Making money in a crowded App Store: it's dog eat dog and Spy vs Spy

Richard Gaywood
R. Gaywood|09.04.12

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Making money in a crowded App Store: it's dog eat dog and Spy vs Spy

On the 25th of July, a shiny iOS remake of the 8-bit classic Spy vs Spy launched on the App Store for $1.99. The next day, the price dropped to $0.99 in a launch sale. On the 30th, it went up briefly, then developer Robots and Pencils announced that "to show our appreciation, we are extending the sale price indefinitely." It remains at $0.99 to this day.

I'm annoyed by this. Now, please note that this is not a complaint about sale pricing per se. As it happens, I bought Spy vs Spy a few hours after it launched (I'm a sucker for a well-done 8-bit remake) so I paid $2; I suppose from a miserly point of view I'm out a buck. I'm fully capable of spending seven times that for lunch without blinking, however, so I can't claim with a straight face that I'm annoyed about the money.

I'm annoyed because Robots and Pencils has just taught me a lesson: don't buy iOS games for $2+ because they'll be cheaper soon. I do not intend this to be any sort of slight against Robots and Pencils, however. If it was the only outfit doing this it wouldn't matter, but the same lesson is being taught to us all, over and over again, by many of the most successful devs in the App Store. For example, it feels like EA puts its entire back catalog on sale for $0.99 roughly every other week. Free App a Day has been enduringly popular for years. Gameloft has regular sales and giveways of its apps. And so on, and so on. It's sale pricing all the way down.

App Store consumer valuations: hopelessly broken?

So here's my hunch: I think the constant sales are training consumers to avoid "expensive" apps, where "expensive" has taken the seemingly ludicrous definition of "anything more than a dollar." Furthermore, I think this will be to the detriment of us all, in the end: devs and users alike.

Before I detail my reasoning, a quick poll: please be honest with me now. How many of you cruise AppShopper's price drops page for bargains when looking for a new game to while away a boring commute? Or how many of you, when someone recommends an iOS app to you, find the first thing you do is load the AppShopper app to check the "price history" section... and if the app routinely goes on sale for less than it costs now, add it to your wishlist to buy the next time it's cheap? I've done both of these things. I suspect many of you have too.

This is perfectly rational, Economics 101 behavior: experience has taught all of us that apps do, frequently, drop in price. If we wait it out, we can save a buck or two, and who doesn't like to save money? Suckers, that's who, and I'm no sucker! With the iOS apps market -- particularly the games bit -- teeming with competition, it's not like the pressure to acquire some hot new release right now is very great. There's always something else to buy, something else that's cheap or on sale. So I think some people (most people, perhaps?) take a wait-and-see approach.

Insidiously, this is self-sustaining and self-reinforcing; once people are trained to wait for sales, devs can only generate revenue when they put apps on sale, which further encourages consumers to avoid expensive apps. And if you're the only dev trying to swim upstream, people will ignore your app forever waiting for a sale that never comes. It's a vicious circle.

For example, consider the case of App Cubby's Timer, an app I liked when I reviewed it recently. App Cubby recently cut the price of the app from $0.99 to free, resulting in downloads going up from 13 per day to around 25,000. That's a not-inconsiderable number of people who, presumably, wanted the app enough to go to the effort to download it but not enough to pay a buck. Now, perhaps Timer's relatively small (but beautifully formed!) feature set meant people were put off. But is that fair? It does one thing well, and it cost a tiny amount of money. Just how much do people expect for $1?

I think near-constant sales and price cuts are at the root of at least some of the "but $2+ is soooo expensive!" world view for app pricing, which is (on the face of it) so utterly counter-intuitive as to be baffling. But it does make sense from some angles, and this is one of them.

Talking to developers and marketers

The acquisition of the Sparrow email client by Google kicked off an extensive dialog between lots of bloggers on the subject of app pricing, App Store economics, and whether or not current "mainstream" pricing clustered around $0.99 leaves enough room for most devs to earn a living or not. Interesting posts from active iOS developers abounded and covered a wide spectrum of opinions; for a few of the more thoughtful, look to App Cubby's David Barnard, Instinctive Code's Matt Gemmell and Instapaper's Marco Arment. It's a problem that's on a lot of people's minds right now.

I reached out to a few folks to gauge what they thought of my hypothesis above.

