Pricing strategies: How to price an iPhone app

Over the past year, many developers and marketers have asked me (in person or through our Contact-Us page) pricing questions for iPhone apps. So I’m going to write my thoughts on pricing, but a couple of caveats (relating to my personal experience) need to be kept in mind.  

Two of our four iPhone apps went on to become #1 paid apps within their categories and it is hard to say whether these apps would have hit the #1 spot if they weren’t priced at $0.99. All of our four apps are ‘civic software’ apps, but news/civic oriented apps aren’t big revenue generators. These two caveats need to be kept in mind even though the post isn’t specific to pricing principles used for our apps.

1. Capital Efficiency:  The pricing of the app is not going to be proportional to the investment made into the app(e.g. our Economy app is priced at $0.99 even though the dev-investment for the app far exceeds that of more expensive apps).  However, it is a good idea to think of the total investment required to build an app. For example, if you expect to spend 100 hours on developing a product and value your time (or your team’s time) at $100/hr, you should consider the fact that you expect to invest $10,000 to develop the product.

Keep in mind that total expenses will exceed the initial capital expenditure of $10,000. For instance, you may have expenses related to recurring server operating costs, time spent on customer support, promoting the app, creating website content etc. I haven’t set revenue targets for any of our apps, but in general, I think that is a good idea to think of the total investment/expenses and a target number for revenue/returns.

There are tens of thousands of paid apps in the app store and my estimate is that on any given day, the revenue returned by most of these apps is either zero or close to zero. This should be kept in mind when setting capital efficiency (i.e. revenue/expense) targets.

2. Value to the customer: Benefits/Value delivered to the customer should be a key pricing consideration for the app. Users may consider a crude entertainment app as worth $0.99 even though the app may have been developed very cheaply. Several top-paid apps have proved this point over the past year. Users may also consider frequently crashing apps as worth $99.99 and $89.99. This is proved by the fact that the top-revenue/grossing list has consistently included $99.99 and $89.99 apps that “crashed several times” in a New York Times review.  

In contrast, our Economy app cannot be crashed and it required a lot of dev-investment and offers great value to a segment of the market. Yet, that –in itself – wouldn’t justify increasing its price, because (for most users), the value of the expensive(but crashing) apps and the value of the crude entertainment apps is much more than the value of an app that retrieves the latest numbers for key economic indicators and draws graphs based on current and past values of economic indicators.

3. Perceived value and competition: The (customer/user) perceived value of the product may be different from the true value of the product for many reasons. If a product’s benefits aren’t apparent to the potential customer, the perceived value is going to be lesser than the real value.  

In some cases, the perceived value of the product may become higher if the app is priced at a higher price and a lower-priced product may signal lower-quality to some users (even though the product itself may be a very high-quality product)

The perceived value is also impacted by the value of competing products. As an example, last year, I had originally thought of pricing our Election app at $1.99 and there were no other election-related apps at this time.  However, by the time, our Election app was released, there were five other election-related apps at $0.99. In many ways, (as demonstrated by the fact that it became the #1 paid news app), our Election app was better than the other apps. Yet, we priced it at $0.99 because of competing products (and also partly because the October release date meant that the product would have a shorter shelf life than what it would have had with a September release date)

4. Market fit for the price: While value to the customer is a very important consideration, the price ceiling should be guided by the market fit for the price. For instance, the product may have a high economic value for a few people, but a lower value for other people. The market fit is going to be based on the perceived value among different segments of the market and how big each segment is.

5. Market segmentation and in-app-purchases: Our Economy app follows a penetration pricing strategy and the $0.99 price helped it attain high market penetration. Yet, the $0.99 price also meant that we were leaving a fair amount of money on the table with some customers, because these customers would have recognized the app as a high-value app and been willing to pay a higher price that reflected the true value of the app (for them).

One way to offset the “money on the table” problem is to create a new higher-priced version of the app with “premium” features that appeal to higher-paying customers. A second option is to use in-app-purchases for “premium” features. The v2 version of the Economy app has in-app-purchase features (one priced at $0.99 and another one priced at $1.99).

Until the v2 release (which introduced in-app-purchase, two weeks ago), I was sure that in-app-purchase was the best way to manage market segmentation. In retrospect, it looks like the in-app-purchase option may not have been the best approach, but I’ll write more about this topic in a separate post.

6. Questionable gimmicks: We wouldn’t use any of these gimmicks, but I’ve seen developers successfully use “sale price” gimmicks. A few months ago, the #1 paid app in one of the categories said that its $0.99 price was an ‘only today’ sale price. They’ve been selling at that price for several months now. Some other apps have used the “on sale today” line to advertise a $0.99 price for several months.

The “only today” line is clearly false. Though one may argue that “on sale today” is not false, it is somewhat misleading to use the line to describe an app that sells at $0.99 for several months. A more innocuous tactic has been to list a sale price of $0.99. At least one app (that was #1 in a category) used this approach, even though that app has never been sold at any other price. Overall, it does appear that the market looks favorably on these gimmicks.

