The Costs and Benefits of Taking Payments Outside the App Store
I don’t talk about this too much on the site (separation of work and hobby), but I happen to work in the payments industry and the has proven to be both helpful and a cause of madness this past week.
It’s been helpful because I not only know a lot about payments, subscription management, and merchant behavior and desires, but I freaking design the tools merchants use to do these things. I work on tools that allow everyone from big box retailers to airlines to one-person shops collect payment data safely and easily. These tools are used billions of times per year to enable merchants to run their business.
Today I wanted to take that knowledge and consider one element of the current conversation about In-App Purchases in the App Store: fees. What is the cost, both in terms of cash and business requirements, to selling though Apple’s IAP or through your own payments.
I can’t get into specific fees since those are going to vary a bit from merchant to merchant, and even transaction to transaction , but we can talk about generalities here. Let’s use Hey (Basecamp) as an example.
Basecamp is charging $99 per year for their service, Hey. Currently they have you sign up on their site and pay them directly. I’m not sure what payments provider they’re using, so I’ll talk generalities for this bit.
In general, merchants will pay a flat fee per transaction, as well as a percentage of each transaction to the payment platform. Again, not knowing Basecamp’s provider, it would not be unreasonable to estimate they pay 10¢ per transaction, plus 3%. That might be a little high or low, but it’s likely in the ballpark for them.
That means on every $99 sale they make, $3.07 would go to fees for that transaction. If they added the App Store’s IAP, then they would be paying $29.70 in fees per transaction. You can see why Basecamp would be unhappy to make that trade.
Of course, this savings has a cost of its own in that Basecamp needs to maintain these subscriptions and make sure billing runs correctly and they need to invest in a good customer onboarding. But even with that, they are still coming out way ahead.
It’s possible Hey is making a decent margin on each customer and they could eat those costs and still turn a profit, but that’s certainly not going to be the case for all companies. Those companies will either need to eat the costs and offer IAP as well, which is bad for the mechant, or they raise their cost to customer by 30% to make sure they still turn a profit, which is bad for the customer.
There are benefits to handling payments for yourself too. Refunds, something that are notoriously difficult on the App Store (aka the developer can’t give you one, Apple needs to do it) are simple if you control the payments flow. Let your support team issue them, give them to customers technically ineligible because you think it’s the right thing to do, offer your refunded customers get a coupon in case they ever decide to come back after you’ve refunded them. These are good for both the merchant and the customer.
Handling payments also gives you a closer relationship with your customers. You can manage them in your existing CRM and reporting. You can more easily track churn and understand your business better.
It’s also worth saying that most iPhone users are not all in on Apple. The average iPhone user uses a Windows PC. While this conversation on Twitter is happening mostly between people with Apple everything, the fact is that we’re a smaller slice of the pie. What if I signed up for Hey on Windows and then got the iPhone app? Or what if I use Android today, signed up for some services, and then switched to the iPhone? As a customer, I’d be incensed if I needed to close my accounts and recreate them in Apple’s system. I would reasonably expect to be able to just sign into that account on my new shiny iPhone. I can do this today, but the suggestion by some that IAP should be used for everything would make this impossible.
Alternatively, what if a customer wants to trade in their iPhone for a Galaxy phone? Now they need to cancel all their subscriptions in the App Store and recreate them on their new device. Why should I need to cancel my email account for a third party company in the App Store if I want to use that on a new platform? Correct me if I'm wrong here, but as far as I can tell, there is no way to manage my IAP subscriptions to third parties without an iOS device. That's a bad user experience, and while it makes you more likely to stick with Apple because no one wants to deal with that, it's not the right way to retain customers.
Finally, there is the possibility for a merchant to be even better than Apple at working with their customers. They may give more helpful subscription renewal notices. They may give incentives to lower customer fees in some cases. They may have a better onboarding on more platforms than Apple has created (although Apple’s is pretty solid). They can innovate in ways that Apple hasn’t even thought of yet!
This isn't an argument for or against Apple changing its policy on in-app purchases, nor does this address anything with monopolies or anti-trust regulations. This is just an attempt to give some more context to the conversation and help people understand why some merchants would prefer to use their own system for payments. I hope to have another article out soon that explains the modern methods of accepting credit card information and how it's both more secure and easier to implement than you might expect if you haven't been paying close attention in recent years.