Digital technology provides a sort of conundrum for entrepreneurs trying to price their products. On the one hand, the very fact that it is digital makes the supply almost infinite and the transfer costs low. On the other hand, each copy of an application still has the same amount of value for each user.
Traditional methods would dictate a price that takes into account the effort used to make a product and the hopeful profit to be made based upon an assumed number of buyers. For example, pricing your application to return a decent hourly wage for the amount of work you put into developing it. Indeed, some developers have indicated they intend to use this method, or something like it, to value their products.
However, this method begins to have problems once a brand or application becomes popular, because it devalues a product the more it is bought. For example, if you predict your app is likely to sell a hundred thousand copies, and it took you 10 hours to build, a price of $5.00 will net you an hourly wage of $50,000 ($35,000 per hour after Apple’s cut). Obviously, that is not a normal hourly wage for a developer. But choosing an hourly wage within reason, say $200.00 per hour, would dictate a price of $.02.
The answer, of course, is to value a product based on its value to a customer. If you think about it, this is how Bill Gates made his millions, and how the iTunes music store works. Even though many people may buy a $.99 song, the price never goes down, even if the band has received more than a decent return on their time and effort into making it.
Therefore, if you feel a person will get $5.00 worth of value from your application, then $5.00 is an appropriate price. Instead of basing pricing upon your costs, you switch it to the value the consumer will receive. Each customer receives a $5.00 product, even if the actual cost of providing that product has gone down to close to zero by the time the 99,999th customer is buying it.
Many entrepreneurs have problems with this method, because it seems to overvalue their efforts. If they are making too much money, the reasoning goes, then some customers are paying too much. No one wants to gouge a customer. It just seems dishonest. Unfortunately, there is no good fix. Lowering the price as the application becomes more popular just makes earlier customers feel like they have overpaid, while it is just as impossible to identify customers who are paying too much, since each customer is paying the exact same amount and getting the same value. Proponents of value pricing, meanwhile, consider it leaving money on the table if you don’t do it.
Many companies instead view the extra money of an advantage of selling in the digital age, and their business models use that money to develop new products and expand into new areas. Indeed, since it is usually hard to identify how long a new product may take to develop, any profit from a previous application goes towards paying off the inevitable mistakes and extended development of possible future applications.
Both methods have problems. You may not have any idea of how many copies you might sell, or there is no good way to calculate the value of an app to a user. Therefore, it helps to look at other sources for guidelines in pricing your app.
The competition:
The advantage of making an app that competes with other apps is that they have already put themselves out as guinea pigs in the pricing experiment. Now, this is not to say you should blindly choose the same price as your competitors (not to mention you should identify the right competitors before you try this). Instead, you should look at the reaction people have had to your competitor’s prices. Do people complain they’re overpriced? Do they rave about what a good deal it is? Are they happy with the service they’re getting, and what functions come with the app? All these things can tell you how your pricing experiment might go. If consumers are happy with the value they are receiving, maybe a price close to what they’re currently paying is appropriate for your app, plus or minus something to account for the benefit (or lack) of your app over the competition.
Market opinion
Of course, if you have no competition, either because you’re first into the store or because you’re in a category all your own (or maybe you have too few competitors), then you’re going to need to look elsewhere. One guideline is what people are willing to pay for applications in general. While there are diverging views, most of the responses I’ve gotten, either via forums or by email is that most people think iPhone applications should be under $20. People commonly make exceptions for enterprise applications, so if you’ve developed one of those, the opinions are all over the board. Developers, on the other hand, have emailed me or posted to forums that many of them are thinking of pricing their apps (a wide variety to be sure) under $10.
A mobile version of a desktop app
Many people posted that they think that applications for the iPhone should not cost as much as applications for computers in general. Whether this is because the iPhone isn’t as powerful as a computer, or because it has a smaller screen, who knows. But the sentimentality is there. This makes some sense when you think that many applications might have desktop counterparts that a user will switch to when in the presence of a computer, possibly to use a keyboard/larger screen, etc. Therefore, the mobile version is just that, to be used when mobile. Coupled with the fact that people hate to pay for things twice, a mobile version of a desktop application is likely seen as having less value than its desktop counterpart. How much less? Well, if you have an application that compliments desktop functions, you may want to look into how other people are pricing the same type of application. I hypothesize that mobile applications that compliment an already existing desktop application will be priced at comparable percentages of those desktop applications. For example, a desktop app that costs $20 might translate into a $5.00 mobile version, thereby making the total package for a customer $25.00. The mobile app is 25% of the desktop app. If you find others are using a common percentage range, use it.
Other considerations
Developers who already have applications out on the market, like widgets or shareware, might have better luck looking at their past experience. They also have installed bases to advertise to, which can help them get a feel for how many copies they might sell.
For those pricing apps that take into account how much work is put into it, they should be aware of a constricting factor; the final result. Because no matter how much work you put into something, if the result is still mediocre, then you will have trouble charging for all the work you put in. Even if it was your best work and took a long, long time, if another developer could have done the same thing in half the time, you will run into problems getting people to agree with your price.
Lastly, you can go with your gut. And my gut is telling me that an reasonably well built app priced between $2.99 and $8.99 is probably not overpriced. If you still have no idea what to price it at after reading all this, go with something in that range and adjust it later.
Exceptions and limitations
This short article mostly covers consumer applications and regular pricing methods, because that’s what I feel most developers and consumers will be interested in. Many people developing enterprise applications commonly value their application on the amount of money or time saved by using their app, so those considerations take precedent over other pricing methods. Also, some people may not choose to price their application conventionally, instead using an advertising method or subscription method. Or, in the case of enterprise, both subscription and an initial fee sounds like the way some are going (an example would be $40 to buy, $10 per month per user, etc.).
Whatever pricing method you decide to use, remember to include Apple’s cut in your projects if you’re using conventional pricing. You can find some tables of net revenue after Apple’s cut for common price points in the post “How much money can I make from my iPhone or iPod Touch Application?”
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