Shared publicly  - 
 
Revenue = X

We've been experimenting with app prices for quite some time and again and again we've noticed a funny effect:

No matter what price we choose, we always make the same revenue.

I attached two charts to illustrate that. I recently lowered the price of the iPad app (http://bit.ly/92xWv1) from 5 to 1 Dollars. At first the sales spike, then they even out to previous levels. Meaning: By cutting the price by factor 5, I am selling exactly 5 x more apps.

Then we lowered the price of iA Writer for Mac (http://bit.ly/jfsHdZ) from 10 to 5 Dollars. And the exact same thing happened. There was a short initial spike, then the curve fattened out to previous revenue levels. We cut the price in half and are now selling 2 x more apps. The same happened when we lowered to price from $17.50 to $10.

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

I'm happy to be able to offer iA Writer to more people without losing too much money (see below), but I'm still puzzelled: It seems that cutting the price is a way to increase exposure without affecting profit. 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).

Sure, you can make some more money with the initial spike, but...

1. support costs
2. the probability of super rare bugs
3. negative comments (not just on the App Store)

...will 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.

The only thing I haven't tried is making the app free, but, unless we add advertisement, we'll have 0 revenue, which is not really what I'm looking for...

For now, we'll keep both apps on the discounted price level (http://bit.ly/jfsHdZ and http://bit.ly/92xWv1) for another couple of days—until the next versions (both with iCloud) get approved.

Did I mention that the more I know about the app store, the more I get confused about digital economics? Have you had similar experiences? Do you have better explanations?
195
224
Daniele Mazzini's profile photoDavide Taviani's profile photoamir khella's profile photoDavid Lindsey's profile photo
54 comments
Ali Ali
+
1
2
1
 
Which model do you think make more sense for your business?
 
Maybe more people bought the app after the price drop because they perceived it as a bargain (and rightly so). The compensatory effect could taper off over a longer stretch of time.
 
IMO you've got to quickly achieve the tipping point (with an economical price point) then sell your product/service for something closer to full retail. For instance, I just bought Animoog, digital synthesizer, for 99 cents (it's also featured as a HOT app). One of the reasons I bought it was because the company said it would be retailing for ~$30 soon. The reviews looked good and I like a cool new toys. Another thing many developers are doing is offering two versions; however, this might introduce addition support and maintenance overhead costs.

By the way I use Write Room and OmniWriter. I'll check out your app. Thanks.
 
we earn exactly what they want us to earn.
 
How much of this do you think is "sale" economics? I.e. Users buying because they thought they were getting a deal and had limited time to purchase (full disclosure, this is when I have bought both the iPad and Mac iA Writer versions). Obviously starting at a lower price limits you ability to cut the price more often. Long way of asking if you think it makes sense to start at a higher price point and doing frequent sales or if a consistently low price makes a difference long term.
 
...implying a linear demand function! this could be an econ 101 case study. awesome. (the likes of amazon, walmart, and apple could probably rewrite econ textbooks with the amount of consumer data they're gathering.)
 
+Oliver Reichenstein even if the profit stays the same the lower price model gives you various benefits. for one your app get´s exposed to a bigger audience, making your brand better known and giving you more feedback in turn. If your App uses internal analytics and tracking tools you also get more numbers on what users like and dislike. In addition the bigger exposure give you the ability to market other app better. since your stats seem to regard to the initial buy action, you may want to experiment with in-app purchases that give users functions that are needed only by intense users. The bigger exposure may also help you find new niches to expand in as users demand functions or even apps that are not yet or only badly covered by the market.
 
+Oliver Reichenstein Yes, it is. The question of why apps and games have unit elasticity is definitely interesting. (That the revenue is flat is just a trivial effect of it. ;))
 
Though by lowering the price you can move some sales from the future getting more revenue in a more interesting point of time. Which is now, not at the end of that tail, when most of the bugs has been already found and less maintenance is necessary.
Ali Ali
 
My first instinct went with lower price for a higher market penetration but I agree with your point regarding loyalty and less complaining. It seems when people pay more for something they tend to value it more as well.
 
