The Beauty Of 99¢ iPhone Apps
After digesting yesterday’s iPhone announcements [with fava beans and a nice Chianti] I started thinking about the pricing models made possible by the “Application Store”. In particular,
How cheap can an iPhone app be?
I think the answer’s clear. The Application Store will obviously be based on the iTunes store, whose bread-and-butter is a product, the AAC audio file, that sells for … 99¢. Apple’s clearly able to make a profit at that price point, despite credit-card processing fees, bandwidth costs, and comparable payments [Updated. Thanks, Dru!] to the record labels. So I see no reason they wouldn’t allow a developer to price an application that low.
But why would a developer want to sell an application for a net 70¢?
Micropayments
Because at such a low price, with a one-click store a couple of taps away, it becomes an impulse purchase. It’s a form of micropayment, an idea that’s been talked about for years but hasn’t widely taken off due to the practical difficulties of collecting very small payments. The few areas where micropayments (albeit larger than the canonical 1/10¢ originally proposed) have worked include the iTunes store, and the downloadable-game stores for the Xbox and Wii.
And let’s not forget the most amazing example of what people will pay for if you make it convenient enough: ringtones. The practice of charging suckers $2 for a 30-second snippet of a song they already have, is a multi-billion-dollar industry.
h2. Do the math
Obviously we are not going to get Quicken or Spore or Excel at a $1 price point. But for a small app from an indie developer, I think it’s quite reasonable. There are a lot of good free programs (I’ve written a few myself.) In some cases these are free for ideological reasons, either open source or just “giving back” to the community. In a lot of cases, though, I think they’re free just because it’s just too much work to set up the e-commerce infrastructure, or because the developer thinks no one would bother to pay just a few bucks.
But if the product is on an Apple-hosted store, right there on the iPhone, billed directly to your credit card with a single tap, then more people will bother. Especially if there’s no other way to get the app — buy-before-you-try may be a turn-off at higher prices, but I think people will do it for a $1 or $2 app, especially if they can read positive customer reviews right there on the purchase screen.
So assume you spent some evenings and weekends writing a cool little utility or game. You submit it to the App Store and set the price at $1.43. You get $1 of pure, unadulterated profit from every user of the app. No bandwidth costs, no fees to PayPal or Kagi, no postage, no packaging, no extortionate demands by distributors and retailers to get shelf space. And note I said “from every user” — it’s not just from the one or two percent of users who actually bother to pay shareware fees.
I think that’s a pretty good proposition. By the time the App Store goes live, Steve promises us there will be ten million iPhones in the world. If a one percent of them impulse-purchase your $1.43 app, that’s $100,000. You could live off that. Even if it’s only a tenth of a percent (one in a thousand), you make $10,000 off your little hobby and can buy some nice toys for yourself (and for your significant other, as compensation for the time you spent ignoring them.)
[Updated, 8 March: Fixed my math. Oops. Really, I do know how to multiply…]
(I predict some readers will think I’m disparaging free software, or will see it as a Bad Thing that there’ll be less free software. But I’m not, and it’s not. Obviously open source software will be free, in both senses, and anyone who wants can publish freeware. But a lot of freeware gets abandoned by its developers, because the developers are just doing it for fun and run out of time or energy. That’s sad. And I think a moderate infusion of cash can definitely help alleviate those problems. As a customer, I’d be very happy to know that my dollar was helping to keep the developer totally enthused about adding new features and fixing my pet-peeve bugs.)
Revenue streams
Then there’s the matter of software updates. The app store will take care of them for you. Presumably, you just submit the new and improved version of the app, and all of your users get the offer to upgrade. I see no reason this wouldn’t work for paid upgrades as well as free ones. And if the upgrade is cheap, and if you’ve done your job well and most of the customers like your app, then Ka-ching! That’s another $100,000 (or $10,000, or whatever).
It’s an interesting model for games, too — you can add value by adding more content. Maybe the first version of your $1.43 platform game only has five levels. So after you release it you get to work designing another ten levels, then release version 2 for $2.86. Everyone who finished the game and wants more, will buy the update. (Especially if you gave the game a good plot, but sadistically interrupted it halfway through.) The game industry calls this “episodic content”.
