(This is a guest blog post by Kate Matsudaira)
Recently I came across The Sparrow Problem, an article that goes into the revenue issues associated with paid apps. To sum up the author’s point in my own words: Google’s acquisition of Sparrow is an illustration of a very smart group of people, with a solid product, that could not build a business with a “paid app” (notice I am not talking about people paying with subscriptions the way you do with Evernote premium, for example).
“The age of selling software to users at a fixed, one-time price is coming to an end. It’s just not sustainable at the absurdly low prices users have come to expect.”
So with the direction of apps, pricing and maintenance – should you ever have a paid app? And if not, how should you sell your software?
Apps are different from digital goods.
Before getting into app pricing strategies it helps to think about the different categories of digital goods. For each type of digital product the psychology of pricing is bit different for each, so let’s cover the types:
- Content. This category is probably most familiar to everyone. When it comes to content, people are willing to pay for ebooks, music, and movies. In addition to purchasing, a lot of content can be rented temporarily, like streaming a movie.
- Consumable apps. These are apps that are used and then finished. An example is a game with a fixed set of levels, once each level has been completed the game is “done” and has been consumed.
- Apps as a Service. Just like software as a service there are apps that provide a service. Sparrow was a great example of this type of good, it was a service that the user used as an app on their phone. Things is another example.
- Additional in-app items or functions. In many apps one of the new revenue drivers is to provide additional functionality, game pieces, or features for a fee. An example of this is the additional brushes you can buy in Paper’s app.
Each of these items have different obstacles associated with them, but generally with the exception of consumable apps and content, I would argue that there should be no paid apps.
Should any service-based app be a paid app?
Early in my career I worked on shrink-wrapped software (Microsoft Windows specifically). The cost of fixing bugs was extremely high, which meant you had to have a lot of specifications and testing prior to any big release. Moving into the world of web software though, it is relatively easy (and quick) to fix problems or address issues when they arise. And since you can launch things quickly it also enables you to get more real-time user feedback on product usage – and even A/B test features simultaneously. These sorts of benefits are part of the reasons I love building web software; it is just easier to get the product right and you can spend time on new features, or improving the features people love, versus trusting your gut and getting it right in the first version.
Apps are slightly different from web software though because you have to “ship” the code to someone’s phone (and in Apple’s case go through an approval process). So there is overhead to shipping a new version – if nothing else because users’ need to update their devices with the latest version. This opens up many of the problems associated with shrink-wrapped software, such as:
- Delay to fix issues
- Maintaining backward compatible APIs or risk having older versions break
- Scrutiny from users with each update (“why are you updating this app?”)
- Testing associated with each update
And all of these things involve time and money from the software and development side.
Apps that are expected to be maintained and updated have an ongoing cost.
The only exception is apps that are consumed, where the entire app (code, assets, etc) all live on the device as the app. If you have a backend service supporting the app, there will be an ongoing cost to maintain and deliver that service to users – so a one-time paid app price does not accurately reflect the cost to deliver the service.
This argument is the basis for software as a service subscriptions. There is a cost to providing the service so it is necessary to charge some users, or have an ongoing monetization strategy like advertisements to support it.
Develop a business strategy. If you aren’t going to create a paid app, then it is important to devise a solid monetization strategy. Choosing a strategy depends largely on the type of app or service you are providing.
Here are some of the common monetization strategies:
- Free app with advertisements or sponsorship
- Free app with in-app purchases for one-time items/functions
- Free app with in-app recurring subscription
- Paid apps (and there are all sorts of hybrids of this model, like a free “lite” app that entices users to upgrade to the paid version, or a paid version without advertisements, etc.)
Non-consumable apps should not consider a paid strategy. There are exceptions (one example is when your core service is on another platform like a website, and the app is paid for the convenience of accessing the functionality on a mobile device); generally a service-based app should consider a free model with other monetization options.
Although regardless of your monetization strategy, it is important to think pricing and converting users to paying customers. And this part of the equation involves overcoming many users’ resistance to paying for apps.
Why people agonize over buying apps
Just today I walked to my local coffee shop and paid $3.25 for an iced drink. And I tipped $1 for the service (my mom was a waitress so I believe in tipping well). I didn’t think about it or even blink my eye at the amount of money. There was no indecision or second thoughts.
However, when I look at the price of an app, even if it is $0.99, I will agonize and weigh the decision. And I seldom consider buying anything that is more than $2.99 (less than my afternoon coffee drink).
Realizing this blew my mind a little bit.
I, of all the people, know the huge amount of work involved to build any type of app, let alone a good piece of software. And it is so much more than $1, $2, or even $100 or $1000. So why would I be reticent to spend such a nominal amount of money on an app? And the crazy part is, it isn’t just digital goods; my hangup around pricing seems to be about apps specifically. For example, I have no problem paying $3.99 to rent a movie on iTunes, or even pay for music. What makes software so different?
Consider removing or adding the cartoon snippet with attribution: (BTW – The Oatmeal has a great comic illustrating this behavioral phenomenon)
These were the explanations I came up with:
- Buyer’s remorse. Other software products or apps I have purchased were buggy, didn’t live up to my expectations, or disappointed me in some other way (free trials, and try before you buy offerings could certainly overcome this obstacle — and part of the reason free “lite” versions of apps have been so popular). As a result I am more cautious to pull the trigger on other software purchases.
- Apps may not just have bugs, but they can actually result in a negative experience for the user. Whenever I download an app and it requires me to login with a social network, and then proceeds to auto-share my actions I almost always uninstall and regret the purchase. Similarly for the apps that crash my phone or drain my battery. Quality matters and the bar is even higher for paid apps.
