Apps are too cheap

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.

The problem

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.

The solution

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.)

33 thoughts on “Apps are too cheap

  1. Good piece. One segment I’d add – the whole app store process itself needs work: you see users going into the store, and you see new users of your app coming out, but you have no idea what happened in between. So you don’t know your conversion rates, and you can’t create, say, custom-onboarding for new users.

    • Good point. I’d love to see Apple provide upsell analytics as part of try-before-you-buy, so that developers could visualise (and improve) their conversion rates. It’s not just ‘how many bought the full version’, it’s also ‘how many didn’t’; ‘how long did people trial it for’, etc.
      Developers could probably implement this with their own custom analytics if it wasn’t provided by Apple, but it would be a much more useful process as an integral part of the iTunes Connect workflow.

  2. If apps are too cheap, why is there no shortage of them? Surely, all you’re really complaining about here is that the laws of supply and demand are working. Supply goes up, prices go down. Apps are plentiful, and hence cheap.

    To be sure, there are probably genuine criticisms of Apple’s restrictive policies about what you can and can’t do with your apps (and allowing paid updates and upgrades would be an obvious move towards greater liberation), but, frankly, that’s what you get when you lock yourselves into developing for a closed platform.

    • In fact, apps come and go. If you want a good app to stick around and be supported and improved over time, they deserve to make a living wage and thus should charge a fair price. If an app makes you more productive, then it’s worth a lot more than 99 cents.

    • It is too early to conclude that the laws of supply and demand work. I think we are still in some sore of gold rush phase where there are enough new developers blinded by the “platform promise” that their app will be different and make heaps of money. (Scott Forstall used the word “Gold Rush” even in a keynote which made me wonder if there is some deliberate luring developers into this model that – so far – works so great for Apple. I even remember him shouting “I want you all to get rich” into the WWDC campus bash crowd…).

      Over time however, if nothing changes, I believe quality apps will disappear (apart from a few ones that solve a problem that everybody needs solving) and the App Store will turn into the online version of your “two dollar shop” around the corner.

  3. Nice article. We’ve found that offering a limited Free Edition alongside a paid Full Edition works quite well. Most users understand that the Free Edition is akin to a trial. This worked well for inkflow. Some folks are content to use just the Free Edition, and that’s great, but many folks opt to upgrade right away.

    Our Apps are priced in the $8-$10 range, and nobody who upgrades complains about it being too expensive. For the right audience, this price-point is considered disruptively inexpensive.

    Agree that Apple should offer limited-time trials for Apps. This would be a win-win for everyone.

  4. App developers in other countries get 70% of the revenue net of tax. In Australia an app that lists at $1.69 includes 10% GST so in reality is $1.54. 70% of this is $1.08. 63.6% of the listed price is the same as 70% of the net of tax price. In everywhere other than the US and Canada, tax is included in prices.

    • Hi Dave,

      Whilst much of what you say is spot on, local taxes (in our case in the UK, VAT at Luxembourg’s rate, which is where Apple are based for tax purposes) is not something we are going to avoid here in Europe, and your article still reads as if it is saying Apple is giving us a worse deal than other countries by taking a higher proportion of revenue here.

      If anything we are benefiting from Luxembourg’s lower rate of VAT (15%) compared to ours (20%) (although its just been announced a few days ago that the Luxembourg rate will change on 1st Jan 2015. )

      I would suggest it would be better to delete the relevant portions of that paragraph, so as not to detract from your other points.

    • In the end, I’ve decided to remove the detail from this part of the article, as it was causing confusion. Thanks for clarifying it nonetheless.

  5. I think you are trying to ask Apple to change their business to fit the way you used to do business, when they are in fact creating a new way of doing business that is popular with users and makes many developers lots of money.

    You seem to think that a customer using your product for free is a bad thing. Yet these people are helping drive you up the charts, evangelising to their friends and are potential future converts. Embrace them.

    Then be inventive about how to make the IAP system work. AppCubby had a timer app that sold for $0.99. then they made it free with IAP. The 2nd most popular IAP (for $9.99) unlocks a wide variety of different themes and backgrounds for what is a simple but high quality app. Now they have a much bigger audience for future releases, a percentage of paying customers who pay anything from $0.99 to $9.99 and are making more money than they did when they were paid.

    So it seems to me that the problem, more often than not, is developers not wanting to adapt.

    • You make it sound like there are only two choices: the old way of doing business and the current way of doing business. I think these suggestions would make the app store work more like a market and less like a lottery. I think this would make customers and deserving developers even more happy.

      The in-app purchase model is adequate when you want to offer a free demo or crippled version of your software. In such cases, a user can determine the app fits their needs based on the limited version. This is great for simple apps and a lot of games.

      But for some apps you simply need to have the full-featured version to know if it’ll work. So I think a timed-trial period would be a great feature. Theoretically a developer can use the in-app purchase for this as well (lock the app after a period of time, then require the user to purchase the ability to unlock the app permanently.) But I believe Apple disallows this sort of work-around.