First of all, I approached Robots and Pencils itself. Company spokesperson Michael Sikorsky declined to comment, saying "I've polled the team of 5 [who wrote Spy vs Spy] and we got back 8 opinions. So, we're not even all on the same page [ourselves]." However, his wife and co-founder Camille did share her personal opinion: "I think Apple screwed everyone by offering games at $0.99. I think our game is easily worth more but it's a race to the bottom dollar in the App Store. And yes, the users' expectations reflect Apple's choice which is good for them but not good for the devs who spend a ton on production."

David Barnard of App Cubby agreed to chat with me and said a few interesting things. Firstly, he urged me not to "lambast" Robots and Pencils for the price cut -- as he said, "They did what worked and are raking in the cash. Better for them to make great money than stand by some sort of principle and lose their shirt." I think he's absolutely right here. Although Robots and Pencils wouldn't tell me directly, I strongly suspect that sales at $2 were simply too disappointing to be sustainable, and the company acted out of desperation. I'd have done the same in its place.

He went on to say:

The thing is, the ship has already sailed on premium one-time pricing on hit apps. Some apps can survive in a niche at a premium price, but as I showed in my post about Sparrow, you still need to rank relatively high even at a "premium price" to make much money.

More and more I just think the App Store has completely shifted the reality of making money on software. Apps that could be hits should try the 99¢ route, and others should just look for other ways to make money. I'll be writing a blog post about this in the next few weeks, but I'm thinking about doing a complete strategy shift for App Cubby. And I'm definitely not going to be working on any new apps without carefully weighing the monetization options.

I'm not sure exactly what the long term solution is, but I'll be thinking a lot more about that as I work on my next blog post.

(Emphasis mine.) It's that emphasized part that most worries me as an iOS user: I have this nagging feeling that there are great apps I could be using, great ideas that devs have in their heads, that will never see the light of day because the dev isn't confident of a return on the investment. We cannot know for sure just how significant that factor is, though it's not hard to find devs who'll admit they've stopped pursuing ideas because of concerns about profitability. Or, as Keith Shepherd of Imangi Studios (Temple Run, Harbor Master) put it, "I think even one year projects on iOS are too risky from a business standpoint."

It's also noteworthy that David isn't specifically talking about games here -- App Cubby's products are utilities.

I also spoke to Brian Akaka, CEO and founder of Appular -- a mobile app marketing and consulting services firm. Brian's experience with App Store pricing goes back right to the very beginning (and before; he was a director of Mac gaming outfit Freeverse before moving to iOS projects), so his insight is particularly valuable:

I have a unique perspective, as I was working with apps on the day the App Store launched in July 2008, and have seen how prices have reached a downward spiral towards free.

While I agree with your idea that the consumer is a culprit in this, I think that the root blame lies with Apple and [the] design of the App Store.

A bit of history: When the App Store opened, no one really knew how to price their apps. As I was working with games at the time, the only points of reference we had was pricing for handheld devices like the Nintendo DS ($20-$45) and casual downloadable games from companies like Popcap (approx. $10-$20 at the time). Prior to the App Store launch, someone at Sega was interviewed who mentioned that the price of Super Monkey Ball would be $9.99. So that's what we charged for our iPhone games. And so it went... we would watch our competitors, and when they adjusted their prices, so did we.

One day someone at Pangea (who was one of the leading iPhone developers in the first year) decided to cut the price of all their games to $0.99. They immediately shot to the top of the charts. And stayed there. I recall a conversation I had with our CFO at the time. He argued that they weren't maximizing their revenue by charging so little. I rebutted him with, "if they aren't making more money at the lower price point, they would raise their price back." Within a few weeks, we had lowered our prices to $0.99 as well. This price drop, combined with some Apple love (they featured one of our games in their TV campaign for "the funnest iPod") got us to the #1 position in the App Store and several million units sold.

Fast forward to 2012, and the situation is worse. The App Store is incredibly crowded and competitive, and additionally Pricing is the one marketing tool (of the 5 P's of marketing) that developers can adjust at a moments notice. This means that developers have (over)-relied on pricing as a tool to promote their app. This leads to frequent price drops, sales, and all kinds of frequent price changes. As you mentioned, this has led to consumers coming to expect that an app will go on sale. And if it doesn't, it's ok, because a similar app will go on sale.

