Down and To the Right By Design

If you’re looking for market feedback on the value of applications, here it is. Using updated data to take a look a pricing trends confirms what I think everyone already knows. Each month, the average price of apps on the store just declines. For example, have a look at the average price of applications (excluding medical applications, whose high prices skew the results).

An average application price that was once nearly $4 has fallen to nearly $2.25. It’s too early to tell, but it certainly doesn’t look like we’ve hit bottom yet, either.

Games

If you look at games, the downward trend is much more dramatic, but prices appear to have stabilized at just under 2 bucks an application. This, of course, begs the question- games are the most popular application in the store, is this because they’re cheap? Or is this really the best we can hope for- that the most popular category of applications on the store is perceived as being worth about $1.50 an application?

Health and Fitness

Health and Fitness is one of the few categories that appears to be reversing this trend. After an initial price drop, this category has seen average prices rise nearly every month, now approaching $3 an application. And it does make sense- after all health and fitness applications are likely to impact your life much more significantly than a game.

 

Why Are Prices Headed Down?

Why the downward trend overall? There are a lot of factors.

1. Buyers of consumer mobile applications were already used to paying $5-7 for applications. This set a relatively low ceiling for applications targeted at consumers (who are the main buyer of iPhones).
2. The inability to trial software means that users have to take a risk that they don’t like the software. This risk has to be priced into the software, reducing the price that can be charged.
3. The large number of relatively simplistic and useless applications on the store increase the perceived risk when purchasing software. This increased risk of disappointment forces prices down further.
4. Of course for many applications (lighters, flashlights, geiger counters) there are large number of substitute goods. This drives prices down. (And while we’re on the subject, do these developers call each other in the morning and decide which sort of annoying application they’re going to build today? How is it that 5 geiger counter applications manage to show up on the same day?!)

There is No End in Site

But the real problem here isn’t that customers like cheap applications. It’s that the way the store is structured today is creating a vicious circle of downward spiraling prices. As pricing pressure forces applications to be less expensive, developers need to respond by reducing their investment in the applications (to make them profitable). This in turn reduces the value of the applications, continuing to increase price pressure. Without some kind of change, I’m not sure where the pricing stops.

A couple of suggestions

1. Let developers get recurring revenue by charging for upgrades or selling subscriptions. This breaks the cycle by allowing developers to profit from further investment, leaving initial prices low, but increasing revenue from satisfied users who continue to use the application.
2. Grow the user base fast enough that some companies can be profitable even selling something for $.99. Of course, when the price pressure forces the price below $.99, then what?

Or maybe, this is by design. After all, Apple stands to make 30% of the total app sales, and they don’t need to applications to be expensive. In fact, when you consider that they make money on the app transaction, but also that each new application adds value to the iPhone platform, more apps (even if they’re cheap) is probably better for Apple.

Comments

[sfmitch]

Total revenue, rather than price per unit, seems to be a much more important metric.

If an App is selling for $0.99 and sells 200,000 copies then $138,600 goes to App developer. That's a lot of money. Obviously, selling 100,00 yields $69,300 while selling 50,000 yields $34,650.

What exactly is the problem? How much do developers envision making on an App?

With 15 million (give or take a few million) iPhones in the wild with millions more coming (I have heard estimates of over 40 million iPhones to be sold in 2009), there really is an opportunity to make it up in volume.

As a consumer (rather than a developer), I love the direction of the pricing in the App Store. I don't imagine many Apps that would be worth more than $5 (OK maybe up to $10). I will impulsively buy an App for a few bucks if it looks interesting or gets a good review / recommendation.

[Charles Teague]

First, I think you're absolutely right that from a consumer perspective the trend is great, so long as the quality of the applications doesn't deteriorate (I mean quality very broadly). The risk is, of course, that at some point it isn't actually profitable to make sophisticated or high quality applications for the iPhone, and so none get made. Cheaper is better as long as the suppliers can stay in business. In this case, the suppliers can definitely stay in business, they just may be supplying things which are worth .99, and that might be a little disappointing.

The impulsive purchase and price cap you suggest is incredibly consistent with my own behavior. Make the app cost 20 bucks or 5 bucks a month, and maybe I don't pull the trigger on it. And this may be the factor that ultimately wins the day. I hope that developers can make it up on volume...

[Ben Frueh]

Apple's revenue model is good for Apple. Many developers are creating apps with the belief that Apple will provide the new revenue models you mention. I hope it's still true, but I'm increasingly doubtful.

If you're a developer and selling your software is your only revenue option, you should be able to charge more than the cost of a tin of chew.

[Ben Frueh]

Apple's revenue model is good for Apple. Many developers are creating apps with the belief that Apple will provide the new revenue models you mention. I hope it's still true, but I'm increasingly doubtful.

If you're a developer and selling your software is your only revenue option, you should be able to charge more than the cost of a tin of chew.

[Nathan D]

Is the average price dropping for non-free apps? That is, these numbers COULD reflect a growing pool of free applications, or did you already exclude those?

Did you look at a histogram of price ranges over time?

[Charles Teague]

I did exclude free apps for just this reason.

I didn't look at a histogram over time, though thats a good idea. Ben Lorica at O'Reilly did this- here's his view of the trend:

http://radar.oreilly.com/iphone18.jpg

-c