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Monday
Nov142011

What's the Optimal Price for Apps -- or Is There One? 


With more than 500K+ apps in Apple's App Store, many developers are out to find the right price for bringing in the most revenue.


Oliver Reichenstein, founder of iA Writer app-maker iA, recently posted to Google+ that his team has noticed a funny effect with pricing apps.

"No matter what price we choose, we always make the same revenue," Oliver writes on Google+.

iA lowered the cost of its iA Writer for iPad from $5 to $1, saw sales initially spike but then return to previous sales levels. By cutting the cost down to one fifth of the original price, the company sold five times more apps.

Oliver writes that iA did a similar experiment with iA Writer for Mac, in which they dropped the price from $10 to $5, and the exact same thing happened: iA sold twice the number of apps. 

"What I expected was that at a certain point the price change would impact the sales profit positively or negatively but it never did," Oliver writes.

Oliver writes that he is happy to sell iA Writer at a cheaper price, but that he is still puzzled by the economics of selling apps.

"It seems that cutting the price is a way to increase exposure without affecting profit," Oliver writes. "Either the app store is rigged, or the market seems to magically decide in it's invisible head quarters how much money is going to be spent on an app. (I don't think that the app store is rigged)."

Oliver's post prompted much discussion regarding app pricing on Google+. Some users associated the phenomena with price elasticity, which shows the responsiveness of the quantity demanded of a good to a change in its price.

Oliver responds that price elasticity is initially what he expected, but in their case, the price did not seem to affect the profit.

Another user referenced a similar situation that gaming company Valve experienced, which seemed to be more like unit elasticity -- where an increase in price causes the same decrease in quantity demanded and the total revenue stays the same -- rather than price elasticity. 

"Good to know that I'm not alone, but...," Oliver writes. "Isn't that a strange effect?"

Another user, guerilla marketer Olivio Sarikas writes, "even if the profit stays the same the lower price model gives you various benefits" such as exposure to a larger audience.

"I'm well aware of all that," Oliver writes in response. "But I am also aware of the downsides. So the right price seems to be more a balance between the positive and negative secondary effects than the price."

As Oliver noted in his original post, support costs, probability of rare bugs and negative comments also grow by the factor of growth.

"So, unless your goal is to grow a big user base, cutting the price is not a recipe to increase revenue but to inflate your app," Oliver writes.

What do LAUNCH readers think? Is there an optimal price for apps?


SCREEN SHOT

Oliver's data shows that once he lowers the price, there is an initial spike, then the revenue slightly drops, but then readjusts to previous revenue levels with higher sales volume at a lower price. 


FURTHER READING

1. Camels and Rubber Duckies (Joel in Software, Dec. 15,2004) 


CONTACTS & LINKS

Oliver Reichenstein, CEO of iA
Twitter: @iA
LinkedIn: http://www.linkedin.com/in/informationarchitect