It will be really interesting to see what happens once you INCREASE the price again :)
 
+Oliver Reichenstein in short term yes in long term on the other hand i would think that the higher exposer gives you the ability to shape your apps towards a ever more successful product. The main thing (imho) is the balancing of features and revenue models, including viral and social media functions. the main marketing focus being "how can i make my users talk about my app?". For example i suggest evernote to most people i know, because it´s an incredible tool.
 
+Ali Ali Isn't it kind of the Apple model? Expensive products leads to better recommendations.
 
I wonder if the individual customer has some kind of budget for "iTunes Store Spending". If — for example — an individual was to budget for "$20 of iTunes spending per month", would that impact the price elasticity of Apps? Thus when Apps are halved in price, you'll find the customers can buy twice as many in their budget, or in some cases a customer might be able to afford to buy the App where previously they wouldn't.
 
The demand curve is set by the market. You are simply moving to a different point in that curve when you change the price. To increase revenue you will need to move the entire curve.
 
My belief is that .99 is the same as free to many, many people.
$1.99 is the same as free to many people.
$2.99 is the same as free to some people.
Most people think about things that cost $3.99 and $4.99.

So, if you price at $4/5 you get the serious folks. If you price at .99 you get a massive amount of folks who will take a flyer on something. For me personally I buy anything at .99 or $1.99 without worrying. at $2.99 I start to think "is this worth it" but i normally still buy. At $3.99 and $4.99 I do research.

All of Mahalo's apps are at .99 or $1.99 right now. We might change that over time as we add features, but like you I feel like getting to more people is, well, more fun.
 
+Jason Calacanis i agree. same goes for in-app. i´m fast at buying a 0.99$ upgrade, but when it comes to 2.99$ and more i mostly don´t do it. also most apps i post or refere to friends are free or 0.99$ - because even if i like the app a lot, i don´t want my friends or followers to feel bad about their purchase. with 0.99$ nothing can go wrong.
 
Beware: If you change the price to free, you'll have an infinite amount of users (which might make the universe crash)
 
All of the discussion of price elasticity (a static concept) is a little off, in my view. The right model is that of a durable good, not a consumable. One doesn't buy the app every week like gasoline; you buy it once and you're done. You might look at the durable goods literature in economics, and in particular the Coase Conjecture (a version of which predicts that, under certain conditions, revenue will be constant even as the price falls.) The trick is that you're really competing against "yourself, tomorrow" rather than any given rival today. Ironically, competition today is what enables producers of durable goods to make money -- otherwise, everyone would simply hold out for a lower price in the future. [I notice that all of your experiments seem to be with price cuts; my bet, reinforced by the Coase Conjecture, is that if you increased the price, revenue per week would NOT stay the same, but instead fall precipitously.]
 
One thing I noticed over time (with free apps though) is that some effects take time to become visible. If you do a change that affects the number of downloads (pricing or just a name change) it may take a month for example to reach a certain tipping point. Maybe it's when the reviews add up, but at some point suddenly you get ranked better which affects visibility and causes downloads to explode. The question is: with your number of potential users, is it possible to stay for a long time in a top ranking. If it is then you definitely have a long term advantage to having more cheaper users.
 
Using the price-volume curves should enable you to figure out what you should charge to sell exactly ONE copy. This would make support & PR much easier, no?
 
+david croson. Wouldn't the price falling precipitously just be a transient effect like the spike observed when they dropped the price? It is not like the customers are repeat customers, so there would be little embedded memory of the previous price point ( i.e. No competition against yourself)
 
I'm curious how would downloads look no only at .99 and 4.99, but at whole spectrum (1.99, 2.99 and 3.99). Maybe it'd not as linear as we think. BTW another pro for lower price/more downloads is making to the TOP10/100 etc. For my ScreenTap on MAS, one week display in TOP10 in Poland made miracles.
 
This is a great real world example of the price elasticity of demand.
 
maybe it would be profitable to lower and raise the price very often like every 2-4 weeks to generate those spikes?
edit: typo
 
Do you have any other apps on the market? If so, do you see any spikes in demand for the other apps as you the sales of your primary app increase through the price drop?
 
Have you tried doubling the prices ($9.99 and $19.99)? You might be surprised (speaking from personal experience)
 
Even if your app doesn't normally carry ads, those extra users might come in handy for in-house ads for your other apps. Also, you really should try at least one other price point for each app.
 