7. Top Paid List versus Top Grossing List: Many developers have suggested that Apple’s Top-Paid list ranking criterion (number of purchases/downloads) encourages a race to the bottom because $0.99 apps are likely to get downloaded at a higher rate than higher priced apps and developers would price their apps at $0.99 in order to get a placement in the top-paid app list. As discussed in the App-Store-Evolution post, a few months ago, Apple introduced a new Top-Grossing list (where apps are ranked on net revenue) and this should mitigate some (though not all) concerns about the race to the bottom.

A study of the two lists shows that (on most days), around half the apps in the top 100 paid list are $0.99 apps and that less than 20% of the top 100 grossing apps are priced at $0.99.

At the moment, the highest grossing $0.99 app is ranked 20th in the top-grossing list. While 28 of the (current) top 100 grossing apps are priced at $4.99, only 15 of the top 100 grossing apps are priced at $0.99.

The $0.99 price isn’t going to be sustainable for most good-quality apps, but for some apps, it does have a couple of benefits in terms of market penetration and also in terms of increased visibility for apps that are in the top-paid lists of each category. A $1.99 price may increase the revenue of most good $0.99 apps (for example instead of 100 users willing to pay $0.99, the $1.99 price may find 65 buyers). However, the increased revenue will be accompanied by reduced volume and the reduced volume will mean a lower rank in the top-paid list. A lower rank will then lead to reduced visibility for the app and this may reduce sales further.

8. Each pricing decision is unique: We launched four apps in the first year of the app store and two of these apps (Election and Economy) went on to become the #1 paid apps in their categories. Both have always been priced at $0.99 (though the Economy app now includes premium in-app purchase features and premium features increase the price of the app). It is unclear whether these two apps would have become #1 apps if they hadn’t been priced at $0.99.

All our apps have been “civic software” apps and one of the key goals of these apps was to contribute to the civic good and provide useful information to the people. So these apps have not primarily been about maximizing revenue for the company. However, revenues are important for any business to survive and this post talks primarily about right pricing strategies that are applicable to many different types of apps.

I haven’t discussed experimenting with different prices, but pricing experiments may also be worth considering.

It is also a good idea to keep in mind that each app needs to evolve its own pricing strategy and that, not all the pricing principles (discussed in the post) are going to be applicable for every single app.

4 Responses to Pricing strategies: How to price an iPhone app

  1. Denis says:

    This is a good piece, it deserves criticism, not just praise.

    I question your assumption that increasing price increases revenue – about a year ago I have conducted a few experiments and revenue stays flat except for one-day bump you get on the day of the increase. Same holds true for decreasing prices and results were repeated by a friend of mine. All tested apps were “productivity” (my own Memengo Wallet and friend’s To-Do kind of app). Having said that, there are some valid reasons to change the price:
    1. Manage tech support / feedback channel saturation.
    2. Keep away low-quality users: the lower the price the more youtube-style one-star review you will get.
    3. Get a shot at moving into top X by volume, which may have benefits.
    4. Price movement could attract attention by themselves. There is a number of sites that are watching “sale” events and they probably have audience that reacts to the sales. Sadly there is no way to measure this.

    There are two subjects I think are wroth your further attention 1) capturing surplus value – you are already down that path and you will find a lot there 2) impact of visual design on the perception of worth. You did a thorough job at visual design in your finance app, however you have neglected to mention how conscious you are about that in your study.

    Lastly, no talk about pricing is complete without thorough discussion about the target audience of your app. I am mostly oblivious about who are my customers and that’s the most worrisome problem I face.

    • Ram says:

      Thanks for the detailed comments, Denis and thanks for sharing the results of the pricing experiments.

      My suggestion that “A $1.99 price may increase the revenue of most good $0.99 apps” was somewhat speculative and also balanced in the same paragraph when I said that an increased price will be accompanied by reduced volume and that this will further reduce sales because of the resultant reduced visibility. I’m sure that the results will be different for different types of apps. However, it is very interesting to know that revenues stayed the same in your experiments (and that of your friend). This is very good data and tempers my speculation a bit.
      I also agree with your other comments on why price changing might be a good idea.

      On your other comment, I did think a lot about the visual design of the Economy app, but I hadn’t specifically thought about it in a pricing context. However, you’re correct in suggesting that the visual design plays a big role in the “perception of worth”.

      You’re right in pointing out that pricing discussions should first talk about “the target audience”.The post talks about market segmentation to address the “money on the table” problem (which you’re referring to as surplus value), but a developer has to know who his/her customers may be before dividing the market into groups of (potential) customers (i.e. market segments).

  2. Seth says:

    Very interested to hear your comments about in-app purchase. I’m a month or so away from submitting an app and all these things are dancing in my head. A competing product that is #1 in its category is clearly inferior, yet sells at $0.99. Currently we’re planning to just release the some of the more compelling features as in-app purchase items…

    • Ram says:

      Thanks for the interest, @Seth, I’ll probably write the IAP post in January after I’ve had more time to think about it

      For now, as mentioned in the post, – in retrospect – I think that in-app-purchase was not the best approach for the Economy app. I can add that I haven’t yet found any developers who implemented IAP in paid apps and were happy about their numbers, but so far, I only know of three other developers who’ve implemented IAP in paid apps.
      Btw though I’m not ready to write the IAP blog post yet, I’ll be happy to talk more about my current thoughts if you email me.

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