iPhone Apps Aren't iPod Songs

The post of the day comes from Andy Finnell who writes that iPhone app developers must abandon the $0.99 price that many apps are selling for these days.

Andy calculates that a developer who wants to make a living off an iPhone app (at $40k/year) must sell 196 apps per day to do that. He also calculates that at $9.99 per app, you’d need to sell 16 apps per day to do that.

But Andy’s best point is this one:

Competing with another application solely on price is a sure fire
way to go out of business. Your product should have a selling point
other than the price, whether it be more features, better usability, a
unique approach to the problem or all of the above.

There will always be students and hobbyists in the market who can
sell a competing product for way less than you. They don’t need to make
a living off the app, so they’re not trying to. This happens all the
time in the Mac market. If you charge enough for your app that you can
make living off it, then you can spend all your time improving it. With
that extra time you should be able to make a superior product to your
lower priced competitors.

People are willing to pay more for superior products. Unfortunately,
with the App Store developers haven’t given them the opportunity to do

I personally think that the best approach is to have a free and paid app with the free app being enough of a teaser that it gets the loyal users to pay up for the premium product. That is, by the way, the strategy our portfolio company Zynga is taking with their Live Poker app.

A developer would be much better off with 196 apps per day being downloaded with 180 of them free and 16 of them paid than 196 of them at $0.99 because there is no "decision cost" on the free apps.

Josh Kopelman wrote a great post on this a while back called The Penny Gap. Getting someone to pay anything is hard. Once they’ve made the decision to pay, the difference between $0.99 and $9.99 isn’t as big as many think it is.

But the bottom line in all of this is you have to build something really useful to get someone to pay for it. Free apps outsell paid apps in the iTunes store by something like a 10 to 1 ratio. And Andy is right, make something unique and useful and charge real money for it and you’ll have a better chance at making a living that way. It’s good advice.

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Comments (Archived):

  1. Chris Dodge

    Bravo Andy!I believe that any SW application that purports to provide real value should charge customers “fair market price” for it’s use. He’s right – there’s a “race to the bottom” and most of these applications are just one-off throwaways from a long term perspective. How can a real businesses price in Customer Support on a $0.99 application. Well, they can’t and – when push comes to shove – these apps will fade away.I’m not a general fan of ad-supported models because it’s basically a subsidy model and the end-user is never really tested to evaluate how much value this particular application provides. The frictionless nature of free ad-supported software – while helping rapid adoption – falsely sets low expectation, as Andy rightly points out.What *is* exciting here is that, after this initial eurphoria, things will settle down into building strong value-building applications for these next generation moble internet devices. There will always be hobbists building freeware – there always has been in the past – but sophisticated software on these devices are right around the corner. Thus things need to be priced appropriately so that operational and support structures can be formed around them.

  2. Aravind

    I agree! That’s a great idea you have presented. Personally I have been selling BrainHack – A brainwave entertainment app and was thinking of a marketing strategy. When I thought a lite free version would do the trick to send more users to the full fledged version which I could sell at a higher price than now. These users might never have otherwise heard of the app or had a chance to experience it.

  3. Dave

    Clearly Andy is trying to distort an otherwise free market for iphone apps. If someone wants to sell for 9.99 and someone else for 0.99 so be it. Let the best man win.

    1. fredwilson

      You can question his motives but I think that’s not always wise

      1. Dave

        Okay, I was a bit blunt. Still, I think it’s fair to question the motives behind claims like this that aren’t backed by factual evidence. For the mean time I’ll remain a skeptic and check back when Andy’s app it out.

  4. Danny Moon

    So the freemium model on mobile phones also? Could it be considered freemium in that you are offering the web service for free and charging for mobile access/app? I personally would rather charge a reasonable price for the mobile app rather than creating a free and paid app.

    1. fredwilson

      Managing two apps could be an issueA free web app and a paid iphone app could be a good model if the web app is popular and the iphone app is additive

      1. @colin

        This is the strategy we’re taking with our first few apps except our website isn’t quite popular yet, eek 🙂 … Nevertheless, by not gumball-pricing our premium app — I think we’ll get to where we want to be sooner rather than later… and we’ve got an experiment planned once our first premium product has been put under the buffer and shined. http://saltlicklabs.com/pro…We’ve been struggling with pricing the past few weeks as our first app sits in the approval process. Glad all of this talk is coming out now, the iphone dev forums were buzzing about Andy’s blog post too.

  5. Brett Tilford

    Pricing is always a challenge for any business. Good insight with the biggest hurdle being charging something but then after that the gap from .99 to $9.99 isn’t as big a deal as you may think. Interesting how our psyches work.

  6. daryn

    One thing to keep in mind is that there are likely monetization opportunities beyond the price of the initial app itself. Hopefully we’ll see payment processing enabled within apps, but even without that, the apps can serve as lead generation for other revenue streams.A few scenarios:A free app like shazam, where i can buy the music that i’m hearing at the moment, and they get their cut of sales.An app tied to an online service (perhaps like tumblette), where the app itself is free but only available to paying subscribers of the service. It would definitely be a strong upgrade motivation to me.An app as a differentiator for a paid product. The Sonos looks a lot more appealing to me now that I can use my iphone as a controller. (And if I had a sonos, I would probably even pay $10 for the app as well)And, again, if we can get micropayments working within app (and ideally transparently tied to the app store account), there are all sorts of in-game/in-program opportunities.The $9.99 app without a free version, just isn’t compelling to me. It takes me back to the days of boxed software, and while I agree that the penny gap is very real, especially when you know what you’re getting, I think $0.99 for a sight-unseen app is more palatable than $9.99.Perhaps it would also make sense for the app store to support limited-time free trials?