An additional issue is that Apple's App Store has suffered from a huge issue since 2008, which is that it is too difficult for a consumer to find the best, most useful app for what they are looking for. As a result, a vast amount of app sales are being decided by what is on the Top Paid charts, which ranks by # of units sold. Any Econ 101 student will know that you will sell more units at a lower price.

At this time, many game developers have given up on trying to charge even $0.99 for their app, instead going for the "Free to Play" model. As evidenced by the download numbers as well as the headlines and acquisitions by these "freemium"/"social"/"casual" game developers (such as Zynga, TinyCo, Funzio, GREE, DeNA, etc), the consumer will overwhelmingly pick a "free" game versus one that you have to pay for (upfront).

Fixing the problem

Brian was kind enough to continue with three pieces of advice to developers launching an app. I'll take them one by one:

Be realistic, not idealistic. Even if you know your app is worth more than $0.99, based on your time, costs, blood, sweat, tears, failed relationships etc. It doesn't matter. Remember that the market decides the fair price, not you.

There's no getting away from this one. A common problem when economics amateurs consider at what level to price products is getting tangled up in the idea of how much money (or time) it cost to make; but the laws of supply and demand are cold and uncaring. If competitors are selling for $0.99, and your app isn't clearly better than the competitor's offerings, then you're not going to do well selling at $3 -- even if that's what you need to cover your costs.

Look at the competition. Is there a similar app out there? Is it priced at $0.99 (or free)? Then so should your app. Until you've developed a reputation as having such outstanding quality that you can charge a "premium" for your product over competing products, you need to be price-competitive. Even Apple struggled through most of it's life by trying to charge a higher price for its products. Consider being freemium and monetizing off of advertising or in-app-purchases. With thousands of games that are available for free, it's a very rare iOS game that can charge more than $1. Typically these are games with enormous brand appeal (such as Tetris) or are well-known for having something truly unique, such as the best graphics (such as Infinity Blade).

Josh Lehman's post "Stop Using The Cup of Coffee vs. $0.99 App Analogy" made a number of points. Some of them have been well rebutted by David Chartier and Joe Cieplinski, but the one I really liked, especially for gaming, was "Free Apps Are Often A Great Alternative."

In theory, games on the App Store are not fungible; if I want to play Swordigo then 10000000 is not a substitute because it's a different game. In practice, however, for the more casual gamers that make up the bulk of the App Store market I think games purchases are fungible because people just want some entertainment and aren't too fussy about exactly what form it takes. I think consumers looking for a new game probably have a mental shortlist of dozens of "might buy" titles to look into -- the sheer scale of the App Store contributes here -- and one of them is almost inevitably going to be free or $0.99, so the more expensive titles might not even get a look-in to the purchasing decision.

Brian touches on the idea of alternative monetization strategies, like freemium games and IAP. As a gamer, however, I am less convinced than him by either approach.

I'm wary of freemium games because, fundamentally, I believe extensive use of IAP actively encourages developers to adopt bad game design. Many freemium titles work by being attractive at first, then requiring the user to gradually do more and more amounts of boring tasks -- "grinding", in gamer slang -- to progress... unless the user buys, with real money, some sort of bypass option. Think buying Tower Bux in Tiny Tower, or gold coins in Infinity Blade, or the "do the farming for you" power ups in Farmville.

The more boring the grind, the easier it is to lure motivated players into forking out to bypass it. I'm not against developers making money, but I'd much rather pay upfront for a well-designed game that's fun all the way through. I'm not saying all IAP is bad, but I do feel that it's a disappointingly rare dev who can avoid its siren call to the dark side.

Still, I cannot deny that freemium games are very popular, so it seems likely I'm simply on the wrong side of history here. So it goes.

Non-grind-avoidance use of IAP might not be the ticket to riches either. Consider the sad story of Gasketball, an iOS game that released for free with a $2.99 in-app purchase to unlock the rest of the content. It managed 200,000 downloads, and at one point was close the top of the iTunes games chart -- but only 0.67% of customers paid for the IAP. After two years of work, the two developers behind the game ended up homeless, staying with friends while trying to address the reasons the app didn't sell well and recoup their investment of time.

Whither Apple?

