iBokan - iPhone App Development

1.0  THE PRICE vs POPULARITY DILEMMA

Launched on 10 July 2008 with 500 third party applications available for download, the iTunes App Store has been open for business to the public and developers alike for ten months. Today, the App Store holds over 45,000 applications, enjoys over $1 million in downloads on a daily basis with more than 1 billion downloads in total to date.

This rapid rate of expansion has brought with it both significant challenges and opportunities for developers hoping to capitalize on the growing demand for iPhone applications. The question of “how much should I sell my application for?” is faced by hundreds if not thousands of developers on a daily basis.

In what is very much a Catch-22 scenario, developers face the issue of selling their application for less than its worth in the hope of making up in quantity sold, or selling at perceived market value with possibly fewer sales and the added risk of not making the ranking lists that play such a critical role in the commercial success of applications on the iTunes App store. 

Finding a middle ground between price and demand (and popularity) that recovers costs and generates profit, whilst not stifling sales is a key factor that requires careful consideration by any developer prior to bringing their application to market.

2.0  LIMITING FACTORS OF THE ITUNES APP STORE

Despite rapid growth and development since its launch ten months ago, the iTunes App Store, and the market for iPhone applications is still in its infancy. From the perspective of developers looking to develop a pricing strategy, the App Store as a platform still has numerous limiting factors built into it in its current form in terms of access to:

2.1 Access to data and information

From a market research point of view, knowing which applications are popular for what reasons is crucial towards determining product positioning and pricing within the market. The App Store itself does not provide any detailed data that could be used for this purpose.

2.2 Search tools and sorting
The search and sorting functions within the App Store are sufficiently limiting to impede any serious attempt at conducting market research. The sorting criteria of time and popularity require applications to be very popular when first released in order to remain competitive or drop in ranking and get lost in the building stockpile of applications on offer.

2.3 Rankings and features
The only official indicators provided by the App Store of application popularity is the “Top 100” ranked applications (Top 100 Paid Apps and Top 100 Free Apps) and the number of reviews an application has received. Rankings are based on the number of downloads, not revenue, in a rolling average system. Unofficially, the number of reviews an application has received is another relative indicator of popularity (and downloads). In addition, the App Store displays featured applications under different banners of “What’s Hot”, “Staff Favorites”, and “New and Noteworthy”. These features skew popularity rankings significantly making objective quantitative analysis difficult.

 2.4 “Race for the Bottom”
The absence of an effective and targeted search tool combined with a ranking system based solely on the number of downloads and iTunes’ ever changing algorithms has spawned a “race for the bottom”. This trend cannot be ignored in the process of developing marketing and pricing strategies, and means that determining a price on the basis of the merit of the application or resources invested impossible.

 
3.0 A QUANTITATIVE OVERVIEW

A snapshot of the Top 100 iTunes applications on any given day provides perhaps the most significant insight into the current trends shaping the market for iPhone applications. The dynamism of the market means however that these snapshots have a limited window of viability in terms of the information they provide. Tracking the Top 100 over an extended period of time could potentially provide further indication about the direction of the popularity and pricing trends of iPhone applications. 

Of the iTunes App Store top 100 paid applications on 21 May 2009, 46% were priced at $0.99, 13% at $1.99, 14% at 2.99 and 27% at more than $2.99. This highlights the very strong negative correlation between price and popularity, the number of downloads, and earning potential. 

Again, it needs to be stressed that the outcomes of any quantitative analysis conducted on the data that is accessible from the Apple iTunes store should be considered only indicative at best, and not conclusive in terms what type of applications are likely to succeed at which price entry points. 

4.0  A QUALITATIVE APPROACH TO PRICING

Recognizing the limitations of performing quantitative analysis due to the lack of applicable data provided by the iTunes Apps Store, approaching the issue of price determination from a qualitative and comparative standpoint provides the most relevant basis for making an informed pricing decision.

