How To Launch A Subscription-Based App Store Business
Subscriptions are awesome. Especially because they give your app that sought-after monthly recurring revenue and turn your customers into assets worth looking after.
Apple recently introduced a change in the iOS App Store emphasizing the app subscription business. In this article, we’re going to look at how to build such a subscription powerhouse. Ready?
Specifically, these are the topics and questions of this guide:
- Subscription apps – why now?
- You’ll take a closer look at Apple’s recent WWDC 2016 changes in the App Store, and its effect on indie app businesses.
- In your App Store subscription business, which metrics do you need to keep an eye on?
- How can you validate, launch and build a subscription-based app?
- What kind of apps are perfectly suitable for the Subscription Business Model?
- There will be goodies and resources!
This guide is roughly split in 4 sections: first you’ll take a look at the App Store 2.0 changes, then find out what a subscription business model exactly is, then take a look at how you can build one, and then you’ll conclude with the specific metrics you can tweak inside your App Store subscription business. It’s a extensive guide and I’m sure you can grab value from it!
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Let’s start with comparing the old App Store subscription model with the new, improved version, and see what exactly the App Store offers to help you build a subscription-based business.
App Store 2.0 and the New Subscription Model
The App Store provides a way for smartphone users to sign up for an app subscription by means of an In-App Purchase. Until recently, not all app categories were eligible for making use of these app subscription purchases and the business model was mostly reserved for magazine-like content.
Starting this fall of 2016 all app categories will be eligible to offer in-app purchases for auto-renewable subscriptions. This means your app’s users can opt-in for a subscription that’s automatically withdrawn from their account at every start of a billing cycle.
Content, Services and… Productivity Apps?
John Gruber from Daring Fireball notes that it’s fairly uncertain which kinds of apps are exactly allowed to work with subscriptions. The Apple Developer page on Subscriptions is ambiguous: it says all categories of apps are allowed to use subscriptions, but then lists Content and Services as main categories eligible for the new model. This eligibility for the most important indie category, Productivity Apps and Tools, wide open.
Quoting from the Apple Developer page (emphasis mine):
Like many freemium apps, successful auto-renewable subscription apps operate as services that are continuously supported, and often require sustained content development or feature enhancements to retain users. Whether updating content on a regular basis, providing on-demand use of a service, or giving access to a large collection of content, successful auto-renewable subscription apps are equipped to offer continued utility and enjoyment to their subscribers.
Most productivity apps, such as a calendar tool or a to-do list app, don’t exactly offer content but they give repeat access to future product update – a feature enhancement. Most indie app developers make money like this: they stay in business because they keep improving their products.
The traditional App Store didn’t offer an incentive for such a business model in the past, and the big question is if the new App Store 2.0 subscription model will allow for such use of subscriptions. Can indie app developers charge a subscription fee for ongoing access to app updates?
The New Features of App Store 2.0
The new App Store 2.0 subscription model will also introduce several new features:
- Instead of the traditional 30/70 split between Apple and the app developer, the developer will receive 85% of app revenue (minus applicable taxes) when a customer accumulates one year of paid service.
In other words, if you retain a customer for more than 12 months, after those 12 months the split between Apple and you shifts from 30/70 to 15/85. You make more, Apple makes less and rewards you for keeping the customer engaged longer.
Although the 15% fee for making use of the App Store platform is steep compared to other distribution channels, it’s a great incentive for app makers to cherish and grow the relationship with their customers.
Apps with auto-renewable subscriptions will be able to set territory-specific pricing in all App Stores. As an app maker you can differ your prices per country your app is available in. This comes in handy if you for instance sell your apps in the European Union and the new VAT MOSS cuts in your margin.
With the new rule you can set higher pricing for countries with a higher value-added tax (VAT), and lower pricing for countries with a lower tax rate. The same goes for currency fluctuations, of course.
The new model also allows you to increase your app’s subscription price for existing subscribers, notifying them in advance to ask to agree with the price increase. This can of course cost you subscribers, but it also allows for flexibility in price and service level.
