchange for free games and feature unlocks, such as online multiplayer options. With subscription pricing models more apparent than ever in the iOS 11 App Store and on Google Play, it’s easy to speculate that ‘bundled’ downloads of multiple games may be one option on the horizon.

This could be an appealing strategy for publishers with multiple titles seeking to cross-promote their offerings, but the business mechanics will be decidedly more complex for subscription bundles comprised of games from different studios.

Is subscription the right monetization model for your app?

If your app’s core value proposition is offering the user continuous access to some form of content that is routinely updated, then a subscription-based revenue model may be right for you. In general, subscription-based models tend to work best for companies that use mobile apps as an extension of their brand experience, like Dropbox and Adobe, rather than as a standalone offering.

Another indicator that your app may be well-suited to a subscription model can be found by studying your on-going costs to support and update it. If these costs are high, and you find yourself struggling to find a one-time price point palatable to your target user, the subscription model is likely worth investigating.

Newsstand apps are a natural fit for subscriptions too, as they are specialized content vendors, such as apps offering access to children’s books or sports programming that’s difficult to access elsewhere.

Subscriptions that auto-renew are suitable for apps with large libraries of content that is regularly updated, with the value proposition of auto-renew for users goes up or down proportionately with the relative ‘freshness’ of content.

Non-renewing subscriptions are applicable in fewer cases, the most common being to provide access to content of static proportion, or in other words, a library of fixed size that will not be updated. Something like a video library of Olympic events that don’t otherwise make broadcast provides a decent example here.

While non-renewing subscriptions offer a limited window of opportunity for app publishers, they can be appealing to cohorts of users reticent to commit to longer-term arrangements.

Keep in mind that subscription models can be easily combined with other monetization models, like IAPs, by offering one-off upgrades on top of core app experience. For example, a financial accounting app with a subscription model offers an annual financial reporting IAP to small business owners that coincides with tax season.

Conclusion

As the number of apps continues to rise, and the marketing gap between top publishers, small studios, and independent developers continue to grow, it is essential to explore alternate means of monetization.

The subscription model, when supported by a steady stream of fresh content and feature functionality, can provide financial stability for app publishers in any category, as well as a deeply satisfying experience for users.

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