I run an app development studio in the UK. We make money – and some profit – by developing apps to sell on the iOS App Store for ourselves and our clients. We’ve launched some very successful paid apps, but we keep running into a fundamental problem – apps are just too cheap. In this article, I’ll look at how this problem has come to be, and how it could be fixed.
Why are apps so cheap? 57% of apps on the store are free; a further 21% are only 99¢. Why do app developers sell themselves short with their app pricing, and why do customers consider a $10 app so expensive?
I believe there are two fundamental problems at play: purchase risk, and ongoing revenue. Let’s take a look at both of these problems in more detail.
1) The risk of an app purchase
As things stand, there is no way for a customer to take a free, time-limited trial of an iOS app before deciding to buy it. This increases the risk of app purchase for the customer.
When I go to the App Store, I usually have an unspoken problem that I’m looking to solve. This may be as simple as ‘I’m bored and need entertaining’; or it may be more specific, such as ‘I need to revise for my exams’, or ‘I need to find out if my train is on time’. In each case, I’m looking to find an app that will solve this problem for me.
The risk involved in solving this problem is much higher if I can’t try before I buy. If I purchase one app, and it doesn’t solve my problem, then I have no way to get the cost of that app back. If I try another, and the result is the same, then that’s two apps I’ve paid for that don’t do what I need. In fact, the price of the app that eventually does solve my problem is the cost of all of the apps I have to buy to find it. The result is that I’m willing to pay less for each individual app.
This has two knock-on effects. Firstly, it biases the store against high-quality, higher-priced apps. A $5 app might be the best solution to my problem, but I’m more likely to try the 99¢ apps first, for the reasons explained above. If the third 99¢ app I try kind of solves my problem, and I’m fed up of buying apps that don’t, I may well settle on this okay app, rather than trying the $5 app that’s exactly what I need. The cost to me of the ‘okay app’ is already $3; the net cost of that $5 app would now be $8, so I’m less and less likely to try it the more apps I buy.
Secondly, without the ability to try apps for free, I may not actually take the risk of trying multiple apps at all. I might just settle on the first cheap app I try. The result? Developers of the higher-end products have no choice but to lower their prices to compete.
(The problem isn’t quite so bad on the Mac Store, where it is still possible to offer a free trial version on your own web site. This is not without its own discoverability issues, but it is at least possible. On iOS, we don’t have this option.)
2) Ongoing revenue
Currently, Apple’s App Stores don’t give developers a way to offer paid app upgrades. Once someone has bought your app, the only way you can make more money from them is to sell them In-App Purchases (IAPs) within that existing app. Although IAPs can be used to purchase additional functionality, this doesn’t fit with user expectations of how new functionality is generally made available. The expectation is that if an update is free to download, any new functionality within that update should be free to access, and shouldn’t require an IAP to unlock it.
Some developers have worked around this by launching ‘[App Name] v2’ as a completely separate app on the store, and prompting users of v1 to purchase the new app. This is a disjointed and clunky process. It means that developers have to launch the v2 app at a price that is effectively an acceptable ‘upgrade’ price for v1 users, with no way to list it at a higher price for first-time users.
Without the ability to charge users to upgrade to a new version, there’s reduced incentive for developers to update existing apps with new features. Many apps never progress beyond v1.x as a result. Because these apps don’t become more complex, their baseline price does not rise, and the average app price remains low.
So what’s to be done? What can developers, customers and Apple themselves do to solve the problem of apps being too cheap?
For developers, I’m not sure there is too much we can do, at least on iOS. We can continue to make great products and promote them outside of the App Store; and we can continue to build relationships with Apple to give our apps the best shot at App Store promotion. We can invent new ways to work around the iOS App Store model – such as freemium games with IAPs to progress more quickly – but we can’t change the underlying model itself.
Macworld’s Lex Friedman wrote recently that, perhaps, customers could help to solve the problem, by paying more for apps. I actually believe that a subset of customers would be willing to do so – to pay what apps are worth – but there’s currently no way for them to do so if they think an app is worth more than the list price.
Fundamentally, the reason apps are too cheap is down to the mechanics of the App Store. The power to fix the problem of cheap apps is primarily in Apple’s hands.
So what could Apple do?
1) Give developers more of the App Store’s revenue
Developers receive 70% of the post-tax revenue from every app purchase on the Store. One option would be for Apple to increase this post-tax percentage – perhaps to 80%, or maybe even to 100%.
The problem is, the App Store doesn’t run itself. It’s entirely reasonable that Apple receives a percentage of revenue to cover the Store’s running costs. It’s also entirely reasonable that Apple profits from a Store it has single-handedly brought into existence.
Unfortunately, even if it were feasible, I don’t think that increasing the developer percentage is a solution to the underlying problem. A larger percentage of a small number is still a small number. The real solution is to fix the Store model itself.
2) Allow customers to pay more for apps they like
This follows Lex’s suggestion of allowing customers to choose to pay more. I’m envisaging an extra option on the app’s page in the Store, where users can pick a price to pay as a donation to the developer.
Unfortunately, I don’t think this will work. The default position would become free apps with optional donations – which would make the current problem worse, not better.
