The Best Pricing Strategies for in App-Purchases

If you thought that implementing in-app purchases is a nightmare, you are entirely right. The whole setup process on iOS and Android is horrible, but in-app purchases are too fantastic to ignore. Nearly two-thirds of all apps in the Apple App Store are making money with in-app purchases. App developers can offer a part of apps for free while holding other functionalities behind paywalls. In-app purchases let users test the basic functionalities of an app without needing to spend any money. If users want to experience more, they can unlock extra stuff via in-app purchases. Magic! That is why the freemium model has been so widely adopted in the last years.

Since you are still reading, the chances are very high that you already implemented in-app purchases. Which also means that you decided on a price. Congratulations, you overcome not one but two hurdles! How did you come up with your in-app purchase prices?

Pricing is a complex process that is even more difficult than implementing in-app purchases. Pricing is one of the most important factors when it comes to users' buying decisions. A high price can be bad for business, but a low price could be harmful as well! You do not want to minimize the chances of a user buying your product, do you?

To find the sweet spot price, you need to find out how your customers value your product, which takes time. You may need to do many customer interviews, implement feedback mechanisms in your app, and conduct A/B tests. In other words, you might want to implement a kind of market research process.

This article focuses on the most common pricing strategies and explains which trends have the most potential.

Competition based pricing

In this strategy, you price your in-app purchases based on the prices of your competitors. This solution seems to be most apparent but can be the worst option possible. This strategy not only puts you in a direct pricing competition but also states that your product is something very similar. Your app is, of course, something different and better, right? So why would your in-app product cost the same? The price is also not oriented on how your customers value you. Instead, you put your complete trust in how your competition has evaluated its prices.

Undercut your competition

Since you know that competition-based pricing is not always a good idea, you might think that undercutting your competition must be the best solution. You could simply charge one US dollar less. Where would be the harm in that, right? Well, sure this one dollar might be an argument to use your product over the other, but it also could make you look cheap. Price has always been an indicator of quality. Your product is not less quality than your competition, isn't it? It could be even worse if your competition notices what you did and lowers their price! You both would be fighting over who can go the lowest, and that is not sustainable at all.

Market research based pricing

As in so many decision-making processes, data is always a good idea and might be very helpful. Knowing what your customer thinks and how he values your product or services might be worth gold. With the gathered feedback, you may learn what to advertise better and who your customer is at his core. Since you now have all the knowledge, you can set better prices. Easy, right?

Market research sounds very good, but let's step back for a minute. It is not something you should do just one time only. As environments change over time, your knowledge becomes obsolete. Good marked research is a continuous process, which can become really cost-intensive. Nevertheless, conducting market research is an excellent way to go, especially for setting an initial price in the start market.

Price testing

A lower-cost method for doing excessive market research is rolling out A/B tests. A/B test enables you to test different prices against each other at the same time. You could compare the overall performance and then choose a winner after a certain amount of time, and once your statistical relevance is good enough. Once complete, you may need to test the winning price against a new, untested price. A continuous process begins.

It's one thing to roll out a series of A/B tests, but another to support the different in-app purchases on your backend and app side. A/B testing is great in finding an attractive price for your overall consumers, but what about customer segmentation? Without dynamic pricing, we might lose many opportunities to sell our product or service. For optimal performance, you should treat markets differently. Not all your customers value your product the same. One price simply doesn't fit all!"

A/B testing also comes with many problems you need to solve. How do you set up A/B tests, split the test subjects into groups, and interpret the results? When is a test meaningful enough to end it statistically? Setting up A/B tests for in-app purchases is still a tremendous task that requires much time, effort, and knowledge.

Automatic dynamic price optimization

Since maintaining A/B tests in 170+ app store countries for different in-app purchase price points over several months is a huge pain and can't be the go-to strategy, we created Mage.

Mage enables you to quickly implement a continuous price testing, setting, and optimization service for your app in just hours. You do not need to spend months of development time. Mage gathers information about your customers' price sensitivity in every app store through an SDK, which is available for iOS, Android and React-Native. Mage's Recommendation Engine calculates better prices that you can accept or reject with one click in our dashboard. Under the hood, Mage uses the concept of dynamic pricing. Accepted prices go live to your customers without the need to ship another app update.

Mage eliminates the need to hire a data science team and make considerable changes in your app or backend. Mage is completely automized, continuously improves, and brings customer segmentation benefits, which we covered in the previous blog post. The best thing: Mage is available for free for small Apps!