Taking a closer look at the pricing strategies of competitors offering similar applications, operating within the same categories and targeting the same audience is always a good place to start in the process of developing an appropriate pricing strategy for iPhone applications.

Many of the Top 100 Apps are listed at a certain price “for a limited time”. Promotional pricing arguably generates exposure, increasing downloads and more customer reviews. Sacrificing margin in the early stages by choosing a low price entry point appears to reap rewards in the longer term.

There are other factors that contribute to the long term popularity of applications. Category selection is indirectly related to price setting and can have a significant impact on the exposure and traffic new applications receive. Listing in more popular categories such as games and entertainment translates into high exposure over a short period of time before applications get buried by newer releases, while listing in less popular categories leads to lower exposure over a longer period of time. Certain categories (”Games” in particular) often have applications listed at higher prices. Price distribution within categories should be kept into consideration in the process of category selection. 

5.0 PRICING STRATEGY OPTIONS

5.1 Basic pricing strategy options

NEUTRAL: Commit to a set price at fair market value ($X.XX).

SKIMMING: Set the initial price higher to increase profit margin on each download (higher than $X.XX).

PENETRATION: Set the initial price low to attract more customers and compensate for lower profit margin through increased sales volume ($0.99).
 
5.2 Recommendations
Based on the research conducted (and experience), adopting a PENETRATION pricing strategy starting at a promotional price of $0.99 (from a nominal price of $X.XX) for the initial release of applications yields the highest returns both in the long and short term.

There are four main advantages to this approach:

5.2.1 Maximize accessibility
Setting the price at the lowest entry level and at the lowest possible commitment cost to potential customers will encourage more consumers to purchase and download the application.

5.2.2 Maximize exposure
Greater accessibility leads to more downloads and more reviews. Reviews increase product desirability and increase the chances of placement on the Top Paid Apps rankings.

5.2.3 Higher rankings
Ranking highly is crucial to maintaining high sales numbers in the longer term. Appearing in any of the top ranking lists, in either the Top 100 lists or within categories, could make the difference between success and having your application fade into anonymity.

5.2.4 Increased cross-product sales
High accessibility and exposure levels will result in greater cross-product sales. This will assist in generating sales of other applications on sale by developer.

5.3 Consumer uptake scenarios
In the event that consumer uptake is significantly different from expected, there are two main alternative strategies that may be considered in order to boost sales and improve long term profitability.

5.3.1 Low consumer uptake
In the event of very low consumer uptake at even the lowest price entry point of $0.99, setting the price to FREE temporarily could help to drive traffic, collect customer reviews, and gain exposure for the application. The risk remains that when the price is increased to $0.99 or higher, sales may not recover sufficiently to recover costs of the temporary promotion. A potentially more suitable alternative would be to launch a lite version of the application (with link to paid app) to generate interest and drive sales. Many developers are using this tactic as a marketing tool to attract downloads for the paid app.

5.3.2 High consumer uptake
A price increase could be considered as a means of boosting profitability in the event of consistent significantly higher-than-expected sales numbers. As a general rule however, even if sales are high, it is recommended to maintain the price at the same level, to keep interest, downloads and reviews as high as possible, and increase the chances of appearing in the rankings. Only under extreme circumstances should a price increase be seriously considered.

 

6.0 RANKINGS, RANKINGS, RANKINGS!

Pricing strategies need to be developed on an app-by-app basis, with close attention paid to the prices set by competitors offering similar applications within the same categories and targeting identical markets.

The importance of making an appearance on the rankings for top paid and/or free applications both in general and within categories can not be understated. The amount of exposure this generates can make or break the earning potential of an application.

The rapidly evolving nature of the iTunes App market means that the reevaluation of current pricing strategies in place across product lines should be conducted on a continuous basis.

Close monitoring of download and sales statistics following launch is crucial towards determining the success of the pricing strategy implemented at launch and assist in the determination of modifications (if any) that may be necessary in order to maximize profitability.