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Given this uncertain revenue generation,
Apple recently announced the release of a new
App Store Subscription Model, coming in the fall
of 2016, which incentivizes companies with long- term customers. Earlier, only apps in the music
and entertainment categories were allowed to o er subscriptions; with this change, apps across all categories will now be able to o er auto-renew- able subscriptions. Currently, if an app developer sells an app, subscription, or other product to a user through the App Store or Google Play, Apple or Google get 30% of the revenue. With this new structure, Apple will lower its commission on one condition: if an app can retain a subscriber for over a year, the commission will be reduced to 15%. If the user cancels the subscription, there is a 60 day grace period to win back the customer. Google
has followed suit with an identical revenue model for its Android platform subscription apps. It is important to note that Google and Apple control 94% of the mobile/tablet operating system industry (Netmarketshare, 2016); as such the addition of app subscriptions stands to have a large impact on the industry.
is new structure will convert non-contractual customers to contractual ones, which addresses one of the most important challenges marketers face when deciding who to call a “customer.” A com- bination of o ers and incentives, duration of the incentives, and the reasons for leaving can guide the win-back strategy (Kumar et al., 2015). If a customer who has been using the app regularly for a long time with higher pro t contribution leaves, then the app developer should o er a higher value subscription deal to him/her than to a customer with low usage or low duration.
Why should apps switch to a subscription model?
e end goal for any company is to be pro t- able for a longer duration, and pro table customer loyalty is one of the means to achieve that objective (Reinartz & Kumar, 2002). A major advantage of the subscription model is that loyalty and pro t- ability accrue simultaneously, compared to IAP where the revenue or pro t is unpredictable and
additional e orts are needed to build pro tability. Moving to a subscription-based model enables a stable revenue ow. Companies could then predict their short-term revenue in a more accurate way since there are less uctuations in revenue, which results in better liquidity management. Moreover, additional cost of product for a new subscriber is much lower in a digital context compared to tan- gible goods, which also contributes to increasing the company’s pro ts. Lastly, as mentioned earlier, Apple and Google are incentivizing app developers with a lower commission cut of 15% versus 30% to retain app customers for over a year. A part of this foregone commission could be shared with the ten- ured customers, or could be used for both customer acquisition and retention, or could simply contrib- ute to company pro ts.
Industry-related statistics also support our argument. In 2011, paid apps accounted for about 85.8% of the global revenue, while it is expected that it will be 37.8% by 2017. IAP, which had only about 8.6% global revenue share of the app indus- try in 2011, are expected to rise to 48.2% by 2017 (Statista, 2016c). Given that there aren’t enough incentives for paid-app developers to constantly improve the bene ts of the already paid service, such apps typically do not release additional con- tent or updates. Hence, the switching behavior of app preferences shows how consumers are leaning towards apps that are more content-driven and engaging. An example of this is additional content that can be acquired through IAP. Since subscrip- tions were not widely available, it has not been taken into account in these descriptive statistics. However, we expect a similar tradeo between IAP and subscriptions, because subscriptions have even richer content and sustained quality, which would explain why industry leaders Apple and Google have decided to shi towards it.
rationale behind the Subscription Model
From a consumer standpoint, aler (1980) illustrates an example of a man developing a tennis elbow soon a er paying the membership fee, yet continues to play in pain to avoid the bad feeling
DisrUPtioN & iNNoVatioN
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