You can also keep the price the same for existing subscribers, and charge new subscribers a higher price. Moreover, you can create different subscription groups with different levels of service (like Basic, Premium and Pro) and different durations. This allows for great flexibility, such as offering yearly subscribers a 10% discount over month-by-month subscribers.
Subscribers can move between levels and groups without losing access to the app and without needing to pay double fees.
On the Developer page, Apple repeatedly stresses the importance of clear communication with your subscribers. Moreover, the page expresses the importance of proper app testing to ensure the subscriptions don’t break.
Apple only offers a payment and distribution channel for apps, and emphasizes you are responsible for maintaining communication with your app’s users. This underscores the importance of creating an in-app Message Center and introducing a single-line of support and product updates through an ordinary email messaging list.
A more technical approach to subscriptions and the associated StoreKit can be read here.
Now that we’ve glanced over the changes in the App Store, let’s take a look at what a subscription-based business model exactly is…
What is a Subscription Business?
A subscription business differs from traditional businesses. The word “subscription” says it all: instead of purchasing a single app for a single price, a customer subscribes to paying a fee on a recurring basis and receives repeat value from that in-app purchase.
- You purchase a magazine subscription, and in return for a month-by-month fee you receive a physical or digital magazine every month
- You subscribe to a flat fee for services you use on a recurring basis, such as physical goods delivery with Amazon Prime or your mobile data plan.
- You use a tool or certain resources on a recurring basis, such as your email provider or social media scheduling tool. (This works especially well if you “use up” resources each month, i.e. send email or use the product infrastructure.)
The recurrence of value is key for a subscription business. It doesn’t make sense to simply turn a one-time-fee into a recurring fee, if you don’t also make the delivery of value recurring.
Just in case – what do we consider a “business”? You already know that any business provides value to its customers, but it’s important to note an extra characteristic: a business provides value for a price that makes it worthwhile to sustain doing business.
Many indie app developers don’t see the app they built as a business, which makes it incredibly hard to turn a profit in the first place, let alone build a foundational subscription-based business. It’s important to start thinking and acting like a business, as defined above.
The Benefits of the App Subscription Business Model
Building a subscription business has several benefits:
- Subscriptions build a healthy relationship between your app and its customers. Oftentimes, when a one-time purchase is complete the relationship between business and customer ends. You purchase an app and the app developer and you as a customer go your own ways. You’d perhaps rely on product support, but to the app maker that’s a cost center.
As an app developer, the cost of running a Support Team is taken out of the margin of the single app purchase, so you make less money when a customer asks for support. A subscription business, on the other hand, makes this a double-edged knife: with the repeat charge you can continously fund your support team and at the same time good support means your customer stays longer with your business.
With a single purchase you can only hope the customer comes back, with a subscription you’re virtually sure of it.
Subscriptions turn your app’s customers into assets. When you acquire a customer for your subscription app, they immediately become appreciable assets: the longer they stay, the more money your business makes.
With a single-purchase model, the lifetime value (LTV) of a customer is determined by the price of the single purchase and eventual repeat business. The lifetime value of a customer is directly tied to your business’ sales effort.
With a subscription business it’s different: the moment you acquire a customer you’ll most likely operate on a loss, but you get to recuperate that during the lifetime of the customer, ultimately turning the customer into indefinite and higher profit.
The revenue from the subscription is tied to the performance of your entire business, and not just to the front-end of it. Moreover, subscribers increase the value of your business itself by means of (semi)guaranteed revenue in the future.
Subscriber engagement in your app cuts both ways. When a customer subscribes to your business’ product they’ll want to “get their money’s worth” every time you withdraw the monthly fee from their bank account.
Instead of stepping out the door the minute the single purchase is done, this customer keeps coming back! We’ve already established that this requires the ability to deliver repeat value on your end, but what about that customer?
