Pricing Strategies for Your App

Maybe you got into app development as a hobby and now you want to turn it into a business. Or maybe creating a moneymaker was the goal all along. Either way, the same question applies: What are people willing to pay for your app?

There are several options for monetizing an app, including in-app advertising, sponsorships and in-app purchases, each of which we’ll cover over the next few months. But for many developers, the most obvious option is simply to charge users to download their apps.

But it’s rarely that simple. One major challenge is deciding how much to charge. In general, the more sophisticated an app is, the more users are willing to pay. That’s why utility apps — whether they’re for carpentry or IT — often go for $1.99 or more. An extreme example is BarMax CA: For $999.99, you get a comprehensive California bar exam review course created by Harvard Law School alumni.

The vast majority of premium apps are priced at 99 cents — minus, of course, the 30 percent or so royalty that app stores charge developers. Multiply that by however many hundreds or thousands of copies you hope to sell, and that price point could be enough to recoup your cost of developing the app and provide a profit margin.

But will 99 cents generate enough revenue to cover your support costs too? After all, when people pay for something, they expect some level of support. The more sophisticated the app, the more calls and emails you’re likely to field, increasing the chances that you might have to hire one or more people to provide support. That overhead has to factor into the price too.

If your app currently is free, and you’re thrilled with its current download stats, don’t assume that they’ll stay the same once you start charging. Expect just the opposite, some veteran developers say.

“If you put a free app out there and you decide to change the price to something like 99 cents, for every hundred that you got when free, you might get one or two at 99 cents — if you’re lucky,” says Terry Hughes, who developed BlackBerry apps before becoming managing director at AppCarousel, which bought his company.

The Freemium Strategy

One alternative is a freemium business model: Offer a basic version of the app for free and then hope it’s compelling enough that users are willing to shell out a buck or more for a premium version that has more features.

“It was the only way we could monetize the momentem app,” says Hughes. “We get $8 a month from the app because once busy businesspeople are hooked on it, they’re more than happy to pay. To get them hooked in the first place, you have to give it for free, especially these days. There are so many free equivalents for everything that having any price tag is a challenge.”

Success with a freemium model requires walking a fine line. The free version has to have enough features to get users hooked, but not so many that they believe upgrading isn’t worth it. Also, the free version needs some kind of in-app messaging to upsell them on the premium version, but those reminders shouldn’t be so pushy and so frequent that users perceive them as nagging and uninstall the app.

Whatever your strategy, keep in mind that app prices have been flat or declining over the past year. For example, the research firm Distimo found that between March 2011 and February 2012, the average price of iPhone apps declined from $3.69 to $3.26, while apps sold through the Google Play store increased by a penny to $3.14.

Do Sales Goose Sales?

If sales aren’t what you expected, a temporary discount could bring in the volumes necessary to get revenue where it needs to be for that month or that quarter. If some of your revenue comes from in-app advertising, a promotion also could expand your ad revenue.

Not surprisingly, the deeper the discount, the more users take advantage of it. “In general, we noticed that the optimum sales occurred when the price was cut in half or the application was offered in tier 1 ($0.99) or tier 2 ($1.99),” said Distimo in a January 2012 study.

Although a 50 percent price cut might be tough to swallow, the sales bump can be significant — even when the promotion lasts only a day. “On the first day of the sale, the average revenue increased by 41 percent in the Apple App Store for iPhone,” said Distimo. “Moreover, the revenue during the whole sale (we looked at a maximum of 15 days) was up by 22 percent. The first-day effect is larger in the Apple App Store for iPad (52 percent), and the increase in revenue during the sale in the Google Android Market was the highest at 29 percent on average.”

Even so, discounts don’t guarantee a big revenue boost. Distimo’s study found that 44 percent of iPhone apps lost revenue during their sale, and 23 percent of them took a hit of more than 20 percent. That’s why picking the right discount amount is key.

“For example, offering a discount of $1 on an application that normally costs $7.99 lowers the revenue, whereas offering a discount of $3 on average increased the revenue by 131 percent,” said Distimo. “In general, we noticed that the tipping point happened when the price was cut in half or the application was offered in tier 1 ($0.99) or tier 2 ($1.99). Despite the risk of loss of revenue, putting your app on sale once in a while seems to pay off for the majority of applications and their developers.”