Brian's last point was:

Pray that Apple changes the App Store. (Just don't hold your breath). Apple definitely knows the criticism about the way that apps are discovered, and has shown signs of trying to address the issue, from redesigns of the layout, to the purchase of Chomp (a startup focused on app discovery). However, it's important to remember that Apple's main goal is to create profits for itself, not developers. Something like raising the prices of apps will benefit developers, but not necessarily consumers. And remember that the sheer volume of iOS apps is an important selling point for the iPhone and iPad versus other platforms.

So what about Apple? It keeps 30% of all App Store sales revenue, after all. Surely it would try and keep app prices high to make more money?

Well, I'm not so sure. Consider Horace Dediu's deduction that app developers receive $12 for each iOS device sold. That implies that Apple makes $5.14 per device from app sales. Apple never discusses margins, of course, but I think I'm on safe ground if I suggest it makes at least ten times more profit from the hardware sales of the cheapest iOS device. I therefore contend that Apple doesn't have much reason to care about how much software is sold for. Profits from the App Store are insignificant compared to hardware sales.

An alternative viewpoint is that proposed by "revorad" in this Hacker News post. As Joel Spolsky wrote in his seminal post on software economics, "smart companies try to commoditize their products' complements." Some products naturally fit together and complement each other, and wherever possible, you want to try and engineer the market to force down the prices of things that complement your product.

In other words, if you're Microsoft and you sell PC operating systems, you want to create a market with hundreds of OEMs driving down prices of PC hardware; that way, more people can afford to buy a PC and can then be sold your software. If you're today's IBM, you work hard to foster Open Source software, so that enterprise software can be commodized and the market for your profitable consultancy services grows. If you're Google, you release Android to OEMs under permissive, almost-Open-Source licences, so as to commoditize Internet access from mobile devices; then you have a bigger pool of users using Google services, looking at ads and earning you revenue.

And if you're Apple? Well, Apple benefits from a crowded App Store marketplace where developers cut prices to the bone in an attempt to stand out from the crowd. Every single app uploaded to the App Store adds value to every iOS device in existence; every single app a customer buys is another reason for them not to migrate away from iOS in the future.

Apple is certainly motivated to keep the App Store busy, and sales high; these things help iOS stand out from competitors like Android. But it's not motivated to keep prices high. In fact, lower prices for apps help to attract consumers to iOS as a platform, selling more of the hardware devices from which the bulk of Apple's vast profits flow.

The bottom line: I don't think it's likely Apple will do anything of consequence to help struggling smaller devs.

Be the change

So, let's recap what we know for sure:

  1. Numerous iOS devs are reporting that they are struggling to make enough money to stay afloat because consumers won't buy "premium" (i.e. more than a buck or two) apps.
  2. Apps that cut their prices report very high sales boosts.
  3. Apple makes much more money from iOS hardware than it does from its commission on App Store sales.

I believe that points one and two together are rooted in consumer psychology; we're locked into a feedback loop, where about the only way for a dev to get attention is to cut the price of an app, but that only further encourages users to avoid expensive apps. And I believe point 3 means we can't count on Apple to do anything to fix this.

If we don't fix it, I don't forecast doom and gloom. I'm not suggesting devs are going to flee the App Store in droves. However, I do think we'll see less interesting apps and less indie devs, as the excess risk scares away the people who can't deal with it and causes risky ideas to be shelved before they are developed. Meanwhile, the big players like EA and Rovio will churn out mostly bland, risk-adverse titles. I think that would be a shame.

Devs could play a part by sticking to their guns and refusing to lower premium prices, but realistically I suspect that ship has sailed. Another option is greater exploration of what freemium can offer, as this thoughtful post from David Barnard (yup, him again!) outlines. This is where I really do hope we see Apple play a part: I'd like to see more flexible monetization options added to the App Store, including paid upgrades and trial/demo modes.

As for users, the people who ultimately stand to lose the most if the vibrant, lively App Store we all know and love declines? What can we do? I don't see an easy answer, sadly. I'm going to do the only two things I can do: publish this post and hopefully get people talking, and be the change I want to see by buying apps that I want immediately -- not waiting for sale pricing to come around.

Sincere thanks to the people who took the time to respond to my interview requests: Michael and Camille Sikorsky, David Barnard, and Brian Akaka.

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