How Much Should You Charge For Your iPhone App?

On September 8, 2009 Apple announced that more than two billion apps have been downloaded from the Apple App Store. There are now more than 85,000 apps available to the more than 50 million iPhone™ and iPod touch® customers worldwide, and over 125,000 developers in Apple’s iPhone Developer Program.

These are very impressive numbers as compared with other competitive mobile application stores (Blackberry, Android, Palm, etc.)

I received lots of great feedback on my last blog post on iPhone Apps, “Should You Build An iPhone App? The Data Speaks.” The post identified several critical tasks that should be done prior to finalizing a business model for your App.  I will use this post to continue that conversation, focusing on a pricing strategy for direct revenue.

First, I strongly suggest reading my previous blog post, “Should You Build An iPhone App? The Data Speaks,”   The basic suggestion is to act like an MBA student and do the appropriate homework:

• Understand your target customer and know where to find them
• Be clear if your strategy is about generating direct revenue, extending a brand/product, or capitalizing on a marketing vehicle.  Pricing strategy for this post will focus on those seeking to generate direct revenue.
• Know your competition down to a feature/function, pricing, and acquisition/retention marketing
• Determine your application’s mobile “secret sauce”
• Size your initial build, maintenance, growth, and ongoing marketing cost structure
• Identify your build and launch strategy
• Run financials in a spreadsheet and project your revenue over the next 12 to 24 months.  Having a full P&L will help you understand break even, profit margins, and ROI.  This will also allow you to test price changes and understand the impact.

Second, Look at an update on some of the iPhone App Store data (thanks to 148Apps) as of 10/1/2009:

• Total active applications available in the iPhone App Store — 84,572 (92,231 is the overall total)
• 17% of the total applications are games
• Average Apple approval time is 8.23 days (Max is 29 days)
• Average App price — $2.75
• Average game price — $1.38
• 23% of available Apps — FREE
• 44% of available Apps — $0.99
• 12% of available Apps — $1.99
• 6% of available Apps — $2.99
• 2% of available Apps — $3.99
• 4% of available Apps — $4.99, and then it goes on to splitting hairs.

Third, Let’s look at a few consistent trends:

• FREE remains the overwhelming majority of unit downloads.  Some are citing actual data that shows the ratio of free to paid downloads at 400:1.
• The most popular categories of Apps are Games (17%,) Books (14%,) Entertainment (14%,) Travel (7%,) and Education (7%.)  See the full list of categories.
• There were 6.7 million downloads per day in Q3 2009, which is a 10% increase over Q2 2009.  Clearly the data is showing increased penetration of iPhone/iTouch devices.  Plus, customers are more comfortable engaging with the Apple App store.
• App pricing pressure continues to be forced downward as price points are being established by vertical (games, etc.)  Additionally, buyers are measuring and choosing (with their wallets) Apps via category pricing.  In other words, iPhone App buyers are comparing prices for like Apps within a category.  This is similar to the “trade area” marketing concept that consumers of shoe stores (in a mall,) coffee stores, or gas stations engage with.
• App discovery (marketing) continues to become more and more challenging, putting added pressure on Apple for solutions.  The Genius service is a good start, yet not something I believe will solve the overall marketing challenge for Apple, its partners, or customers.  Although lots of folks are clamoring to get their Apps in an Apple commercial, it remains a long shot for most.  The reality for most iPhone App owners is to assume you will need to be the master of your marketing.  This starts with a great product that meets a unique need.

Last, Below are some suggested pricing strategies (assuming your objective is to generate direct revenue:)

1. The Free Trial to Paid.  This strategy usually entails allowing consumers to download/install a free version of your application that is limited by specific variables (either timing, feature set, usage levels, etc.)  This allows your customers to “try before they buy” and engage with your application in a meaningful way.  This model works well if you are a first-mover in an App category, have a trusted brand that consumer attribute value to, meet the needs of your customers by feeding their addiction to your App, or where your App becomes a tool-set they’ve incorporated into their routine.  Another valuable component to this strategy is that it provides you with an effective way to generate feedback in the form of ratings and reviews, which is critical for marketing purposes. Once the customer gets to the expiration point of their free trial, the user is required to pay and convert into a “paying” customer.  Be careful determining your actual conversion price as you need to weigh several variables (your financials < and a fair 12 to 24 month ROI>, categorical competitive pricing pressures, the opportunity to garner more $$$ from that customer over time, etc.)
2. Price Skimming.  This is a traditional pricing strategy typically used for cutting-edge, first-to-market branded products where consumers are typically waiting to get their hands on a newly-released product.  Consumers commonly have an emotional connection to the highly-desired product and are typically willing to pay steep premiums to be among the group of first users.  This concept has been successful for some iPhone Apps, including a few of the recent $90 (Navigon) and $100 (Tom Tom) GPS Apps, some product extension tool-sets (LogMeIn, Slingplayer,) and some games (Madden NFL, Golfshot.)  Choosing a specific price point is less about categorical or cost-based pricing, rather it’s about value-based pricing.  Once the product matures and more competition arrives, pricing pressure is forced downward until the market determines an equilibrium.  This concept is tough to execute against, yet can be lucrative if you your App fits the mold.
3. Low Price – High Volume.  This is a commonly used iPhone App pricing strategy where categorical competition is high.  The “non-free” price point establishes value which is critical for building credibility and a brand.  This strategy also provides a low barrier to generate feedback in the form of ratings and reviews, which is critical for marketing purposes. My suggestion is to carefully examine your category and competitive set.  Try not to start out with too low of a price point, thus allowing yourself the flexibility to test and re-test discount strategies.  You will also need to be careful and watch your financials and performance metrics so you make sure you meet your ROI and margin targets.  You will likely find (over time) that some Apps will fail under this pricing model as the low price coupled with increasing competition wont be able to substantiate the cost structure.  This strategy is commonly used when there are Apps in a series and bundling/upsells are a growth opportunity, post initial customer acquisition.  In this situation you may be able to amortize your development, marketing, and maintenance costs over multiple Apps, rather than the initial one.

Which pricing strategy is working for you?