      The other issue is apps that are really just intentional junk and they’re basically designed to get $1 from as many people as possible before the bad reviews start piling up. I would think even a 10 minute free trial period would be beneficial for that sort of thing.

  6. I think that Apple would be able to simplify the upgrading problem, without changing that much, by adding two new options to iTunes Connect:

    1. The ability to mark an app as “obsolete”, hiding it from the App Store, but allowing users that bought it to download it again, and allowing the developer to update it if needed.
    2. Add an option to define that the app has price X, for users who already own any AppIds, in a list defined by you. This would not only allow you to give upgrade pricing to your current users, but also to the users of similar programmes.

    Note that I don’t think that this would be the best solution, but these changes should be easier to implement than completely changing the way that apps are managed in the App Store and, as an added bonus, these options would be interesting (specially the second) even if a proper mechanism for managing updates existed.

    * Not so hard != easy.

  7. I think you forget one thing and that is the law of “volume” and “more”.

    One or two $10 apps will be just fine for most people but… people are used too (by now) and want many, many apps. Twenty $0.99 apps is better than twenty $10 apps right? :-)

    Same thing is happening with all the subscriptions for services and software like the new Adobe CC, LinkedIn Pro, Typekit, Typecast and whatever other great stuff. All these things are payable when alone but all together make a serious amount.

    I wish you would make piles of money but I think it won’t be easy to change what’s happening.

  8. Agree on almost all counts, but I’m not sure how much threat there is of developers abandoning iOS for other platforms. Is the situation better for developers on Android (or Blackberry, or Windows Phone?) I would think not. More likely, you would see good developers forced out of the business altogether, and that’s a lose-lose for everyone on every platform.

    • One thing I really like about Windows Phone is the try before you buy-feature. Before I paid 2-3€ for a weather app some time ago, I tried at least six different apps until I found the one that I liked most.

  9. I think it’s all about targeting the right audience. As has been said above there are audiences out there who are willing to pay for useful apps that are well made. You have to make something completely original (practically impossible) or something obviously better than what’s already out there, otherwise there’s no point trying.

    As for new suggestions, I think what you hinted at above, i’e using IAP’s for non-game apps is something which hasn’t been done much, and there’s probably room for new ideas in that area.

  10. Too cheap? I can see via Slice(free app) all the apps I’ve purchased in the last year(give or take). If these apps had been any more expensive I wouldn’t have purchased, I definitely would have found alternatives.

  11. “Worst of all is Norway, where developers only get 56% of the Store price. (In these countries, the on-store list price includes local tax; the 70% developer / 30% Apple split is calculated after the tax has been accounted for.)”

    That’s some sloppy presentation. You’re failing to make clear that Apple is actually getting less than 30% of the store price also. Your approach is to make it look like the developer is getting hit even harder by Apple. Perhaps the developers should talk with their government.

    • You’re right – this wording was confusing. I’ve removed the detail, to avoid distracting from the overall message about increasing the baseline percentage.

  12. Great article. You’ve given some interesting solutions for the problem. But here’s the thing. I believe these solutions will work in advantage of everyone. Customers, Developers, Apple, that is. The fundamental problem about Apple wanting apps to be cheap isn’t too apparent.

    Due to the nature of different app markets, prices won’t rise on all app genres. Even within an app category, not all apps will become pricier (only the quality ones will). And then not all customers will start paying more, but some certainly will do.

    Ultimately this will result in higher quality apps. There will always be enough cheap apps to make iOS devices very capable in terms of productivity, creativity and entertainment, after the pricy hardware purchase. But giving developers more (financial) space to create great apps exclusively for iOS will likely work in favor of Apple, have customers love iOS even more and let iOS continue to be wildly preferred by developers.

  13. 99¢ is generally throw away money and at that price I’ll buy just about anything, even if it’s not great! Being a dev if I had the choice between selling 100k at 99¢ and 10k copies at $9.99, I’d take the 100k as that’s 10x the opportunity to sell again or upwell with in-app purchases. It reminds me of big company mentality of trying to milk the customer for every dollar instead of looking to scale and have more opportunities.

  14. Great article . We have 50 apps and some less expensive 99 cents and some up to $18 and sufer from al the same problems. Three additional things, the free upgrade policy might have worked fine as long as the market was growing rapidly, but today most ios purchasers are buying there second and third devices, and we are expected to support them and upgrade our apps forever for no new revenue. Second the search problems that ios 6 brought about, the fact that it find one result at a time on the iPhone and 4 on the iPad just makes the problem of free worse, since they get more downloads they appear first . Our sales dropped by 50pct when ios 6 came out. Third the legal problems surrounding IAP instead of just indemnifying all developers who are being sued apple just became a third party to the suit. Lastly they eliminated the section for new aps in the store that used to automatically list new apps, At least that way you knew a new app would get a few days to shine. One final point about price that I recently wrote about, the low price makes it very difficult to find the right venue to promote, it’s very hard to finds something with a high enough ROi.

