I am in an iPhone mood. Just like the rest of the world. It will go away, I promise. Last week I tried to answer a more fundamental question: Should you build an iPhone app? Now that you built one: how would you price your iPhone application?
Here are some interesting statistics: based on Tech Crunch’s mid day iPhone App Store download statistics from Friday, the top 10 free apps had a total of 68,452 downloads where the paid ones (mainly games) got a total of 4,484 downloads. It means that only 1 of 15 downloaded app was a paid one. I suspect the overall numbers are even lower. Why? The ratio between the number one paid app (Monkey Ball) and the number one free app (Remote) is about 1 paid to 9 unpaid. If you look at the last apps in the top ten list the ratio is now 1 to 25- which means that the longer the tail is, the more unlikely you are to make money on your app.
So what? It is clear that people prefer free for paid. As I mentioned in a previous post, a chapter in Dan Ariely’s book, Predictably Irrational is dedicated just for that. According to Ariely, when people were presented with two options, one free and the other not, they always selected free, even if it meant getting a lesser product. Dan even tried to minimize the disturbance of paying by adding the Lindt truffle to your lunch check but people still preferred free. Get this, when Hershey kiss was priced for 1 cent and Lindt for 15 cents, people picked Lindt in a ratio bigger than 2:1. When Hershy was offered for free and Lindt for 14 cents (same 14 cent difference) people selected Hershey in 2:1 ratio. This is how powerful free is.
So, according to this tested human behavior, people would always rather getting their apps for free, even if the priceis going to be very low. Nevertheless, experts anticipated that it will be different with the iPhone app store since Apple already proved that it could educate the market to pay for songs and movies instead of stealing them. In my opinion, it worked because it was easier to click buy now and pay 99 cents than going to your favorite file sharing site, look for the song, take 10 minutes to download it and import it to iTunes (and felt bad throughout the process…) . The tight integration made buying a song a no brainer.
But when customers will face two options: tightly integrated free app or tightly integrated paid app, both offer the same download experience – the first day statistics and Ariely’s research indicate that the vast majority will go for the free option, even if they will get a lesser app.
What does it mean? unless you are sure you can produce a massive hit, go for a free option and build a loyal install base you can market to in the future. Since the cost of development is so low and there is no distribution friction, most developers should seriously consider the free route and find a way to monetize the application based on something else (user data, commerce options etc). If you do price your app, be very careful with a low fee- it seems like one dollar apps will be way less popular than the free ones but will get little revenue. With a special enough application, that solves a unique problem of a relevant target market you may be able to charge enough and make it work for all sides.
Now, I may be completely wrong- Apple proved smarter people than me wrong in the past. Even in this case I would still suggest following the trends in the store, reading Dan’s book or the research paper and make sure you put a lot of thought into your pricing startegy. Good luck.
Update July 15: As posted in Tech Crunch today, there is a trend of increased number of paid application compared to free. The statistics refer only to the total number of applications and not to the number of downloads/popularity but they reflect on the fact that developers are optimistic about their ability to generate revenue selling apps. Jury is out…
Related article: Apple destroys iPhone apps credibility