Sustainable Pricing in the App Store
Posted on October 22, 2012
The subject of App Store pricing has popped up on my radar a lot recently, and I’m a bit surprised since I thought that debate had been long-since settled. After all, prices quickly dropped after the launch of the iPhone App Store, and it’s been downhill ever since. Today, anything above 99¢ is regarded by many to be a "premium price," as so-called "freemium" pricing is becoming the norm in many categories.
I started hearing again about app pricing when Joe Cieplinski (@jcieplinski) gave his presentation titled "Avoiding the Race to the Bottom" at 360iDev. Then Twitter lit up last week with chatter about Michael Jurewitz’s (@Jury) well-received Çingleton talk in which he reportedly advised developers to double their prices if doing so would cost them less than half their user base. Most recently,
First, I think there’s a growing awareness on the part of developers of how hard it is to build a business on the back of 99¢ downloads. In his 360iDev presentation, Cieplinski displayed a graph of estimated App Store revenue among all developers. The graph was exponential, but in this case the long tail was really long. Only a small fraction of developers were in "viable business" territory. This is corroborated by a survey conducted last year that found that the median annual revenue for game developers is under three thousand dollars. Cieplinski’s point, and I think it’s a good one, was that you’re unlikely to build a long-term business on 70¢ of revenue per customer (99¢ less Apple’s 30%) without some really attractive in-app purchase or outside venture capital. (And as the joke goes, if you take VC, now you have two problems.) Instead, Cieplinski suggested that developers should charge a higher, more sustainable, price in order to reach their revenue goals over the long-term.
For example, let’s consider an app developer who has a $100,000 annual revenue target. To reach that target with an app priced at 99¢, he would need 142,857 purchases per year, or 391 downloads every single day. For most, getting almost 400 paid downloads day after day is unlikely, to say the least. But if he raises the price to $9.99, he would only needs 39 downloads per day to reach his target. If he raises his price to $14.99, he’d only needs 26. These are much more reasonable numbers for most developers considering the typical advertising budget. But will people pay these prices in the App Store? That brings me to my second point….
Many people made a really big deal out of the $19.99 price point that Tapbots recently chose for the Mac version of their incredibly popular Twitter client, Tweetbot. Some claimed it was way overpriced and labeled it a ripoff or worse. Tapbots’ pricing strategy was quickly proven, though, as Tweetbot for Mac climbed the Top Grossing charts. The success that Tweetbot enjoyed, despite being expensive by App Store standards, demonstrates that a lot of customers will pay more for a quality product than is usually asked. It also suggests a corollary: A lot of developers are leaving a lot of money on the table by undercharging for their software.
When I tweeted a similar sentiment a few days ago, some challenged me claiming that Tweetbot was a special case. They maintained that Tweetbot’s success at a sustainable price was possible only because of Twitter’s policies which introduced an artificial scarcity into the market. While it’s true that Twitter’s user- and developer-hostile policies have caused an artificial scarcity, to dismiss Tweetbot’s success as unique and unrepeatable is to ignore a fundamental underlying fact: A lot of people paid a lot more than is customary for that app. Tweetbot is proof positive that many people will pay sustainable prices. The question is, under what circumstances is that true?
Tweetbot’s success suggests that many of us have had the psychology of the App Store customer dead wrong. It’s not that App Store customers are price sensitive, it’s that they’re risk averse. Under the circumstances, their aversion to risk makes a lot of sense: They’re being asked to shell out their hard-earned money for an app that they haven’t tried before, and for which it’s hard to get a refund. Add in the fact that many of these customers have been burned before when they bought one of the thousands of garbage apps out there, and it’s easy to see why they would be resistant to paying a sustainable price for an app, sight unseen. Tapbots’ gold plated reputation for quality goes a long way towards reducing the risk that a customer associates with the purchase of Tweetbot for Mac, and I believe that’s why they succeeded at a higher, more sustainable, price than is ordinary.
When you look around the App Store, there are actually several companies that are prospering through the use of sustainable pricing. Instapaper has prospered despite being more expensive than its competitors. Cultured Code and AgileBits both have their apps priced at or above $9.99 and have thrived in the App Store. More than any other company, The Omni Group has made it their standard practice to choose and stick with sustainable prices for all their apps. But it’s not just productivity and business apps that can do well with sustainable pricing. Utilities like App Cubby’s Launch Center Pro, educational software like Vito Technology’s Star Walk, and even games like Sword & Sworcery have all done well with higher prices than the norm for their respective categories. The one thing that they all have in common is a reputation for quality and long-term value. This reputation has given their customers confidence in their purchase and allowed the companies to charge more for their products.
So how can the successes that these companies have had with sustainable pricing be duplicated by other developers who don’t (yet) have a similar reputation? The trick, I believe, is to do everything you can to reduce the perceived risk that potential customers associate with purchasing your app. Some things are obvious. Start with a quality app that does its job well. Have a really nice website – maybe even pay a designer to replace all your crappy programmer graphics. Have a beautiful app to show off in your App Store screenshots. Maybe put a video on your website showing your app in use. Other things aren’t quite as obvious. Have excellent customer support and make sure that that excellent support is highly visible. Place prominent support links in your app and on your web page. Also, use a self-hosted message board or a third-party solution like Get Satisfaction for support. This allows customers to receive self-service help, but it also shows off your excellent service to potential customers and lets them know that they won’t be left high and dry should something go wrong after their purchase. In general, anything you can do to impress upon the potential customer that you are legit and that they won’t be swindled will make it more likely that those potential customers will pay more for your app.
I can already hear your objection and yes, you’re right, these types of marketing activities won’t catch the attention of all potential customers. A lot of people who shop the App Store won’t do any research before purchasing, and won’t see the effort you’ve put forth. But if you’re charging a sustainable price, that’s ok. The sales you’re going to lose due to having a higher price are, quite frankly, customers that you didn’t want anyway. The customers you’re going to lose are the support headaches and those who leave a one star review for trivial reasons. By charging a sustainable price, you’ll be left with customers who have taken the time to educate themselves about your product, and who are motivated to seek support rather than leave a bad review. And because you will have charged a sustainable price, you’ll more than make up the difference from those lost sales through your increased per unit revenue.
So am I suggesting that every app should be priced at $9.99? No, certainly not. Every App Store category is a different market, and every app has different competitive forces at work upon it. A "sustainable price" is going to mean something different for every app. But, as Jurewitz suggested in his Çingleton presentation, I bet most apps could safely double their price. I bet most 99¢ apps would generate more revenue priced at $1.99, just as I bet most $3.99 apps would make more if priced at $7.99.
Messing with your product’s pricing is scary, I know. Our businesses rely on steady revenue, and whenever we raise our prices there’s a fear that we’ll price ourselves out of the market. The recent success that Tweetbot has had at a higher price point should serve as a wake up call to all of us, though, and embolden us to take a hard look at our own pricing strategy. Perhaps now is the time to start pricing for long-term success.