ABI Research has a new press release on how in-app purchases will outpace paid apps in 2012. It goes on to explain how in-app purchases on the Android market have been hampered by Google. In-app purchase were only introduced in July 2011 and only recently added 17 mostly European countries. Even paid apps aren’t available in all countries.
My personal belief is it’s best avoiding Google paid and in-app purchasing altogether. Design your app/service so that the app is always free. This way you will get maximum downloads and won’t get tied into the Android Market. For example, you might want to also distribute on the Amazon store or SlideME.
I believe the best revenue model is one where the user pays for a subscription to some server-side service. Most of the functionality needs to be on the server and the app is just a view on this data. The app should still be able work without the paid server service but the incentive should be for the user to subscribe to obtain the server side functionality or improved server side functionality. A great example of this is Evernote.
A subscription obviously brings recurring revenue. Asking the user to pay for a server side service also insulates you from from being perceived as an app with low (unsustainable) unit cost. You can charge tens of dollars (Euros or Pounds) rather than join the race to near-zero app cost.