Every time the customer comes back to receive value, you create a touch point with your business. That opens a lot of doors! You want to improve your business, and you already have a loyal fanbase that can tell exactly when and how they want to receive value from a product upgrade.
Subscribers cause engagement and a more lively business, making the value exchange a perpetual two-way street.
Unfortunately, subscription businesses have downsides too:
- Spreading the cash you receive from a customer over its lifetime carries risk. Logically, customers are more valuable over time, but it could take some time to generate profit from a customer acquisition because you receive less cash up-front.
- A new business model comes with new metrics to get used to. Say you need to invest $ 10.000 to build your app and instead of charging a $ 60 one-time purchase, you charge $ 5 over a period of 12 months. With the one-time fee you could recoup your investment in your first month of business based on one-off sales, but with the same sales effort you’d only recoup 1/12th of your investment in the first month. The end result is the same and provided your subscription business retains those subscribers, resulting in a higher profit, although it initially appears as a loss!
What Kinds of Apps are Suitable for Subscriptions?
Different types of apps benefit from different types of business model, and not every business model is a good choice for particular app types. Which types of apps match well with the subscriber business model?
The first app category that comes to mind is a content-based app: magazines, news, courses and any kind of consumable digital content like music, video and in-game consumables. If you add value to the digital lives of your customers through content, the app subscription model is perfect for you! I’m specifically aiming at the content subscription model for one of my own apps, Growth.
The second category is of course a service-based app: cloud storage and associated resources, or online games, or even running tasks on your behalf such as social media scheduling apps. Apps that provide access to tasks and services people perform are by rule excluded from In-App Purchases (and thus, subscriptions). The big question is of course whether providing app updates, like features and bug fixes, counts as a “service” and whether its consequently excluded or included in the new App Store 2.0 subscription business model.
At this point I’d like to stress that, if you think the new subscription model isn’t for you because you want to charge for app updates, you can take a gander at your next-door neighbors the Software-as-a-Service apps. They’ve perfected the business model of charging for both service and updates.
Most professional SaaS apps I use, like Zapier and MeetEdgar, use the revenue from their subscription for both continued service as well as product updates. If you can’t use the new subscription model because you only offer product updates, it’s a great idea to find out how you can make your app consumable.
Think about cloud storage, online backups, synchronizing data between your app and its desktop web app counterpart. There are plenty more ways to make a productivity app profitable, without charging for app updates.
How Can You Launch and Build a Subscription-based App Business?
Now you know how the new subscription model works, let’s take a look at how you can benefit from it. Are you considering to launch your own app business, but are you in doubt over the best business model? This is how you’d start to build your subscription-based app…
First things first: what’s your app’s value proposition? Always make sure to validate your app business before you build it (or at least launch without spending a fortune and see what sticks). The new App Store subscription model doesn’t mean you should jump to conclusions and start coding anything that resembles an app suitable for subscriptions. Think before you build!
Fortunately it’s incredibly easy to validate most subscription businesses. Why? Unlike other types of apps, for content- and service-based apps the app itself is not the product, it’s the value it provides that is the product.
Let me clarify that. Take a look at the following examples:
- A recipe app provides access to healthy dinner recipes
- A movie recommendation app provides curated recommendations about the movies you should go see
- A curated content app (like Growth) gives access to a filtered segment of news articles
Each of these example apps can be validated without the app, because the app itself is simply a medium for value distribution. The value itself, respectively recipes, recommendations and curation, is the only thing you have to validate before you can say whether your business is viable and has potential for profit.
How would you go about validating these ideas?
- Go talk to random people shopping at your local supermarket (you could ask for permission) and see if they want to use your recipes for tonight’s dinner. Moreover, you could ask a friend to pay you $ 5 a month for sending him or her a recipe each week.
- As for movie recommendations, here’s what you do: call your friend who’s always stuck for movie ideas and ask his or her preferences (horror, action, romcoms, etc.). Before, you search for the best movies on IMDB for each category. See if your friend finds your “free trial” valuable, and sell them on your movie-recommendation-a-week subscription.
