The Dangers of Under-Pricing Your iPhone Application

According to recent articles and ad-hoc surveys taken at Apple’s WWDC, many developers are looking to offer their applications for free. While free might sound good to the ears of anyone wanting applications, entrepreneurs in it for the long run should be wary of pricing their applications at $0 or far below costs. Here’s why.

On the outside, the issue of pricing sounds rather exciting, because it tells you how much money you’ll make if you sell a certain amount of products. But making money and enticing purchasers is not the only role pricing serves in your business.

It also serves another function: a message to consumers about the quality of your product. Not only does pricing give a message about the quality of your application in comparison to other applications, its also a statement about you, the developer. How much do you value your own application? Pricing your application at free might actually send the wrong message. If you, the developer, don’t think its worth a dollar, why would anyone want to try it?

It’s a common phenomenon; lowering your price lowers your perceived value. There is a point at which a lower price decreases the value of your product in consumer’s eyes instead of increasing it. At first, a lower price may seem like a great deal. But the lower it gets, the more people will start asking “what’s the catch?” or “what’s wrong with it?” People will judge your application less on its merits, and more on what the price suggests about its merits.

Instead of your application being perceived as a viable alternative to that established app you were trying to compete with, your application will be seen as a half-assed attempt to do something a better application does already. People will be reluctant to invest money or time in something they are unsure will be worth it. They know the established app has worked for a lot of people, they don’t know yours does. Why would someone buy your low-priced application only to find out it doesn’t do the job well enough? Then they might end up having to buy the established application on top of yours. Instead, they can buy a sure thing and be done with it.

What exactly is going on?

Here’s how the phenomenon works psychologically. Our minds use price as a substitute for quality when there is no other information out there to tell us the difference between two competing products. We say to ourselves, ‘this one costs more, it must be worth more, therefore it will have more value to us.’ Even though realistically we all know this isn’t necessarily true all the time.

In fact, we know there will be many applications out there that are very useful and free. But psychologically, when we are searching for an application to fit out needs, it makes sense to rely on price. Only when other information is available will we stop relying on this mechanism. Of course, its important to remember people may ignore information, or more importantly, people are lazy and they may just not look at it. These consumers will be affected by price because it gives them a subconscious message about quality, even though they don’t realize it.

On the other hand, there just might not be a lot of information out there. As one might expect, when the Apple's App Store launches there is likely to be a large amount of missing information. If there is a crowded and fiercely competitive category, such as casual games, information might be lost in the “noise” or be inaccurate or not believed. For example, too much overhyped or obvious false marketing information might make people suspicious of all other information out there, even though it could be true.

So how will this affect your application?

If you are a new business or developer without a large blog following or press, you might have trouble standing out in a crowd. People do not know of your value, therefore pricing your application at $0 isn’t necessarily going to get you recognized. Because of people’s built in mechanisms, instead of taking the time to properly explore exactly what your application does and how well it solves their problem, they may instead turn to a reasonably priced alternative.

To put it another way, its much easier for a consumer to spend money and act indignant that they didn’t get their money’s worth than to put work into researching and getting it for free.

How might you know when price is dragging down your application?

• You have very few people trying your application, even though it has comparable features to another application many people are paying for.

• You work hard at promoting your free application but no one seems to be taking the bait. The word “desperate” might come up.

• People have an unreasonably harsh view about your application.

The key word is “unreasonable.” People heap scorn on applications because the value has already been lowered in their eyes by the price. Their scathing review is only confirmation in their minds of the already low opinion they formed based on your price.

If that sounds like a circular argument, that’s because it is. But who ever said everyone was logical? People feel the need to justify the money they’ve spent. The availability of a lower priced application that offers the same features signifies that they made a bad choice. its an attack on their good sense. Therefore, they will attack the lower priced application to justify their “correct” choice.

So what are some things you could do?

1. Instead of going completely free, you might make it clear that your application will be free as a promotion only, and after some time it will revert back to its normal price. The key here is the “normal price.” Psychologically, a product that is discounted will have more value than a product that is not, even if they are the same price.

Don’t believe me? Just think about this scenario: You have an application normally priced at $5 but now available at the special price of $1 for a limited time, and another application that regularly sells for $1.00. Most of you, if you really thought about it deep down, will somehow get the feeling that the $5 application is worth more. In reality, at this exact point in time, they are both $1.00 applications.

2. Price your application at a discount to your competitors, but not so much as to decrease its value in the eyes of consumers. Personally, I wouldn’t ever go past 50%. For example, if you have a strong competitor selling at $8.99, don’t go hawking a free app if you’re not well known. Instead, maybe come in at a reduced price point of $5.99, and expound on your “comparable features” and value. Instead of the sending the message of “try me, I’m free,” send a message of “try me, I’m reasonably priced and the usual choice is actually far too expensive.”

3. Use customer service to get the word out about your application’s worth.

If you plan on staying low cost or free, technical support and customer service is one of the biggest things affecting user satisfaction you have control over. You’ve heard it over and over again I’m sure, but it really is that important. Happy users leave happy reviews and tell their friends. Legitimacy and respect from past customers is protection against the stigma of a low price.

So what could possibly go wrong if I give it away for free?

Answer: It will make it harder to sell something for value later on.

Offering a free application may (and I stress may) gain you followers now, but those followers might be reluctant to move up to become paying customers in the future. Naturally, this is a tradeoff. Followers of today could be persuaded to pay tomorrow, but followers of a future app cannot just be magically created.

On the other hand, people who were all over your free application may abandon you when you come asking for cash. Instead, they will move on to the next free offering. Remember, anyone can offer an app for free if they have no interest in making money. So if your strategy is “offer for free now, make money later,” don’t be surprised when you’re trying to make money later and suddenly your competitors are now offering it for free. You’ll end up with no money ever.

Feel free to leave comments, and be sure to check out previous posts on Pricing methods of iPhone applications and How much money can I make with my iPhone application?

Follow-up Reading: A great article about under-pricing by Norm Brodsky, a longtime Inc. Magazine columnist.

Comments

[Ryan]

I see your point, but in the end, software prices drive towards zero. There is too much talent creating software, and too many people who will be competing for limited space on the phone. Open source software is a good example.

[Tom]

While software prices are lowered by alternative choices, I don't think they drive towards Zero. For example, people still pay for operating systems, despite the availability of open source operating systems, and many people do choose to pay for software they want.

Even more important, I think there is a competing view to yours, think of it as an equal and opposite reaction. As software is more complex, it cannot be easily copied for free. Sure, its easy to copy a solitaire game, but copying Spore might take a little effort. People will happily pay for Spore, just like they do for other software people sell. There is a huge army behind open source software, but that doesn't mean that army is going to make a free version of everything people want, keep it working, and keep it relevant. I'm basically saying, if you put effort into your software, and plan on providing value, you shouldn't give it away just because everyone else is.

[vlad the impaler]

someone is mad cuz they priced their app too high so hes making up a sob story....

wuss.