- Lack of information. It can sometimes be hard to tell what an app really does from the description and pictures that it makes it very hard to decide if I would even want to download it and spend time trying it out. Let alone spend money on it. Most of the things I am buying in the physical world I can touch, feel and interact with so I know what I am getting ahead of time. And with digital goods like songs and movies there is more information in the form of reputation, reviews, or samples (clips or trailers). Outside of the App Store there isn’t much information for the majority of apps; many app developers don’t invest into other websites or marketing materials outside of the App Store ecosystem.
- Apps aren’t refundable. There is something about “final sale” that makes app purchases seem so permanent. In a restaurant you don’t have to pay for dinner before you eat it, and most stores or even websites will make an effort to ensure you are satisfied with your purchases; but this isn’t the case with apps. If you don’t like it, then you are screwed.
- Discovery. This post has a great write-up about some of the problems finding apps. There are half a million apps in Apple’s appstore alone, this makes it hard to filter some of the junk from the good stuff (although one person’s trash *is* another person’s treasure). One other piece called out in the article is that many of the ratings and reviews are about the price more than the app itself and as a result are less useful.
- Price. There is definitely an upper limit to the price I put on apps, although this is true for most purchases. There is a psychological aspect to pricing and these limits were what created so many of the price tags that end in “99″. And to many people the price of things on the Internet is free (for better or worse); over time this will certainly evolve and people are likely to become more accustomed to paying for digital goods and services.
- Form factor. Related to price is the mobile form factor that impacts the psychology of purchasing. For example, computer programs for your laptop and applications for your tablet (iPad) tend to sell for more than apps for phones. When I was doing research for this article one person said “It just seems so small on my phone, it is harder to justify a higher price” so for some people size and platform limits their perception of utility or power and therefore price.
- Ratings. Paid apps with bad ratings are doomed. Since there is less information (see #2) available user endorsements via reviews and ratings are big factors in whether someone will pay (or even download) for an app. Ratings also play a role in rankings in the app store, too.
- Friction. In the ADHD online world capturing a user’s attention is a challenge. And if your app requires a user to login, create an account, or other sort of obstacle then it can result in a monetization challenge. And of course charging for an app is an obstacle in itself.
With all of these reasons in mind, it is key to realize and then come up with a plan to overcome these barriers with marketing and pricing strategies.
Applying this to App Marketing
- People don’t like buying software from websites, they want to buy software and products from people. The best thing you can do is be more than a no-name application, which means being a brand with a personality. There are lots of articles touting the value of having a friendly brand mascot, with benefits like making your brand more relatable and memorable. Also consider this when designing an app icon, a character or friendly look and feel can drive more downloads and create avid fans.
- Software has an ongoing tax with maintenance, so price apps to account for ongoing maintenance and improvements. Unless of course your app is consumable, like a game with a fixed number of levels, where a paid app or in-game purchase may make more sense. If your app is something people use over time, consider a free app with a yearly subscription to paid features or functionality. This is a great post on app monetization as it covers lots of different options.
- Create a high quality app. In addition to aiming for high reviews and ratings from your customers, creating (or updating) an app that has been tested on all the different devices can help ensure that the app won’t result in a negative experience for users.
- Have a presence outside of the app store. Since places like Apple’s store have limited real estate for descriptions and marketing material, creating a website with more information can benefit prospective customers looking for information. It also gives app developers another place to capture potential new customers (aiding with discovery challenges of being noticed – of course a good solid marketing strategy involving PR, etc. can also help here).
- Drive ratings and reviews for your app. Get everyone you know to review and rate your app. Use a service like Apptentive to prompt users to review your app. In addition to influencing potential customers, it can also help with app store rankings.
- Remove friction. Reducing the hurdles a user has to go through to use your app and give you money is a smart move in monetization. If you require an account, let users have the option of using existing accounts (like Facebook, twitter, or their phone number) and only asking them to add more details when needed. For iOS apps having a free app with in-app purchases is a great example of removing hurdles; there is no obstacle to get the user to pay for the app, and then using in-app payments through Apple allows users to give you money without ever entering their credit card (of course apple takes a cut, but one-click purchasing is a solid strategy for increasing conversion rates).
- Pick an appealing price point. Whether you are pricing your service or your apps, pick a price that makes sense to users. Look at other apps and services in your space and understand what they charge. Do you are want to be the highest priced app? The lowest? Perhaps somewhere in the middle? Choose a price tag that ends with ”.99″ to help users overcome their psychological price barrier.
- Leverage promotions. Using techniques like discounts, sales and coupons can drive downloads and purchases since users like to get a good deal. Temporarily lowering the price gives users the perception of increased value and can reduce the price below their mental price barrier.
- Create a marketing message that brings perspective. Crafting a marketing message that justifies the price by relating it to something a user would pay for in the physical world. For example, if you have a Yoga app or subscription, a compelling message of “A month of yoga for less than the price of one drop-in class”. Bridging the gap between the physical world and your digital product can help reframe the price and value of the purchase.
About the author: Kate Matsudaira has worked as the VP Engineering/CTO at several technology startups – including her current role at Decide, and past roles at SEOmoz, and Delve Networks (acquired by Limelight). Prior to joining the startup world she spent time as a software engineer, and technical lead/manager at Amazon and Microsoft. Kate has hands-on knowledge and experience with large scale distributed web systems, cloud computing and technical leadership. She maintains a blog at http://katemats.com and also helps curate the Technology & Leadership Newsletter http://www.techleadershipnews.com