- When it comes to content, why don’t you make a list of friends interested in a particular topic – for instance, fitness workouts and exercises. Then, every week, search for a bunch of cool exercises and explain why your friends should try them. Send an email out to your list with those links, and every once in a while you ask for feedback. Is your list growing and are responses positive? Perhaps it’s then time to go pro and charge a fee for your curated content. (This is what we do for app makers, every Monday morning.)
Validating a business idea becomes increasingly difficult when the app itself provides value, and isn’t a mere medium for value. Say you’re building a social media scheduling tool like Buffer or MeetEdgar. You can’t build a “low tech” version of those tools like we did in the above list, unless you’re willing to “automate” the work by actually doing the work yourself.
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Building A Low-Tech Business With… Zapier!
Now that you’ve come up with a plan to validate your app idea, it is time to actually build the low-tech app idea. Let’s say you wanted to try out your Recipe App, how would you do that?
This is what you could do:
- Create a sales page for idea with Strikingly. It’s a free tool you can use to build web pages that gather email addresses. You need your customer’s email address to send the recipes to.
- Create a free Zapier account, which you’ll use to automate the sending of recipes to your app’s customers.
- Create two Google Sheets spreadsheets: an empty sheet for the email addresses, and a filled sheet with the recipes. Add a recipe per row, and add the ingredients, instructions, meal size and prep time to individual columns.
- Every time someone signs up for your Recipe App service, you’re going to add their email address to the first spreadsheet. This will trigger a “zap” from Zapier, which you’ll build next.
This is what the “zap”, a series of automated tasks triggered by an action, should do. The Zapier workflow is triggered when you input a new email address in the spreadsheet.
- First, when the zap triggers, you should send an email to yourself (with the Gmail action) to log that a new workflow has started executing. Just to know what’s going on.
- Second, select row 1 from the recipes spreadsheet with the Google Sheets action in Zapier. Distinguish each of the columns as properties of the recipe (i.e., meal size, instructions, etc.)
- Third, send an email to the customer (with the data from the zap trigger) that includes all the information for this recipe. They can the cook the recipe any time after they’ve received your email.
- Fourth, add a “Delay” action to your Zapier workflow of 2–7 days. After that time, you’ll add another “Select row X from Google Sheets” and “Send email with recipe to customer” action to the workflow. You can repeat as many times as necessary: send 7 recipes over the course of 7 days, or two per week, etc.
- Fifth, make sure you include an email that asks for feedback. Did they like the recipes? How much is the service worth to them?
This is of course a very simple and rudimentary implementation of a subscription-based app idea, but if you look closely you can see that it doesn’t differ much from the value of an actual app. The app is of course nicer, better designed, more tightly automated – but the value is the same!
When you’ve set up this app implementation, in a day or so, you would of course send it to anyone you know. Ask them to refer new customers to you, and see if you can go from 1 to 10 to a hundred customers. When the trial period is over, investigate which of your customers want to stay for a paid continuous service. If you have found a market for your app idea, it’s perhaps a great idea to turn your ducttape Zapier business into an actual app.
You’ve guessed it: the new App Store 2.0 subscription model is super useful in that case. Awesome, you’ve just gone from idea to basic app to actual business. Congratulations!
Note: Are you thinking about launching your own App Store business? Make sure to check out our App Launch Plan to stay on track during the launch of your very own app!
Important Metrics for the App Store Subscription Business Model
Alright, let’s wrap this guide up with some tangible metrics. You can’t build what you don’t measure.
For a subscription-based app, these metrics are the most important:
- Montly-recurring revenue (MRR) or anually-recurring revenue (ARR)
- Life-time value (LTV)
- Churn rate and growth rate
- Customer engagement (a vague term, really…)
The Pulse Of Your Business: MRR
Monthly-recurring revenue (MRR) is, as its name says, revenue that repeats itself every month.