3) Enable developers to add demo videos to their App Store pages
We often create demo videos for the launch of our apps. Our theory goes that you can’t embed an app in a review or blog post, but you can embed a video – and a video can tell the story of the app far more effectively than an app description or a set of screenshots.
Given that developers create these videos anyway, why not add them to the Store? Movies on the Store have free trailer videos – why not apps too? It’s not as good as a free app trial, but it’s still a great way to get a sense of the app’s functionality when you’re at the point of purchase.
4) Enable free, time-limited trials of apps
This is the biggie. Certain kinds of apps just need a fully-featured, time-limited trial in order to prove their worth. For example: back in 2002, I developed a Mac DJ program, which offered a fully-featured trial for 30 minutes per launch. This trial was the perfect compromise – long enough to use the full functionality to mix several records together with your live DJ setup, but not long enough to DJ an entire event without a gap in the music. The app sold for $80, and sold well, because working DJs could prove that it solved their problem before they purchased the software.
Implementing time-limited trials isn’t a new feature for the iTunes Store – this principle already exists for Movie Rentals. I download the content; as soon as I start using it, I have a time-limited period to consume it.
One of our developers, Amy Worrall, suggested a very neat way to implement this kind of time-limited trial for apps:
Developers can choose whether to allow a trial of 1, 7 or 30 days, or to disallow trials all together, on a per-app basis. For those apps that allow trials, the App Store would show a “Try for 7 days” button alongside “Buy app”.
If you install the trial app, it gets flagged with a “Trial” flag over the icon, in a similar way to the “New” flag that was introduced in iOS 6.
When you run the app, it permanently runs with a double height status bar, which shows the amount of time left. Tapping this status bar opens the app store page allowing you to purchase the app.
Once a trial is used up, you can’t get a trial of that app again on the same Apple ID. When the trial is used up, the app icon still remains on your device, but the flag says “Expired” and tapping on it takes you to the App Store rather than opening the app.
I think her suggestion is perfect, and I’d love to see it implemented.
5) Enable paid upgrades for apps
Paid upgrades enable customers to reward developers for their continued efforts in developing and supporting an app. They make the financial relationship clear, and enable developers to make upgrades cheaper than new purchases for customers who have already invested in their app.
Here’s how this might work. In the Store, customers would see an UPGRADE button (rather than a BUY or OPEN button) if their current app version required a purchase to update. If the new version was a free upgrade, the existing UPDATE button would appear instead.
I’m not sure this will happen, however, as it would need some major changes to the underlying Store infrastructure. The Store doesn’t currently have the concept of paying to update a purchase, so this would need to be added. Also, the Store’s software update path is single-track, with every new version being a direct step up from the last. This means there’s no way for a developer to upload a maintenance release of an old version of an app once a newer version is on the Store. If v2 of an app was a paid upgrade from v1.3, and was already on the store, there would be no way for a developer to release v1.3.1 (to ensure compatibility with iOS 7, say) for users who haven’t upgraded to v2.
Changing the Store infrastructure for such a crucial part of Apple’s business is decidedly non-trivial. I don’t expect this change to happen, unless Apple has a strong imperative to make it possible.
The fundamental problem
As described above, Apple could go a long way to solving the problem of cheap apps by implementing time-limited trials and paid app upgrades. Sadly, I don’t think this will happen.
Apple’s iOS hardware business model – currently its largest revenue stream – is based on making a large margin from a premium hardware product. Their trick is hiding this fact from customers, and selling the iPhone and iPad not on their hardware specification, but on what you can do with them. And that, in every Apple advert, is all about the apps. Apps are what make your iPhone or iPad great; apps are the thing that make you come back and buy a new iOS device every couple of years. The hardware is, of course, incredible; but it’s the apps that make it useful.
This business model means that it is in Apple’s interest for the hardware to be as expensive as possible, and for the apps to be as cheap as possible. Apple doesn’t make much of its revenue from app sales; it makes the vast amount of its money from the device (often as part of a mobile carrier contract). An expensive device is much more valuable to customers if they can fill it with great apps for as little as possible – and the less they need to spend on apps, the more willing they are to spend their money on the device.
Apple is the only one able to change the Store to make expensive apps more palatable, but doing so would compete directly with its biggest revenue stream. This, then, is the fundamental problem with the iOS App Store: apps are too cheap for developers; but cheap apps are good for Apple.
There’s a risk here for Apple, of course. If it doesn’t distribute enough of the ecosystem’s wealth to developers, those developers may look elsewhere. There are a finite number of talented developers and product-makers in the world. Good tools, hardware and frameworks are a draw to a particular platform, but ultimately developers will go where the money is.
Apple needs to make it worth developers’ while to choose their platform over others. If they don’t, developers will stop taking risks on the apps that make Apple devices great. And that could be a much higher cost to Apple than the price of apps going up.
Do you agree / disagree? If so, you can find me at @daveaddey on Twitter, where I post regularly about all things app-related.
(Update: Since this article was first published, I’ve simplified the ‘give developers more of the App Store’s revenue’ section, to avoid confusion about how the post-tax revenue is split.)