Very interesting read. Gabe Newell (from Valve Software) had the same conclusion, specifically: "We have Steam so we can watch user behavior in real time. That gives us a useful tool for making experiments which you can’t really do through a lot of other distribution mechanisms. What we saw was that pricing was perfectly elastic. In other words, our gross revenue would remain constant." Source: http://www.geekwire.com/2011/experiments-video-game-economics-valves-gabe-newell).
 
I have no better explanation too, but a recommendation as old fox in the business. To stay with a higher price (as Apple always did) provides a form of inherited class. It gives the customer the feeling having got a real counter value for his buck- look at textile store "Versace". There selling some rotten chinese rags for astronomical sums and girls / their financier, go crazy about. A look at the lady owners lips (forget to look at the whole face) alone tells all and everything you ever need to know about the product.
Therefore I state: people are not 100% rational, neither robots, the buying process itself has a lot to do with sex/lust and imagination not only bland needs. Buying software for a Mac product especially has a lot to do with pride and feeling. Going cheap means being cheap means un-Apple. Follow the old rule "Was nix kostet, is nix wert" - you should double the price when releasing the new version (in a few days I suppose) and stay with your product in the premium market segment.
Do not loose that medal please!
You will get the same revenue, stay in the high class premium club, and lower the support costs (Moritz will thank you) considerable. Corey King (read above) stated the same pure facts, only in more refined wording - my two cents
 
+David Lindsey i would opt against ads anytime. if you want to include ads for own products banners are, imho, by far the worst way. i would rather include ads for own apps in the format messages that are integrated in the design and humbly inform the user of other products without taking needed screen space. Appzilla uses a nice format as they have a extra menu, that is still obvious and easily reached. it is also a good idea to mix self advertisement with "how-tos" and "use-cases" of the very tool the user is using to add additional value and draw the user to this area of the app.
 
It's simple. There is an equation that shows the relationship you mentioned in this article.

Rate of change of the Revenue (R) = Rate of change of the Price (P) + Rate of change of the Demand (D)

In your case, cutting the price in half means that (P) is "- 0.5", and we can assume (R) is 1 because there is no price change. Then, it is obvious that (D) is "+0.5". Does it make sense?
 
Reichenstein!
always go for the higher price.
Same benefit, less trouble but higher reputation.
Your the platin class - how can you give away / in your product like el cheapo just to meet your competitors advances?
Be a man Reichenstein!°
- stand proud by your product and don't try to undercut the copycats on the price-side!
 
Olivier i think the additional exposure you get in your vertical is proportional to your price decrease. the only benefit i see is, if your app is really good, you will collect a lot more ratings and that will both affect your ranking but also your users' potential decision to buy

It also depends on whether you integrated some viral features to your app in order to gain additional free exposure. But intuitively, more users you get, more word of mouth you generate. So if the revenues are equal, shoot for volume.

One last factor to take into account: if you app one day includes in APP purchase you d be better off widening your user base for obvious reasons: you 'll have more opportunities to purchase because of a natural bigger basis or purchasers.

If you want to talk to us we have wide experience in those matters > ouriel at appsfire dot com
 
i just had a look at the iA app for iPad in the appstore. from what i can see the app presentation could be much better. you provide a lengthy info text that puts the functions at the very end. the main picture shows little of the functionality or benefits of the app. the comments are full of wishes for functions that are dearly needed (like folders, printing, change of background and font color). to be honest i didn´t really understand what benefit this app would bring to me. maybe these are some reasons for the steady price/purchase conversion. - you need to make very clear what the USP is.
 
On an app I used to run, we found that increasing the price by 50% lost 17% in monthly customers, but actually increased revenue by 9% that held until I left nearly a year later. Granted, we felt the app was originally under-priced, and apparently our market did as well, but nonetheless: we did not expect an increase in revenue.

It would be interesting to see if you bring your prices back up to their original values, if you would lose customers and/or see a rise in revenue.

Also, a factor that I did not see addressed: Apple’s Top Apps listing driving more attention and therefore more sales. Makes me think that you could see the same spikes and increase in customers by marketing or other attention-getting means, rather than adjusting price. Of course, that adds overhead, but does not decrease profit.

Really is a tug-of-war, isn’t it?
 