The Big Conclusion!
I don’t have one. I’m just thinking out loud, and posting it here because I haven’t seen anyone else raise these possibilities yet. Someone else start thinking about this! We have three months to figure out where we want to set our prices…
March 7th, 2008 at 4:20 PM
I’ll be waiting for the first $6.66 app.
March 7th, 2008 at 4:24 PM
LPs cost $6.66 at Tower Records, when I first started buying music.
March 7th, 2008 at 5:31 PM
The App Store sounds like a much bigger and better opportunity than the one presented by Facebook to developers. FB developers have to develop their own infrastructure amongst other things. The iPhone numbers is definitely an easy ripe for the picking. Now I gotta come up with an app concept. Ka-ching!
March 7th, 2008 at 5:39 PM
Saying that there are “no fees to PayPal or Kagi” is a bit disingenuous given that these fees are replaced by fees to Apple. I don’t object to Apple’s cut, but it’s not as though this kind of fee is eliminated— in fact, it goes up.
March 7th, 2008 at 5:47 PM
Totally agree with you. Micro-apps with micro-cost and economies of scale is a heckuva value proposition for all. Developers that can keep it simple while offering value beyond a nominal price point (like a buck) will see economies of scale drive their roi to new levels. It gives a similar level of access to an organized group as the Facebook API but creates a simple way of earning returns that is both risk free for consumers and rewarding to developers. In short, this might be the cleanest alternative to ad supported software.
March 7th, 2008 at 5:52 PM
There are a couple of little things you’ve got wrong in your post. By all accounts that I’ve read, I don’t think Apple’s making a profit (or perhaps barely a profit) from 99¢ songs. They’re making their money from iPod sales.
Second, Xbox Live sales is not “micropayment”. You have to buy a minimum number of Points (I forget if it’s $5 or $10).
Otherwise, great post.
March 7th, 2008 at 5:55 PM
I think the $99 developer fee makes a $0.99 price point a little unrealistic. That means selling 142 copies just to break even on Apple’s fees, completely ignoring development and support costs. (And is the $99 per year or for all time?)
March 7th, 2008 at 5:55 PM
I will buy any (max.) $1.99 app which sounds interesting to me and has acceptable reviews. Even if I’d deinstall it after some hours/days/weeks again.
The only problem with $.99/$1.99 apps is that soon there might be way too many apps and everything might look like sourceforge. Ajungle of apps.
March 7th, 2008 at 6:32 PM
Jens, please don’t give up your day job just yet. Unfortunately your calculations are off by a factor of 10. If you could sell your $1.43 software to 0.1 % of 10 million iPhones owners that would be just $10,000 for you, not $100,000 as you suggested and 0.01 % would be just $1,000, not $10,000.
March 7th, 2008 at 6:43 PM
@Tom Harrington:
Saying “it goes up” is hard to quantify — with Apple hosting and marketing it for you also, and presenting it to every iPhone and iPod Touch user out there, the relative fee is almost guaranteed to be much, much lower. The fee percentage is higher than Paypal’s or Kagi’s, but it’s more than compensated by the exposure and removal of hosting costs, which — as Facebook’s Apps have shown — tend to become rather sizable for very successful apps.
@vlad:
What makes you think Apple makes no money at all on the iTunes Store? See for instance, Gruber’s Keynote Roundup of this year’s Macworld for some notes on that.
@Steven Fisher:
And 142 copies is supposed to be a scary high amount? When there’s already somewhere around 6 million iPhone and iPod Touch users (if not more) out there right now, more so by the time this becomes available to them?
@franky:
One key difference between Sourceforge and the Apps Store is that there is no barrier to entry for the former, but a $99 barrier (a year or one-time, not sure) for the latter. Plus, Apple will be approving apps for the Apps Store, so I can’t imagine that it’ll become quite the jungle that Sourceforge is.
