Premium Pricing and Back Seat Driving
Posted on October 27, 2015
A friend of mine, Curtis Herbert, has been writing a series of articles (1, 2, 3) he calls Slopes Diaries about the development and pricing of version 2 of his app Slopes. Although I’ve found Slopes Diaries to be interesting, and while I agree with a lot of what he’s written, a few things that he wrote in his most recent installment of the series struck me as wrong.
Curtis begins Slopes Diaries #3 by quoting himself from Slopes Diaries #1, “Lesson learned: Charge more. Then double it.” He then continues:
After that lesson you might expect I’d announce I’ll be raising my price to $49.99 with v2.
I’m going free up front with Slopes 2.
Why would Curtis make Slopes free after earlier citing “charge more” as one of his lessons learned? He gives three reasons in his post:
- The first reason, he refers to as “The Acquisition Barrier”: “One of the biggest barriers to entry for someone to try my app is having a price on it.”
- The second reason, he refers to as “The Churn Barrier”: “Eventually, I’m going to saturate the market of people willing to pay up front for my app.”
- And the third reason, he refers to as the “The Survival Barrier”: “Here’s the thing: if I want any kind of serious chance to grow this into a business and do more for my users I need to find a way to charge more. My current price of $7.99 would be considered by many a premium price point, but even at that I have practically no money for user acquisition through advertising or customer support.”
While I completely agree with his third reason—he does need to increase his revenue per user if he wants to grow his business—his first two reasons for going free are almost certainly wrong. But he’s not the only one that believes them. I’ve seen these same justifications trotted out by other independent developers as well, so I want to take a moment to refute them.
The Acquisition Barrier
Let’s start with the first reason, “The Acquisition Barrier.” Curtis claims that an up-front price is the biggest barrier to entry for his app. I don’t think it is.
According to the SnowSports Industries America (a snow sports trade association), there are an estimated 13,000,000 adults in the United States who ski or snowboard in 2015.1 According to the Pew Research Center, 64% of American adults own a smartphone.2 According to Forbes, the iPhone accounts for 36.5% of smartphones in the U.S.3 Multiply those together and you end up with an estimate of the number of adult skiers in the United States who own an iPhone: Over 3,000,000.
Compare that figure with Slopes sales last year. According to Curtis, Slopes had about $10,000 in sales last year.4 Since Slopes sells for $7.99, that means Slopes sold about 1,250 copies last year.
It’s clear that Slopes has a lot of fans, but there is a lot of room for growth. Slopes’ 1,250 sales last year mean that it has penetrated only four ten-thousandths of the addressable market. There are millions of adult skiers in the U.S. that haven’t purchased, and have probably never even heard of, Slopes. This leads me to believe that up-front pricing is not, in fact, Slopes biggest barrier to entry. Customer awareness is.
The Churn Barrier
Now let’s talk about Curtis’ second reason for going free, “The Churn Barrier,” in which he fears that he will eventually saturate his market of customers. While I concede that is mathematically inevitable, I don’t think that’s the issue Curtis should be most concerned about at this point. Slopes sold 1,250 copies last year. At that rate it would take 2,400 years to saturate his addressable market. Even if Slopes experienced 10x growth next year and started selling 12,500 copies per year, it would still take 240 years for Slopes to saturate its addressable market. Simply put, even if Slopes experiences a sharp uptick in sales, its developer will be dead and in the ground before market saturation becomes an issue.
The Survival Barrier
What I find most interesting about Slopes Diaries #3 is that Curtis’ third reason for going free, “The Survival Barrier,” gives tacit acknowledgement to the fact that the root problem of Slopes’ sustainability is not in fact the two reasons that are explicitly stated, but rather that Slopes can’t effectively reach its target market to acquire new customers.
Inability to reach the target market is a real problem and one that many indies, myself included, struggle with. Charging even a relatively high price (by App Store standards) of $7.99 ($5.60 after Apple’s cut) doesn’t make it worthwhile to advertise, market, and generally do the things that need to be done in order to attract customers. The cost of customer acquisition is simply too high compared to the revenue per user.
The solution to this, as Curtis acknowledges, is to increase the average revenue per user. There are many ways to do this, and Curtis has apparently chosen to go with some variation on a freemium or subscription model. Those can certainly work (I use them myself) and it very well might be the best solution for Slopes, but I’d like to close with a look at a strategy that Curtis acknowledged, but dismissed: paid up-front premium pricing.
Charge More. Then Double It.
In Slopes Diaries #3, Curtis quickly considers increasing his paid up-front price, but just as quickly dismisses it:
I know the value of my app: at the end of the day Slopes is considered entertainment. Fairly so as I’m not making my users money with it. If I raised my price to say $50 to increase my revenue per user I’d lose so many sales that I’d have less revenue coming in monthly.
I’m not so sure. Curtis knows his customers better than I do, but I think the $50 price point he mentioned is interesting, at least, as a thought experiment.
First let’s consider the feasibility of a $50 price point. Skiing is an expensive hobby. Doubly so for those serious about it. Skiers have to pay for transportation, lift tickets, equipment, special clothing and more. But the fact that they’re skiing is proof that they’re willing and able to pay those costs. Skiers are a self-selected affluent market.
According to SnowSports Industries America, skiers spent over $4.5 billion5 on clothing, equipment, and accessories last year. That’s a lot of money. I bet there’s a lot of people who would consider $50 to be a reasonable investment to permanently document their day skiing and have tangible evidence of their bragging rights.
So now let’s imagine how re-styling Slopes as an app for “prosumer” skiers at a $50 price point might change Slopes’ business model. Most obviously, with no other changes, Curtis could almost certainly expect fewer sales. But as long as sales were more than one one-sixth their previous level, Slopes would still be making more money than at the lower level. But who says that nothing else must change? At $50 per download ($35 after Apple’s cut), that gives much more room for user acquisition. How might Curtis make use of that extra revenue per user? Google ads? Facebook ads? Podcast ads? Physical signage at ski resorts? Ads in ski-related newsletters? All of these seem like real possibilities when each sale brings in at least $35 in revenue.
Charging a higher price could provide a solution to the biggest problem that Slopes (and most indie apps) face—customer awareness. It could give Curtis a way to reach a larger, more valuable audience, and help him overcome the “survival barrier” that he identified.
To be clear, I don’t take issue with Curtis’ stated intention to take Slopes free with version 2. I have no insight into his business, or his plans. It very well might be that going free with Slopes (presumably with some sort of in-app purchase or subscription), is the best course of action. What I do take issue with are his stated reasons for going free. I take issue with them not to belittle Curtis or his app Slopes (it’s a well made app that’s functional and stylish), but rather to hopefully counter some misguided business thinking that seems to be common among indie developers.
I wish Curtis nothing but the best of luck with Slopes. I hope he find success, and is able to find a market that is willing to pay for the clear value that he’s providing. If you’re a skier and you’ve read this all the way to the end, you might consider supporting a fellow indie by buying his app.