Did you try a "sexy price" like 4.99 vs 5.00? I would be curious if that changed anything.
 
+Davide Taviani Thanks, I don't have an iPhone and didn't know that. It would still be interesting to compare that to 5.00 (if they didn't already)
 
I like this research: i followed closely the first time you put on your blog numbers about iA, and it closely remembered me Craig Mod's essay about Kickstarter's pledge tiers ( http://craigmod.com/journal/kickstartup/ for those who need a link). It is definitely an interesting topic and I would like to know more about it. Keep it up Oliver! Also, 37signals' founder article mentioned above is something on which I really agree, and I presume so do you :)
 
+Oliver Reichenstein Thanks Oliver, didn't know that. I'm still developing my first Android app, I still have some time before doing an iPhone port - I'll have to study, I guess :)
 
I was intrigued by the product when featured on Minimalissimo.com; at $5 it was a bit much for what would be a frivolous purchase (looks great for prolonged prose which I don't do much of), but at $1 it's an aw-what-the-heck purchase. 

As an aspiring iApp writer, found your experiment interesting. Thanks for sharing, and for a good minimalist product; looking forward to more of both. 
 
We just finished an "interesting" one-week experiment. We publish an app called RaceSplitter. It's a utility for the timing of sports events. With RaceSplitter, an organizer of small to medium sized races can save thousands of dollars by not having to contract a chip timing service.

Until now, the price has been $14.99. Last week we lowered the price to $0.99. We did this to try to get an approximation of the traffic to the product, by those people who would have some interest in it (thinking that for $0.99, anyone even remotely interested would buy it). After a week, we sold only twice as many copies as we normally sell during a week.

This seems to be in line with what Marco Arment wrote in Quora, that for specialized utilities, dramatic lowering of price doesn't produce the kind of sales spike you see with games, or apps that have mass applicability.
 
Great and interesting writeup. The AppStore confuses me on a daily basis as well. My app originally cost $99 cents. After the initial spike of launch (and being featured by Apple), the number of sales dropped to almost nothing after 3 weeks. I decided to raise the price to $1.99 (with no extra press) and it began selling MORE than before. It wasn't a significant increase, but it was more and thus doubled revenue. I don't know if this has to do with perceived value or not. Maybe people think a $99 cent app is a toy and $1.99 app is more useful.

I've also had 2 experiencing with "going free". The first time, there were 30,000 downloaded after 3 days going free. The day after, it returned to $1.99 and sales were 3x the norm, but the next day they dropped back to normal. So, the numbers of days gone free ended up breaking even. The second time going free, we were part of a press deal so we had more exposure. We had over 100,000 downloads in 2 free days and made it to #1 overall in Italy. Since then, we've had 5-6x the sales for 3 straight weeks (many from Italy and surrounding countries). So, the first time wasn't 'worth it' and the second time it definitely was.

I've come to find that not all apps can be created equally and there has to be other factors that come into play. We also just released the same app on Android and have actually been making more revenue (at a cheaper price) on Android (which has been very surprising).
 
+Olivio Sarikas I did not mean banner ads in particular. The principle applies to less annoying advertisements as well.
 
As other have alluded to, at some point, you will experience an impact on the sales profit, but you are simply in a linear range of your pricing sample. By extending the range to lower and lower levels (not allowed by Apple's pricing format), you would begin to experience profit deviation. The same will be true at higher price levels. I guess the takeaway is not to devote too many resources to finding a perfect price point.
 
+Bert Vanderveen Bert, there is no such thing as objective worth. It doesn't exist. You exchanged a certain amount of money for iA Writer, because at the time of purchase, you felt compensated by the value it provided. The value it provides to you has no relation to price of the product a week ago, or the price of the product a week in the future. Oliver's price change doesn't reflect his view of its worth, but even if it did that would still be irrelevant to the fundamental notion of what the product is worth to YOU.
 
+Paul Bennett You wrote: "The demand curve is set by the market. You are simply moving to a different point in that curve when you change the price." Both true. BUT....

"To increase revenue you will need to move the entire curve." Only if the curve is of the shape price x demand = 1 (which it is so far in testing), and continues to have this same shape at all values. For other products and other curve shapes, there is likely a revenue-maximizing spot on the curve.
Add a comment...