Six years ago, two separate studies, one by McKinsey & Company, another by A.T. Kearney, demonstrated how increasing price by 1 percent had the biggest effect on net income compared with similar improvements in reducing fixed and variable costs, and increasing sales volume.
This suggested that the products and services of the businesses surveyed were underpriced and further showed how effective pricing is as a strategic activity compared with other activities like cost cutting. Today, I can’t help but be reminded of these results every time I flick through the top grossing iPhone apps in the app store.
Why are most of the apps in this list not like the majority of those out there, free or priced at less than €1 / $1? Well free apps are never going to make any money. That’s obvious, right? You wouldn’t think so with some people. But if cheap pricing was a good money-making strategy, the top-grossing list should be full of cheap apps. But it’s not, because it’s not. iPhone apps are underpriced and businesses smart enough to purposefully price them are laughing all the way to the bank.
This is applicable beyond the app store: most web apps are underpriced too. Think about the effect a 1 percent increase in price would have on your sales, then think about the effect it would have on your bottom line! Would Basecamp, for example, really see a significant drop in sign-ups if they increased their prices by 1 percent?
I think not. But would Jason and David quickly realise they need to upgrade their company cars?. I think so!
9 Comments
Regarding some web apps, there’s a certain point in a pricing structure that triggers the buyer to think “the price is not a factor” and the deciding factor comes down to suitability for purpose (or moreover will waste my time testing for suitability).
If your market is large and you can hit this price point, I think your revenue will be greater than pricing ‘above’ this point.
Mobile (iPhone) apps are different in my point of view - in the sense that you DON’T get a “try before buy” experience - so it needs to be cheaper for the impulse (disposable app?) purchase.
Posted by Michael FitzGerald at 3:50 pm on 4 March, 2010.
Well, duh they’re underpriced. Given the time to develop, even at minimum wage, the vast majority probably never even get close to matching their costs. Unless you include a bajillion which were made to solve problem X for user & programmer Z, and they’d like *something* when they may have released it for free. And the app store makes that a *brainlessly simple* choice.
$1 is well below the impulse-buy threshold, and $1 might as well be free for most people. But the difference on the developer’s side is that they get *something*, instead of *nothing*. $1 compared to a $0 app means a single sale is an *infinite* (fine, undefined) increase in income, which totally eclipses the chart’s 11% net income increase from a %1 increase in price.
From another angle: what if your favorite free software cost $1 instead? Would you still use it? How about you donate that $1 to the developer directly? You’d be in the extreme minority of any who donated, I guarantee it, and if they had charged $1 they’d probably get several times the income from that freeware in a *year* than from *all* their donations.
To make matters worse for app-store developers, people are arguably even *less* likely to donate when downloading from the app store, because it’s not built-in.
Posted by Groxx at 4:22 pm on 4 March, 2010.
I’m hoping that the launch of the iPad will cause a price reset in the AppStore: Apple gave a strong pricing signal by setting the iWorks apps at $9.99, let’s hope the slide down the pricing scale will be less marked for iPad apps.
Posted by fd at 4:27 pm on 4 March, 2010.
I’m definitely going to sell my first iPhone app for €1.01
Posted by Oisin at 4:41 pm on 4 March, 2010.
The App Store ranking system is entirely driven by downloads/sales for the prior four days. If you have no marketing budget, but your app is lucky enough to hit #1, you have nowhere to go but down. The lower your price, the better its ranking.
This isn’t retail, man!
Posted by Dan Fabulich at 5:30 pm on 4 March, 2010.
You effectively say: “it always makes sense to increase prices by 1%”
So by induction, all apps should have infinite prices. Brilliant.
Posted by kevin at 6:18 pm on 4 March, 2010.
What’s the upgrade from a white Lamborghini?
Posted by Fred at 9:24 pm on 16 March, 2010.
Ease of transaction should be noted here as well. For a desktop app free vs $1 I probably wouldn’t pay the dollar because it either requires me to login (to Paypal, Google Checkout, etc) or grab my credit card. The App Store is different in that downloading a free or paid app requires the exact same step. Tap the price, tap buy now, enter your password, couldn’t be simpler.
Posted by Brandon at 1:47 am on 17 March, 2010.
I just read a book called “the art of pricing”… exactly the same… they had an example about ford that “started” this kind of thinking
Posted by daniel at 9:50 pm on 15 April, 2010.