It’s the heartbeat of a subscription-based business and it tells you exactly how much money you’re making from your subscribers every month. When you’re working with an annual subscription, it makes of course sense to work with Annually-recurring revenue (ARR).
It’s often sensible to look at your business’ performance on a year-by-year basis. In such a case you can’t simply multiply your MRR by 12, but you’d rather look at the average monthly recurring revenue for each of the months of the year.
The Backbone Of Your Business: LTV
Life-Time Value is the backbone of your business. It tells you exactly how much revenue you make from a single customer during its lifetime with your business.
Let’s say you sell an app for $ 1.99 a piece, without additional revenue from In-App Purchases. Logically, your customer’s life-time value will be just $ 1.99 because it’s all the cash you make from a customer during its time with your app business.
Another example would be an app with a subscription business model. Let’s say it gives access to dinner recipes for $ 5 per month. On average, a customer stays with the business for 9 months. The life-time value of a customer, then, is 9 x 5 = $ 45.
Churn and Growth Rate
Churn rate is simply the annual or monthly percentage of users that decides to unsubscribe from your app.
If 2% of your subscribers stop subscribing every month and you started with 1.000 subscribers, you’ll end up with ~ 857 after 3 months. (Don’t forget that percentages compound.) A reliable way to calculate churn is to count the number of customers who stopped subscribing, comparing one period against the one before it.
Your app’s growth rate is the opposite. It’s the annual or monthly percentage of users that signs up for your app’s subscription business. You see that a 5% churn rate and a 5% growth rate cancels itself out, so you’ll always aim to outrun your app’s churn rate with its growth rate.
Customer engagement is the vague term describing the continuity of customer actions in your app. You’re looking for signals of engagement from customers to measure whether they receive value of your app.
Engagement is always calculated over a fixed period, such as month-by-month, and compared against the previous period. It’s the single most important predictor of app success, because a customer that receives value from your app is a happy customer, and happy customers stay with your business longer, thus moving the needle on LTV and MRR.
Customer engagement can express itself through various means:
- The number of times a customer opened your app in a given period
- The number of page views, or UI/UX actions such as creating a to-do item, downloading a recipe or scheduling a social media update
If you want to measure customer engagement, you simply measure one of the above data points and compare them against a previous month. The resulting negative or positive percentage is the amount of people that engaged with your app.
If you would want to know a more foundational or “overall” engagement number, you can measure the percentage of users that interact with your app in a given period by comparing the number of engaged users with the total number of users your app has.
More obscure metrics such as user feedback, complaints or usage patterns can also be reliable sources of engagement metrics. Think about it: customers who complain are probably not happy with your app, but not unhappy enough to stop subscribing. Moreover, if customers only use your app on Mondays that doesn’t mean you’ve lost them on Tuesdays!
Lead and Lag Measures
It’s important to note the difference between lead and lag measures. Revenue, churn, growth and engagement are all lag measures! You can’t influence them directly, they literally “lag behind”. Unfortunately, you can’t simply turn a lever in your business and have less churn and more engagement.
Likewise, you can directly influence lag measures by means of lead measures. Sales effort, for instance, is the perfect example of a lead measure. The more marketing outreach you do, the more people sign up for your app, and that ultimately moves the needle on revenue and growth rates.
Moreover, you can survey your users for their satisfaction with your app and improve your app on points it’s lacking. This is a direct measure, and it’ll have an indirect increase in engagement as a result!
(Looking to professionalize your subscription business, or switch over? “The Automatic Customer” by John Warrilow is a great read!)
Concluding With – Are You Ready?
Are you ready to launch and build your own subscription-based App Store business? Perhaps you’re still contemplating how to validate your ideas (with Zapier!) first … or you’re getting ready to pivot your app from one-off purchase to a sustainable MRR-based business!
In any case, we’re here to help you. Got any questions? Make sure to ask them in the comments below. Want to get started with your app business idea? Get started with our guide, here.
Let’s BUILD something!
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