March 7th, 2008 at 6:52 PM
@kurafire,
A once in a life time (as things seem to be, I think it would have been specified/updated already if it were once/year) $99 fee is peanuts for a developer, even if ‘sourceforge alike’. 3 Apps at .99 would only have to be purchased 45 times each to cover that cost (btw, wasn’t the cost to host an application at sourceforge $35/year not that long ago and still there was a jungle).
Also, Apple only mentioned they would block malicious/pr0n/aso applications. Nowhere was written they would control applications on quality/UI (it would not be a smart business move if they did, many times the best application is not the most popular one)
March 7th, 2008 at 7:05 PM
@franky,
Sure, it’s peanuts, but it’s a significant step up compared to nothing at all. Also, $35/year for hosting, if that was static, is nothing compared to hosting on your own and potentially seeing your hosting costs skyrocket to hundreds if not thousands of dollars a month.
On the whole, though, I just don’t think the comparison with Sourceforge will hold once this all goes live. The two have very different (developer) communities and, more importantly, audiences.
March 7th, 2008 at 7:42 PM
@franky
Yes, actually, in the usage agreement you will find this:
3.3.5 Applications must comply with the Human Interface Guidelines and other Documentation provided by Apple.
Sad thing, because this will leave out anyones app that does not adhere to their HIG. No matter how much energy, knowledge and time have been put into development of a superb UI concept. If it is not according to Apple’s book it is not okay.
March 7th, 2008 at 8:50 PM
…Jens already gave up his day job! And we’re all excited to see what he comes up with, whether it’s for .1% or 1% of the market…
March 8th, 2008 at 3:15 AM
I find the $99 fee sort of discourages writing (only) free apps. I would be reluctant to pay $99 to be able to share an app I wrote, for free. (I suppose if you need to pay $99 to be able to sign it and install it yourself, too, that changes things.)
So to set a really low price, a couple of cents, could make it almost-free and still hope to break even (or better).
March 8th, 2008 at 4:02 AM
For a quick app you made in 2 days I could understand charging ¢99 or $1.99. I believe the main price bracket for applications will be $5-15. Maybe they won’t be impulse buys but they’ll generate quite a bit more profit per sale. I’d expect the ¢99-$1.99 bracket to be filled with “Yet another text editor” or “Yet another basic notes app”.
March 8th, 2008 at 4:34 AM
I think setting some financial barriers for a) distributing an app and b) using an app will weed out the lower quality me-toos with no added value and will focus talent and effort on real quality applications.
I don’t get the iFund though, J Doerr mentioned Amazon and Google as examples, but it doesn’t seem likely any iPhone-focused company will require similar investments in infrastructure. I think successful iPhone apps will come from a couple of talented guys with laptops with no real need for VC money.
March 8th, 2008 at 4:41 AM
@Martin: $15? No way. Problem with iPhone apps is they can only offer core functionality. They’ll only perform one function well. With screen size, memory limits, and the HIG emphasising simplicty, you simply couldn’t “complex” it up to justify $15.
(The exception being games, of course.)
March 8th, 2008 at 4:54 AM
@Matthew R: I didn’t say it needs to be complex. If someone spends weeks on a piece of software then they’re going to want to sell it for a decent price. Sometimes making something simple for the user can require more work from the programmer. I’ve just spent 3 months implementing a feature in one of my applications that is actually quite complex but all the user has to do is click a checkbox, enter in some login details and then do not a whole lot else, it just works.
March 8th, 2008 at 7:06 AM
[…] Applicazioni per iPhone a 99 centesimi: un’ipotesi Jump to Comments The Beauty Of 99¢ iPhone Apps — Thought Palace: Jens Alfke, programmatore da poco indipendentedopo aver lavorato svariati anni in Apple, ha un’intuizione interessante. App Store, la struttura che Apple metterà in piedi per permettere la vendita e diffusione autorizzata di applicazioni di terze parti per l’iPhone, darà la possibilità agli sviluppatori di poter vendere il proprio software anche a prezzi molto bassi senza apparenti svantaggi e sfruttando il modello dell’iTunes Store, in cui il singolo brano costa 99 centesimi. […] Ma perché uno sviluppatore vorrebbe vendere un’applicazione al costo di 70 centesimi netti? […]