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The Pseudo Science Of App Pricing

Prashant is Co Founder of Signals , a stealth mode start up in the mobile app space. Prior to starting Signals, He was part of  Spice Labs. A hard core mobile enthusiast (addict as he often calls it) Prashant is founder of the Delhi Chapter of Mobile Monday, a Global community of mobile developers. When He is not thinking about mobile apps he loves to travel, write poems,
cook and read.He lives in Noida with a Macbook, an iPad, an iPhone and Two Android devices. You can follow him on Twitter @pacificleo. In this post he writes about mobile app pricing.

App stores  are essentially market places. A giant shopping mall for mobile apps. Like every marketplace it has some structural elements, which impact the performance of your product. In my previous post, I talked about the discovery aspect of this market place. I also touched upon the pricing aspect of presence management. Shortly after publishing that post I was invited to speak at the inaugural session of the Product Nation meet up . I gave a talk on pseudo science of mobile app pricing.  This post is based on the same talk .

I call this pseudo science because this in not a deterministic approach with a definitive outcome. Like everything else in app stores, deciding the optimal pricing for your app is a heuristic process where you reach an optimal result after couple of iterations. The key here is not to get obsessed with results but to understand and if needed tweak the process as per your unique requirement.

Four Quadrants of App Pricing:

Before you decide the exact price point of your app, you need to come up with a pricing model which is most suitable for your product. Should you go for transactional pricing (paid app) or In App purchase or Subscription or make it free and make money via advertisements? How do you do decide that? I believe that a good way to think about it is not to think of it as a question of choosing a pricing model but to rephrase the question as “When does my user base get ready to be monetized? i.e. exactly when  in their lifecycle, will users have the highest propensity to pay ? ”

One way to approach this problem is to think of  it as a  2 X 2 Matrix where Vertical axis represents Engagement and Horizontal axis represents life span of user. As shown in grid below:

Quadrant #1 is Entertainment Quadrant. Apps in this quadrant have short life span (1-3 weeks) but high engagements. They also have high churn rate. Apps in this quadrant are in the business of hits. Games are in first quadrant. Since it’s a quadrant of high churn rate so businesses in this quadrant have to build a portfolio of apps to keep users in loop. Best strategy in this quadrant is Transactional pricing i.e Pay at the time of download .

Quadrant #2  is where apps have instant realization of value and they tend to have high engagement for long duration. Instant messengers ( WhatsAPP , BBM ) and social networks  fall in this category . Best pricing strategy for this quadrant is Free product with advertisement as revenue model. In the absence of competition, Free-mium can also be a good strategy . Gravity twitter app on Symbian is a case in point .

Quadrant #3 is utility quadrant. Apps in this section tend to have moderate engagement for long duration. They tend to have the consumer lock in. Your News reading app , Stock and Weather App are in this category along with apps like Dropbox, Evernote, Skype. Best pricing strategy for this quadrant is Free-version  coupled with subscription based paid upgrade.

This is a tricky quadrant as apps in this quadrant are most qualified for device embedding (TuneIn Radio in HTC, Dropbox in Samsung Galaxy S3) or Telecom Operator lead promotion ( Evernote with NTT DoCoMo ). However this opportunity comes with its own challenge and that is if your app is just a utility without a strong brand  then chances are that operator and OEMs will choose to go for a white label version of it.

Quadrant #4  is quadrant of companion apps . Apps in this section tend to be either a brand app ( your car stereo app or your TV remote control) , Enterprise App ( your MIS Dashboard on mobile phone ) or VAS services ( Mobile Antivirus ,  Geo fencing based kid security etc ). Apps in this quadrant are mostly outsourced and cost is underwritten by brands.  In some cases, where the end user also pays (like in Telecom VAS) pricing is mostly subscription based.

Choosing An Optimal Price Point :

Once you decide your pricing model, the next thing to work upon is price point. Observations suggests that app stores tend to have huge pricing elasticity. Research has shown that the first day of price drop alone can bring 41% jump in revenue which over a two week period leads to a 22% jump in overall revenue. This chart by distimo shows this effect for various app stores:

An interesting thing is that since pricing also impacts the discoverability of your app, some of this elasticity is a bit artificial.

To make an informed choice about the price you need to consider these three variables:

Baseline Price: The minimum price point in your app store. For iOS this is 99 cents.

Median Price: The price value where most of the apps operate in when they hit a plateau. For iOS this value is $1.47.

Maxima:  Theoretically this is the maximum pricing allowed by app store but in practice it’s the maximum price you can ask without hurting your product. It varies from category to category and depends mostly on competition.  For action games in iOS this value is $10.

Once you know these values for your product niche, you need to come up with a pricing plan.  This requires a basic understanding of typical app lifecycle. A typical app goes through a cycle of Launch, Growth and Steady State.

In the launch phase you have the novelty factor working for you. In growth phase you get a basic validity in the market and you reinforce the traction via promotion, partnership and offers – Things like New year discounts, cross promotion, Advertisements, Editorial promotion, Social media push etc. In the Steady state your growth rate hits a plateau or decreases gradually.

Points to remember here is that (a) You can’t price it too high, (b) you will have to slash the price at some point to spur growth and (c) your product should be sustainable and marginally profitable at baseline. All three conditions are rarely met in real life.

Rule of thumb for pricing in most cases is to launch above the median and below the maxima. Ride the growth curve at median and sustain the product at baseline.  Here is the chart showing this median value data for most of the categories:

Epilogue :  A lot can be written about app store pricing; it’s a fascinating topic. The App store is probably the best sandbox to carry out these pricing experiments. I am sure someone will write a PHD thesis on it. I don’t want to be that guy. I see it more like an amusing time killer.  I request you to look at it in the same way. I believe that in most markets, pricing is secondary to product quality. Real and Intended purpose of App stores is to bring your product to a huge audience. Knowledge of pricing tactics cannot substitute the need for a great product. But once you have a great product I am sure a little bit of knowledge will help.


(c) 2013 Prashant Singh. Disclaimer: The views expressed above are those of the author, and not necessarily representative of the views of MediaNama.com.  

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