Do Ads Hurt In-App Purchase Revenue In Mobile Games?

Overview

Ads can theoretically reduce IAP revenue through cannibalization, but only when implemented poorly: for example, by offering too many free rewards through rewarded ads or showing excessive interstitials that drive players to churn before making a purchase.
Research from Unity shows that adding ads to a previously IAP-only game can actually boost day-7 retention rates by 2.3% and increase the share of users making at least one in-app purchase by 1.1%.
Rewarded video ads are the most player-friendly ad format for IAP-focused games, with data showing that players who engage with rewarded ads are more likely to make in-app purchases afterward, not less.
The hybrid monetization model, combining ads and IAPs, is the standard approach for most mobile games, and smart ad implementation requires balancing reward value, ad frequency, and player segmentation to protect both revenue streams.

Can ads actually hurt in-app purchase revenue?

If there's one question that had everyone divided for years when it comes to advertising on gaming apps, it's this one.

Some believe that ads do not significantly impact in-app purchase revenue, while others think that they can actually hurt it. So, what is the truth?

This article will dive deeper into the question and discuss whether it's just a myth or a stern warning.

What Is In-App Purchase Cannibalization?

In order to answer this question, we first need to understand how mobile game advertising works.

Generally, ads are shown to users in order to generate revenue for the app publisher. This revenue can come from clicks on the ad or impressions (when the ad is shown to a user). It may even come from the installs of the advertised app.

So, how does this affect the in-app purchase revenue model?

One way ads can do this is by cannibalizing it. In-app purchase cannibalization happens when showing advertising on gaming apps decreases the amount of revenue that an app generates from in-app purchases.

This can happen if, theoretically, rewarded ads discourage players from purchasing in-game items or currency since they can get them for free through rewarded videos or other forms of rewarded ads.

Another way that ads can affect in-app purchase revenue is by reducing the number of people who see or engage with the in-app purchase prompt. This can happen if the ad takes up too much space on the screen or is placed in a position that makes it more likely to be accidentally clicked on. Either way, this may, in theory, lead to fewer people seeing or engaging with the in-app purchase prompt, affecting the revenue for the app publisher.

One more scenario in which ads can hurt IAP revenue is the one were showing too many system-initiated ads (such as interstitial ads) leads to users churning early from the game. Consequently, potential purchases from those users are lost too.

Does In-App Advertising Really Hurt In-App Purchase Revenue Model?

Publishers and developers once feared that in-app advertising on gaming apps might reduce revenues from in-app purchases.

However, rewarded ad formats can actually help publishers and developers increase their IAP revenue.

In fact, several reports have shown that players engaging with the rewards after watching a rewarded video ad makes them more likely to make an in-app purchase.

Rewarded video ads are the most common form of ads used in games with an IAP monetization strategy. These ads offer players the chance to watch a short video in order to receive a reward they’d otherwise have to buy, such as bonus coins or power-ups.

According to Meta, rewarded video ads are increasingly popular among U.S. gamers. In fact, out of 71% of hardcore mobile gamers, 41%, and 30% are OK with rewarded video in games.

The Benefits Of A Hybrid Monetization Model

Games with strong progression systems and highly competitive players can afford to base their games exclusively on in-app purchases. The rest usually rely on a combination of in-app purchases and ads, called a hybrid monetization model.

According to a study published by Unity, adding ads into a game that previously relied exclusively on the IAP monetization model can boost retention rates and IAP revenue. This also resulted in an increase of 2.3% in day-7 retention rates. Additionally, they saw a 1.1% increase in users who made at least one in-app purchase. Finally, 86% of developers who used rewarded video ads experienced an increase in in-app purchase frequency.

In the case study on "Complementing IAP With Rewarded Ads" published by Fyber, researchers found that those who engaged with ads ultimately spent more than the other participants. After interacting with rewarded ads, the cohorts with the lowest spending showed the greatest increase, spending 40-100% more on IAP.

Despite that, developers still have an uneasy relationship with advertising on gaming apps. They fear ads can affect the player experience, so deciding to start showing them ads is not something they are eager to do.

However, players are now more accepting of ads and value exchange, particularly in F2P games. In fact, they prefer ads that offer rewards, such as rewarded video ads. Additionally, according to the same Unity study linked above, 71% of players prefer ads like a game’s primary monetization model.

How to Keep The In-App Purchase Revenue Share Unharmed?

Ads that are well integrated into gameplay offer real value to the user and consider their preferences. By implementing these ads, game publishers allow users to take advantage of premium elements while having little impact on the gameplay experience.