  7. kenberger

    I think it’s interesting to review the concept of PRICING SEGMENTATION, which can work well. I think the combination of Freemium and Penny Gap result in something mutated away from the concept.Today was the opening of Ramen Setagaya on St. Marks Place (East Village, nyc). I noticed the menu:http://kenberger.com/graphi…Has a bunch of lunch specials as cheap as $3.50. Gives you a chance to taste what they’ve got, though you’ll probably leave a bit hungry. They also offer more substantial dishes for $11.50 (toss in some meat, etc). Gives a wider audience a chance to dine there, and loyalists a chance to “pay up later if they like it” for advanced offerings on future visits.(I have no real point here, other than this menu made me think of this post 🙂 )

  8. rick gregory

    If anything he understates the issue. $40k per year is a pretty low salary and it’s unlikely that you can simply post an app on the store, have it immediately zoom to 196 sales per day and just sit there. Even if you can get it to that sales volume it will take time. And after awhile, it will fall off as you either saturate the market or other things come along that grab marketshare.Now think about what it would take for one app to provide a truly decent software developer compensation. Remember, your compensation isn’t just salary – there’s health insurance, business expenses etc. If you want the equivalent of an $80,000/year salary you probably need to sell $120,000 worth of applications. That’s, oh, call it 450 $0.99 apps per weekday. Ok, people will buy some apps on weekends etc so you can drop that to 325 per day if you use a 365 day per year figure. But… do you really have an application that 120,000 people will pay for? Really? Or do you have an app that 12,000 might pay for? It seems that the latter is far more likely for most applications especially if you actually create multiple apps that have aggregate sales in this range.

  9. andyswan

    What I don’t like about the app store is that they don’t allow “monthly” or subscription pricing. 99 cents would actually work out if it was .99/month, because then the developer actually has an incentive to continue improving the product and reacting to customer feedback. Get 10k paying subscribers (or 1k at $9.99/month) and you actually have a business….but getting that many NEW buyers every month, well that’s a bitch.As it stands, the app store is much better utilized on the FREE DOWNLOAD side of the store, with your $$ made on the backside via partnerships, affiliate agreements and other ad-supported models.

    1. rick gregory

      We really need to get out of the One True Model mindset. Some products work best the way you describe while others make more sense as a one-time purchase and still others might make sense when the customer pays a subscription. No single model is the best for every kind of application so let’s not try to shoehorn everything into an ad-supported model (or any other model).

      1. andyswan

        I agree. I want both. Plenty of apps like mini-games are fine as one-time pay

    2. fredwilson

      Great point andy

  10. Colin Smith

    Much as we’ve benefited from the $.99 apps, (we currently have three of the Top-10 games), I agree that this pricing structure is unsustainable. We tried to hold the line on pricing, first at $9.99 and then at $4.99… but after watching inferior apps make more money, we finally capitulated, dropped the prices, and watched our titles shoot up in sales and revenue. Great for us so far, but until someone figures out a way to get more than 10 apps in a Top-10 list, this isn’t a deep market.We had the competitive advantages Andy talks about, (our bowling game was better than the competing bowling games), but until we dropped the price, it didn’t seem to matter. Games may be more price sensitive than utility apps… but it was still awfully dramatic.The free and paid version solution is certainly workable, but its a pain. Getting the balance of what you give away just right is tricky… and frankly, after having lived in both the olde timey shareware world, the causal games space, and the XBLA ecosystem, I was hoping we could get away from living and dying with the single digit conversion rates. The “lite” versions will eventually be so useful and plentiful that a large segment of users will never buy anything at all. Especially for games, they’ll just move on to the next demo.I’d much prefer rankings based on dollar volume, so a $10 app sale is counted the same as 10 $1 app sales in the charts. And then I’m sure Apple will also improve the search features of the Store over time. It’s amazing that the App Store is only 5 months old. It feels like years!!!

  11. Shadowlayer

    the iphone app scene is not that different from the Palm dev scene from the late 90s/early 00s, the difference is that the platform (the iphone) is far more popular.It all goes down to the basic problem of the SaaS enviroment: it’s specially difficult to sell something when somebody else’s app is cheaper, and even worst when some other guy is giving it away for free.For example, making an office suite for the iphone would be an excellent idea, but there’s google docs which is free, how you compete with that?Back when the appstore went live I said this app craze looked more like a fad in part because Jobs never wanted it on the first place. Now I’ve a feeling of deja vu, because devs in other cellphone platforms have failed to meet the (similar to iPhone’s) expectations from 4-5 years ago. There’s no one to blame for this besides the end user who seem more willing to pay for junk content than apps.

  12. Banet

    Excellent post. What kills me is that Apple, which is so good at some things, is so bad at others.As Andy points out above, why is the Top 10 paid apps based on units moved, not dollars spent? (The again, do we really know what the heck it’s based on? I understand Apple’s need for secrecy in some cases, but here it’s just damned frustrating.)And why doesn’t Apple come out with a bunch of case studies on app sales and small-scale app production shops? It could be anonymized to protect the innocent, but really — wouldn’t some charts and spreadsheets help people better understand the economics and there encourage more people ro dive in? (Or… would it hurt when people realized how hard it is to do well?)Peter Steinberghttp://www.FlashlightWorthy…Recommending books so good, they’ll keep you up past your bedtime. 😉

  13. Michael

    Good point Andy. I am in the middle of developing an App so this definitely hits close to home.Great Stuff.

  14. Mike_at_Wanna_Develop_COM

    I disagree… If it’s a decent product and/or service — price doesn’t matter.Mikehttp://www.wannadevelop.com