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 8th, 2008 at 7:36 AM
You said: “Apple’s clearly able to make a profit at that price point, despite credit-card processing fees, bandwidth costs, and more-than-30% payments to the record labels.”
Actually, Apple pays the record labels 65¢ for every song sold in the iTunes Music Store. Apple gets 34¢.
March 8th, 2008 at 11:18 AM
I just hope Notational Velocity makes it to the iPhone; a simple, powerful app that has a very straightforward interface.
How does one sync data between one’s Mac and one’s iPhone?
March 8th, 2008 at 1:02 PM
As a frequent buyer of smaller apps I always go to the applications site to see previews, screenshots, an in-depth description, etc. I am sure I am not alone here and wonder how this will affect the new distribution method. Will there be any capability to provide anything of this nature? I know you can do a description and I feel that so many apps that come out really don’t have the proper advertising write-up… it is kind of sad. Anyway, off onto several tangents here. :-)
March 8th, 2008 at 2:28 PM
March 8th, 2008 at 3:06 PM
I think you’ve hit the nail on the head and I’ve got four games under development right now that fit that sweet $1.99 spot. With the success I’ve had with more than 750,000 downloads of my Widget Monkey dashboard widgets, I know there’s a huge market for simple, fun, little games (toys) and I hope to be able translate that to the App Store too. At least three Objective-C developers who have contacted me seem to think there’s a market anyway.
And that episodic idea would fit right in to one of the games … CocoaBot. Hmmm…
March 8th, 2008 at 3:20 PM
what would you pay for iAno or PocketGuitar? Even though these are already free (for jailbroken phones) I’d stump up at least a quid for each, for two reasons:
- they are fine apps, and I’d like to reward the developers with 70p at least
- I can’t be arsed to jailbreak my iPhone
cheers ta
March 8th, 2008 at 4:10 PM
@Martin — I totally understand your point about the time it takes. But this is one of those classic microeconomics trade-offs, I think it’s called the “demand curve”. The lower the price, the higher the sales; the question is, where are the profits maximized? If you can sell more than 5x as many copies at $1 than at $5, then the lower price make sense.
The answer might not be $1, and it depends on the app, but I think it’s lower than you might think. There’s a lot of psychology involved, as there are price barriers that affect people attitude toward purchasing, in a nonlinear way.
March 8th, 2008 at 4:31 PM
@Jens: If it was 10-15x the copies at $1 than $5 then it may make sense. Selling 5x the copies for $1 than I do at $5 simply means I’ve earned the same amount of money but have 5 times the support burden. Now iPhone apps should be much simpler than desktop apps by design and so require less support, but you will need to provide support for some people.
Another thing to point it out is that Apple’s current set of iPod games costs $5 (£4 for me) yet I would consider that an impulse buy price. The price for an impulse buy depends entirely on what you are selling. $1 for a song is an impulse buy, but you could also make the point of the $49 iPod shuffle being an impulse buy in terms of MP3 players.
Also remember that songs and applications are not the same. A song or album takes time to write, record and release, but after release there isn’t any extra input needed. An applications takes time to write, test and release and then requires further updates and support.
Now $1.99 is a nice price for some sorts of software but I believe the main price bracket will be in the $5-15 range.
March 8th, 2008 at 5:00 PM
Damn, now everyone will be pricing their apps low, and I won’t be able to undercut them!
Seriously though, wanted to request that you switch to a full feed, since you’re not advertising on your blog, and your new fans would appreciate being able to read the whole article in their feedreaders….
March 8th, 2008 at 9:28 PM
[…] 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”. […]
March 9th, 2008 at 3:29 AM
[…] * Als Inspiration dieses Beitrages gilt der Artikel von Jens Alfke ‘The Beauty Of 99¢ iPhone Apps‘ aus seinem Blog Thought Palace - der bereits in unseren Del.icio.us-Links entsprechend vermerkt wurde. 11 Comments, Comment or Ping […]
March 9th, 2008 at 7:57 AM
I really think the biggest thing is not that we have an iPhone SDK and that people are gonna be able to develop apps for the iPhone.
It’s way bigger than this, “bigger than the personnal computer” as John Doerr, Partner at Kleiner Perkins Caufield & Byers, said when he introduced the $100,000,000 iFund initiative.