The more familiar users become with premium in-game items and experiences, the more likely they are to look for them again, which increases the likelihood of players continuing to spend money on in-app purchases.

When Can Ads Affect In-App Purchase Revenue?

The most common type of cannibalization occurs when developers introduce rewarded ads (rewarded videos or even offerwalls) and offer too many valuable rewards, disincentivizing the players from making in-app purchases.

IAP can be a great way to monetize your app, but it's important to make sure that you're not giving away too much for free. Finding the right balance of rewards is essential to keeping your in-app economy healthy.

Too few rewards may mean users are less likely to watch ads, while too many valuable rewards could decrease IAP revenue. This is something that often requires a trial and error approach or doing A/B tests to see what works best for your app.

It is also worth considering how different types of ads will affect IAP revenue. For example, rewarded video ads are generally more effective at driving up IAP revenue than banner ads or interstitials. This is because rewarded video ads tend to be less disruptive and offer a reward. This could incentivize the player to make an in-app purchase once they've had a taste of the premium experience.

Ultimately, it is up to the developer to decide what type of ad to display and how to offer rewards. There is no one-size-fits-all solution, and what works for one app may not work for another. The best way to figure out what works best is to keep testing. That way, you can see what produces the best results for your app.

In Conclusion

While some still believe in the myth that in-app advertising may cannibalize their in-app purchases by default, most developers agree that implementing both in-app purchases and smartly placed ads can lead to higher mobile game ad revenue revenues, provided that each is tailored to the user's optimal engagement potential.

In-app purchases may be the answer if you are looking for ways to generate revenue from your mobile game. However, implementing in-app purchases can be tricky. It's important to do it in a way that doesn't disrupt the player's experience.

Are you unsure how to best implement ads into your game that already relies on in-app purchases? Our experts at GameBiz Consulting can help you develop a winning game monetization strategy. With decades of gaming industry experience and dozens of satisfied clients under our wing, we are confident we can help any developer achieve their maximum mobile games ad revenue potential.

Contact us today to learn more about how we can help you with game monetization. We offer a free initial consultation to all new clients, so you have nothing to lose!

Do Ads Hurt IAP Revenue in Mobile Games FAQ

This article examines whether in-app advertising cannibalizes in-app purchase revenue in mobile games, or whether the two can work together to grow total earnings.

Do ads hurt in-app purchase revenue in mobile games?

No, not when implemented correctly. The concern that ads cannibalize IAP revenue is largely a myth. According to a Unity study, adding ads to a game that previously relied exclusively on IAPs can actually boost retention rates and increase the share of users making in-app purchases. The key is thoughtful implementation: the wrong ad formats, poorly timed placements, or overly generous rewarded ad economies can cause harm, but a well-designed strategy protects and even grows IAP revenue.

What is in-app purchase cannibalization in mobile games?

IAP cannibalization happens when showing ads in a game decreases the revenue that game generates from in-app purchases. The most common scenario is when developers introduce rewarded ads and offer rewards that are too valuable, making players less motivated to spend money on those same items. Another scenario involves interstitial ads that cause early player churn, eliminating any future purchase opportunity from those users.

How can rewarded video ads increase IAP revenue instead of hurting it?

Rewarded video ads give players a taste of premium in-game items and experiences they would otherwise have to purchase. The more familiar players become with those premium elements, the more likely they are to seek them out again through direct purchase. Several studies, including a Fyber case study, found that players who engaged with rewarded ads ultimately spent more on in-app purchases, not less.

What types of ads are most likely to hurt IAP revenue?

Two scenarios carry the most risk. First, rewarded ads with excessively generous rewards can disincentivize purchases by letting players obtain valuable items for free. Second, too many system-initiated interstitial ads can frustrate players and cause them to churn early, cutting off any potential future purchases. Keeping interstitials infrequent and user-initiated keeps this risk low.

What is the hybrid monetization model and why do most games use it?

The hybrid monetization model combines in-app purchases and advertising in the same game. Games with strong progression systems and highly competitive audiences can rely on IAPs alone, but most titles use a hybrid approach to generate revenue from both paying and non-paying players. Research shows this model can grow total revenue and lifetime value compared to relying on a single stream.

What does the Unity study say about adding ads to an IAP game?

According to the Unity study referenced in the article, adding ads to a game that previously used only the IAP model resulted in a 2.3% increase in day-7 retention rates and a 1.1% increase in users making at least one in-app purchase. Additionally, 86% of developers who used rewarded video ads experienced an increase in in-app purchase frequency.