App Store Pricing (It’s not a free market!)

Many people continue misinterpreting what Craig Hockenberry, myself, and other developers have been trying to convey. Here’s another stab at it: We’re not complaining at the existence of $0.99 apps. We’re frustrated that artificial market forces are driving down the price of apps, which in turn drives down the perceived value of the products we have invested significant time and money to create. Marketing can help, but it’s throwing good money after bad if the market discourages charging a fair price for an app.

A tweet from Steven Frank, the co-founder of Panic, challenged me to think more about App Store pricing and describe in more detail the issues with the App Store as an economic market.

"99c apps don’t preclude expensive apps any more than Hyundai precludes the existence of Lexus."

That is quite true, but we need to look at the market forces that influence app pricing to better understand the motivation of developers in setting the price of an app.

Many developers are not pricing their apps at a sustainable price, or even a fair value for their app, they are using price as a marketing tool. In a competitive free market, price is one of the ways to compete, and heavy competition generally leads to lower prices, but price isn’t the only way to compete. Apple itself proves that a premium product can be wildly successful.

But, the App Store is not a free market!

If you walk into any major grocery store in the world, you may not notice, but you’re walking into a very specially designed maze of marketing. Manufacturers pay for end caps, prominent shelf space (floor level for children’s products, eye level for adult products), and other subtle tricks that move more product. General Mills spends millions of dollars marketing Cheerios, but they still pay for prominent placement so that a child will grab a box on impulse and beg their parent to purchase it.

As opposed to what many have suggested, the App Store is not just a giant warehouse where everything gets relatively equal exposure. Apple’s design of the distribution channel is actually one of the strongest market forces.

"Despite what others say about marketing, iTunes placement is KING."
Layton Duncan of Polar Bear Farm

I haven’t been able to determine this conclusively, and no one at Apple will comment, but it seems as though app rankings (and therefore placement in the App Store) are determined almost exclusively by sales volume. Volume drives ranking and ranking drives more volume. This cycle creates momentum that is hard to stop, and developers are using price as a means to feed this cycle. As volume starts to drop, a quick price adjustment will spur demand and cause an uptick in volume, which then pushes it back up in the rankings and gives the app even more exposure.

That sounds like market economics at work, what’s the problem? Using price as a marketing tool really only works for the top 50 apps. From everything I’ve been told by other developers, publicly and privately, the top 50 list generates it’s own buzz. The top 50 is the place where people make those impulse purchases. Most developers are lowering their price hoping to get more attention, but end up shooting themselves in the foot. If they bet on volume and fail to make it to the top 50, it’s unlikely that they will make a return on their investment of time and/or money.

The makers of Ocarina recently revealed that it sold close to 400,000 copies in a single month, which equates to over 13,000 copies per day. Ocarina is one of the most viral apps so far, and may be a unique case, but I’ve seen other numbers that confirm that the top apps in the App Store are selling around 10,000 a day. I’ve heard from other developers that app #50 sells between 500-1000 copies per day, and from my own experience I know that app #100 sells 200-300 copies per day. Here’s what that looks like:

I don’t have sales data to back it up, but I’m pretty sure the numbers don’t drop as rapidly after the top 200, but any way you look at it, that’s an incredibly steep curve! If you stretched that graph to include all 10,000 apps, you’ll see that most apps are making VERY little money.

Ranking apps by volume incentivises cheap gimmicky apps, and makes it difficult for developers to charge a fair price for quality apps. Sure EA and other game developers have been able to sustain higher prices and hold strong in the top 50, but most apps in the top 50 are games from big name developers, priced at $0.99, or both!

If Apple changed the rankings to use a combination of volume, price, and maybe even star rating, the App Store would take a dramatic turn in the right direction.


UPDATE: More great reading on this subject from Layton Duncan at Polar Bear Farm : The Hack Store