We’re actually witnessing the birth of a whole new platform.
I’ve developed this opinion over at the hardmac.com blog, come and read it.
March 9th, 2008 at 11:05 AM
@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 9th, 2008 at 1:52 PM
[…] Jeff Alfke penned a great piece about the great potential for developers to make a decent chunk of change by offering small iPhone apps for $0.99 once the upcoming app store goes live (hat tip to John Gruber for the find). In his piece, Alfke made a great comment on the pitfalls of open source freeware that sums up my stance really well: […]
March 9th, 2008 at 2:32 PM
[…] Jeff Alfke penned a great piece about the great potential for developers to make a decent chunk of change by offering small iPhone apps for $0.99 once the upcoming app store goes live (hat tip to John Gruber for the find). In his piece, Alfke made a great comment on the pitfalls of open source freeware that sums up my stance really well: […]
March 10th, 2008 at 12:10 AM
Problem with this “live by our rule or die” approach is the fact that many apps for the Mac, we love so, because they disobeyed the HIG. And I don’t necessarily mean extreme apps like Shapeshifter, but take for example the HIG saying “don’t create your own menu bar extras. That’s reserved for the System.” We completely shrugged that off and created our own menu bar extra-apps anyway. If there was (run with me on this) an App Store for the Mac; then apps like Quicksilver and Twitterrific would have been turned down.
Apple, what happened to the “rebels, the risk-takers, the misfits” being the greatest ones of all?
Hopefully Apple will keep the iPhone Human Interface Guidelines, just that, guidelines.
March 10th, 2008 at 8:16 AM
@ Steven Fisher:
142 people buying an app is hardly unrealistic. The number of people who already have jailbroken iPhones and iPods Touch is huge - I released an update to a game of mine around twelve hours ago and it’s gotten over 23000 downloads by now. It’d take all of 0.6% of those people deciding to pay $.99 for my app for me to break even on Apple’s developer charge. Jens is right – this is a huge opportunity for small developers.
March 10th, 2008 at 11:44 AM
Remember the old Lemonade Stand game on the Apple IIs? This will all shake itself out, but it’s going to take a few tries to figure out what price will generate the volume to maximize profits. Pricing your app too low, will result in a missed opportunity…too high and you’ll just cripple sales. It will be an interesting time to watch this OS X Touch based market flesh itself out.
March 12th, 2008 at 12:34 PM
@Jens: I agree that there’s a good opportunity for small developers ;-)
@Martin: $5 does sound more reasonable for a functional entry-level app or game.
The $0.99 a song puts a full album of 10-13 songs in the price range of what a discounted CD goes for in the store, so price-wise, it’s in line with expectations. The $.99 application, however, would match up with what you would expect from the discount bin at CompUSA. And even though it might be enough to sustain a single developer working at home, it won’t pay for office space, network, and salaries once you scale up to 2-3 or more developers. So the app price is going to have to be high enough to help cover overhead and support costs.
Fully functional mid-range software, I’m going to guess will be in the $30-$50 range to help cover the cost of development and ongoing support. That also gives you room to offer discounts, volume deals, and coupon specials. If you start off at $.99, there’s not much room to go down.
As for the $100M iFund. There will be a lot of applications that will require back-end server support (surely, with a live 2.5G/WiFi connection sitting there you can’t expect every app to be standalone ;-) The iFund is probably targeted at people who need to put together a team of developers and get all that infrastructure in place. Hopefully, it won’t all go for enterprise-type apps and they’ll reserve some of the money for people doing fun projects.
March 13th, 2008 at 12:35 PM
[…] What do you think of this $0.99 and $1.99 app concept? I read an article recently on this (The Beauty Of 99¢ iPhone Apps). The good thing about $.99 apps is the potential for impulse purchases. People will not be afraid to buy an app, because, after all, $.99 is nothing. If the app were priced more expensive, potential customers would have to think about whether they really want to buy the app. With the inability to offer try-before-you-buy, it will be harder to sell a more expensive app. Of course, there are problems with $.99 apps. Firstly, it devalues your product. People will associate your product with the notion of “cheap”. I think the better option would be to price apps between $5 and $10. It is still low enough for impulse buy, but increases profit 5-fold and adds perceived value to the product. […]