Hrishipedia

Free apps with in-app sales are a better way to make money than charging for apps upfront.

Today I read two very interesting blog posts:

One by Tony Wright - http://www.tonywright.com/2012/how-to-evaluate-a-paid-iphone-app-idea/

And another by Andrew Chen - http://andrewchenblog.com/2012/05/30/stop-asking-but-how-will-they-make-money/

(Aside: Both these blogs are excellent for original thought-provoking content.)

Web apps seem to have mostly missed out on the idea of in-app purchases (probably mostly because of a lack of a good in-built payments system). The standard is freemium with 1-2% conversion rates, which is considered very good. But I think web apps can still learn from mobile - go “free” and sell one-off items for purchase inside the app to active users.

Basically, you’re spreading your average user LTV over indeterminate points in the future, unlike monthly subscriptions where you are guaranteed a chunk of the LTV every month, but get only one chance to make the sale or lose it forever. With in-app sales, you can take advantage of impulse purchases, which is exactly what mobile apps do, but web apps don’t for some reason. 

Patience is the business model of the internet :-)

The other thing web apps seem to be getting wrong is pricing. People have now been trained to spend a few dollars here and there on apps. But web apps are still stuck on the $10 per month subscription model. This works for selling SaaS to businesses but not for consumers (unless you’re a Dropbox or Spotify).

As Tony pointed out in his post, in-app purchases can work out to an *average* of $5 per user per month in the best cases. Contrast this with the best case for a SaaS app like Dropbox or Evernote - the average per *paying user* is $5-$15, so the average over the whole active user-base works out to a few pennies!

Small impulse purchases can add up quickly to respectable amounts of revenue (and profit) per user.

This insight might help in reducing the one big remaining risk of consumer internet startups that Andrew points out - needing millions of users before even having a shot at making good money.

If you can make money early on, you can re-invest it for buying more traffic (just like mobile apps as Tony showed), and grow even faster.

Update: Just read this Internet trends report from Mary Meeker - http://venturebeat.com/2012/05/30/mary-meeker-internet-trends-2012/

On slide 20, she quotes some figures which suggest mobile ARPUs for Pandora and Zynga are actually much lower than desktop ARPUs. I should have noted in my post that in fact Zynga got big first by selling virtual goods in their web-based games. So web apps can actually simply look to web-based games that have successfully used in-app sales.

The overall trend of mobile apps overtaking desktop web use of course can’t be ignored, but the open web will still keep growing and stay strong for a while.