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How to Decide Between In-App Purchases and External Payment Gateways?

By Nick Epson on December 8, 2020

When the goal of your app is to sell products or services, it’s important to understand what options are available to collect payment – generally speaking, you have in-app purchases (IAP) at your disposal as well as third-party payment processing systems. Both Google and Apple offer platforms that enable users to pay with their associated accounts, streamlining the payment processing on the user end. Too, systems like Stripe and other payment processors can be used, but only in certain circumstances.

A challenge that many companies struggle with is determining which to use as there are scenarios when you simply have to use IAP. Here, we’ll explain in-app purchases then walkthrough different selling situations, indicating which option to select.

What is IAP and how does it work?

Both Apple and Google include a payment gateway feature that’s accessible to developers – and often required – to collect payment when selling an app through the App Store or Google Play as well as when selling certain digital products and services through an app. These systems for in-app purchases are intrinsic features that tether to an account associated with a device that developers can easily and securely call on when payment is required.

For iOS, users are required to either set up or use an existing Apple ID which serves as the primary account for the device. For Android, users typically use their primary email or are offered to set up a Gmail account. Once an account is properly registered to a device, users can input payment information either directly in the device’s app store or through a native payment processing system like G Pay or Apple Pay which inherently link to a device’s respective store.

On the developer end, apps can call on these payment gateways using StoreKit for Apple or the Billing API fog Google when a user is required to make a purchase. However, it only needs to be used in certain scenarios as not everything that’s sold through an app has to use this payment method.

When to use in-app purchases and when to use other payment processing systems

Understanding when you need to use IAP or IAS (in-app subscriptions) is important – while it’s convenient and secure, it does have its drawbacks as both Google and Apple collect a 30% fee for anything sold using this method when business revenue is over a million and 15% for those making less. Not only are apps themselves subject to this fee, anytime you use this method you’ll be hit with this same fee.

Both Apple and Google provide thorough documentation on how to implement this feature in addition to scenarios where you’re required to use IAP. To make it easy, we’ve plugged this information into an easily digestible chart that shows a handful of general selling scenarios.

 

Scenario IAP / IAS External Payment Processor
Unlocking an app feature
Upgrading an app to premium
Selling in-app currencies
Offering an app-related subscription 
Selling a physical good
Selling a subscription to something physical (e.g. food delivery, printed magazine, etc.)
Selling a streaming subscription

 

As you can see, you’re limited to using in-app purchases when selling anything that relates to a function performed by or in the app. For example, if you offer your app as a freemium model with limited features alongside a paid premium version, unlocking the latter will require payment through IAP. Anything sold in an app like add-ons for a game or currency that’s spent in the app will also need to use IAP.

Selling physical goods, as a rule of thumb, should rely on an external payment solution like Stripe, CardConnect, Clover, or Braintree (to name a few) to handle the process. For example, if your business sells furniture, you’ll want to use a third-party payment system to collect from your customers. When selling subscriptions, you’re limited to using IAP when a subscription is related to something the app specifically does, but if it’s something like Blue Apron or Netflix, then you can (and probably should) opt for an external payment processor.

One thing to point out is that streaming services and their respective apps can be a little different as they’re treated as “readers” for outside content subscriptions. In the case of Netflix, it’s a digital subscription but it spans multiple platforms so it’s not subject to rules that would mandate using IAP.

For more information on how to best monetize your app, please visit our blogs 5 Ways to Increase Mobile App Revenue and 5 Upselling Secrets to Increase Mobile App Revenue.

Blue Label Labs builds profitable apps 

We capture the essence of your business in the platforms we build – our designs intend to captivate audiences and drive your business toward its goals. Blue Label Labs understands the rules and best practices for implementing payment processing functions that allow our customers to monetize their efforts. Feel free to reach out to us to learn more about how to monetize your app through in-app purchases and beyond.

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