  15. I think upgrading or even differentiating between user groups with IAP *does* work. Example: Animoog. A 4-track recorder was added to Animoog. It was given away to existing users of the app and also to users who bought the app in a certain time window as a promotional gift.
    The others had to buy this feature.
    So this essentially shows that it is possible to offer different functionality for new and existing users and allow feature upgrades via IAP.
    Maybe they had to use some workarounds to make this possible (I don’t know the technical details), but at least it shows the feasibility.

  16. Great article overall, but Apple is unlikely to improve their split to Developers or one simple reason – that retail $100 iTunes card Likely sells to Best Buy and Walmart for $80 – hence those stores selling the $100 cards for $80 3-4 times per year – i.e. at cost! This leaves Apple $10 gross margin:

    $100(retail price) – $20(discount to Retailers) – $70(to Devs) = $10
    …to run the service.

    All your other ideas for how Apple should change their service to imorove it for both developers and customers should be done immediately!

  17. You say that having lots of free/$.99 apps is in Apple’s best interest; I’m not sure that’s entirely true. The problem with apps selling for cheap is that they encourage cheap apps – apps without depth of function or content. There are exceptions; apps that use IAP to monetize, apps that can make up in volume what they’ve lost in purchase price, and apps that are exquisite in their minimalism. But if the iPad is to become the next mainstream computing platform, Apple also needs more robust apps that tackle more involved problems – and require more resources to develop. Those apps aren’t being written today because they can’t be properly funded or monetized. THAT is why Apple needs to make the changes you suggest.

  18. The vast number of similar apps also make it difficult to buy one. Ratings are often skewed so I’m reluctant to take the risk. I don’t mind paying $9.99 for an app that useful, well-designed and thought out, and which I’ll be using after the first week, such as 1Password. An app that has a Mac companion is likely to draw in more customers.
    I think having a trial version of an app is the way to go and I’d love to see it implemented.

  19. I think that there *is* a variant on solution #5 (paid app upgrades) that could go a long way towards solving the problem without changing how the App Store works: allow app vendors to offer discounted prices to owners of previous versions (or other apps by the same vendor).

    In other words: stick with the current App Store concept of “new versions major are new app purchases”, but include more flexibility in how the price is determined. The app author gets to specify price(-lowering) exceptions so that owners of logically previous versions or other applications by the same vendor are rewarded.

    This shouldn’t affect Apple’s profits — they get the same cut, just on a lower price extended to certain customers — and it would allow app authors to fairly offer “upgrade” pricing.

    Note that this mechanism doesn’t require Apple to know anything about which applications are “new versions” of another — all they have to do is allow the app author to set price rules based on ownership of other apps by the same vendor.

  20. Some developers have found a work-around this “limited free trial” restriction that apple won’t let developers use, guys who develop goodnotes app (a pdf annotation and note taking app) actually offer the two versions of the app side by side, a lite one, with limited functionality (only two notebooks can be created) but all the features, and a full version, with full functionality and features, they even offer in-app purchase in the free, lite version so you don’t have to worry about migrating your documents and data between the full version and the lite one when you decide to go full version. Both the versions get all the updates needed so those who go full version with an in-app purchase (myself included) don’t have to be worried about being left off without updates.

    Developers of a game called “the room” actually offer you a free game, with only the first two levels unlocked, you try it out, and when you like it, you can unlock the full features and levels of the game with an in-app purchase.

    Some people, like developers of “Zombies! Run”, kinda followed both models, they offered more levels and functionality in version one, unlockable with an in-app purchase, and issued another version of the app “Zombies! Run2″.
    There is always a work around limitations.
    The true problem is with people, those who would prefer to get stuch with a crappy free app, or a crappy $1 app that doesn’t solve their problem.
    Some are afraid that after they purchase an app, a free, good quality one would surface (like “Moves”, free, perfect app that logs your exercise and movement around all day).
    I think developers have to embrace goodnotes solution of the free trial problem, and people have to change their way of looking at things, if I buy a $5 app that would solve my problem now and another, better, cheaper (or even free) app surfaces later, I shouldn’t be sad about it, because at least, that $5 app solved my problem for now till the free one came up.

  21. The spec left by Amy in your article is ‘perfect’. Apple should show huge appreciation for free product development of such quality. So now let’s hope they will take it upon them to implement!!

    To me this feature is a big thing, as I do not want to come close to ‘limited features for free’ or any other way of creating a deformed app to get around this problem.

    Great article Dave. Compliments

  22. For me, the best option (from a user standpoint) is when an app has a free ‘Light Version’ that is a fully functional product in its own right, but with ads or some limitations, e.g. a tasks app might limit me to 10 tasks at once and not offer reminders.
    If Apple allowed ‘trial apps’ i fear the App Store would become full of demos, which would just frustrate users – I’ve use the free version of an app for over a year before deciding to buy a ‘pro’ version. ‘Free’ is much more enticing than ‘trial’ although as a developer myself I understand the need to earn a living.

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