The Value of an App
20 September 2010
Posted by: justin
The App store – over a billion downloads, more than 200,000 apps and lots of PR and profit for Apple. But is there any profit in it for anyone else?
Certainly there are some high profile cases of apps that have and are making their developers a load of money. But how about the standard developer or company that spends £20k on an app? Are they able to get a slice of the pie? Can they make any money? Or is it just luck and the whim of Apple and their ‘What’s Hot’ choices that do it? I guess the question we are asking is:
Is it possible for a good quality cheap app to make a profit?
We can start by qualifying the word cheap. In the App Store everything is cheap when compared with other markets for software ( or any other market for that matter). The average price for an app is around 59 pence. Generally apps are priced between 59 pence and £5.99 with some specialist apps priced much much higher. So generally everything on the App Store is cheap i.e. the price of the product is not an indication of its quality and/or the cost of development. It is an indication of a value frame that has been created by Apple when it set up the App Store which seems to have its roots in the cost of a song on iTunes (99 cents). In this sense developers have walked into a rigged market, Apps marketed and enjoyed like candy, cheap suck it and see bits of software which generally have no more value than the length of a visit to the toilet. The original App Store, launched by Apple in 2008, was aimed at attracting as many downloads as possible in a very short time in order to create a massive positive PR storm and help launch the iphone as a game changer in the mobile phone market. And of course, it worked. The customers were enthused and anyone who was everyone produced an app, and the press went wild.
Now for the reality check.
The average earnings of an app on the App Store are estimated at £2000. Only 10% of the Apps sell more than 100,000 and 56% sell less 10,000. If the average cost of a decent app is £20k, and the average price is 59 pence, how many sales are needed to break even? (read more about the Economics of iPhone apps in Tomi T Ahonen’s blog http://communities-dominate.blogs.com/brands/2010/06/full-analysis-of-iphone-economics-its-bad-news-and-then-it-gets-worse.html)
£0.59 x 70% (30% goes to Apple) = 41 pence
£20,000 / £0.41 = 48, 780 sales for break even.
However, these figures do not include any kind of marketing budget which you will need in order to generate those sales. Yes, you might get lucky and catch a wind, or Apple might pick you out, but here we are talking about the business case for creating an app. Let’s put £10k in (some PPC, a You Tube Video, some PR, a small amount of offline advertising etc) for marketing meaning the App costs £30k which means we need to sell 73,170 apps to break even. What we can conclude from these figures is that even for a modest outlay of £30k in order to make any amount of profit the app has to be in or close to the top 10% and sell over 100,000. Profit from 100,000 sales is only £11k, and that is gross profit. It seems impossible that this could continue. A lot of commentators are saying just that, advising businesses to look at the more profitable Mobile Web market instead. (Read more about the Economics of iPhone apps in Tomi T Ahonen’s blog http://communities-dominate.blogs.com/brands/2010/06/full-analysis-of-iphone-economics-its-bad-news-and-then-it-gets-worse.html.)
So what’s going on?
How can a market sustain itself if the general majority of producers are making a loss? One could argue that app market is international and the iphone uptake is growing everyday and therefore there are massive opportunities to quadruple those kind of sales figures – – just look at Angry Birds and Bejewelled. And then there is the Android market fast catching up. Well, yes and no. Angry Birds, and before it Bejewelled, are massive winners, but they and a few like them are one offs up there through a mixture of a great app, Apple’s endorsement and a fortuitous knack of catching a buzz. But a few winners cannot keep the App market going on their own, and the more apps that are uploaded to the App Store the less likely it is that most of them will make any money due to the numbers and lack of distribution channels available. In fact, there is only one distribution channel and that is the App Store. The App Store, in its current form, is like having only one Tesco in the whole of London in which you can sell your product, and it isn’t one of those big open stores, it is small corner shop with a few items displayed in the front and a massive warehouse attached behind it. For your customers to find you if you are not displayed in the front they need to either know that you exist (through other channels), or they can aimlessly search through the 200,000 page catalogue. If you’re lucky they may by chance find you. It is not hard to foresee the App Store turning into a horror shop of bad coding, terrible design and useless apps because the companies who want to make a major investment in great intuitive genre pushing apps go elsewhere due to the impossibility of making a return.
How can the App be saved from itself? How can it secure it’s position as a credible alternative to the unboundaried Web? How can the future of the App Store as a vibrant and innovative software developer’s channel to market be secured?
We think it is pretty simple.
The answer is to charge a real price for the apps based on the quality, functionality and design of the app. And redesign the App Store to be more like the Amazon website and open it up to the user community so they can create more of the reviews, lists, and help identify and source the quality.
The Apple App Store is a strange beast.
The more time and effort spent on it looking for particular solutions to problems in app form, the more frustrating and useless the App Store seems. The reasons for this are the subject of another blog post, but it is enough to say that as the number of apps grows the whole design of the store needs to be rethought.
Something has gone wrong with our value judgements.
Pricing an app that costs £20k at 59 pence with estimated total sales of less than 50,000 is not a loss leader, it is a loss follower. It is not sustainable and is bad business. The pricing of apps need to take into account that the app is only bought once, for life, and updates are expected.
Pricing Example 1 : Guardian App
A very good example of erroneous pricing is the Guardian App. Sold at £2.39 it just about replaces the need to buy the newspaper in the morning (and is much easier to read on the tube). It is a life long app and in itself generates no other revenues for the Guardian (it carries no advertisements) except brand value. It is a very well designed app with a substantial amount of money and time invested in it. How was the price calculated? Figures are a bit sketchy but by February of 2010 they had passed the 100,000 downloads mark. We can probably safely guess that has doubled since then. So on 200,000 downloads the Guardian would have turned over around £500,000 minus the cost of development, maintenance and marketing. Let’s estimate £100,000 leaving a nice gross profit of £400,000. Not bad, until you realise that this a one off. Just a little more thought and it is obvious to anyone that such an app, which after all will have some negative effect on newspaper sales, should be either an annual subscription or 3 times the price if it is a one off payment.
Pricing Example 2 : Things
An example of how to price is Things, the to do list. There are a large amount of free and 59 pence to do list apps, all pretty much doing the same thing. Things however sell their ipad app at £11.99, the iphone app at £5,99 and interestingly the Mac version at £44.95 (something odd about the fact that the ipad version is one quarter of the Mac version – a behavioural economics nudge perhaps?). How come they feel they can charge so much more than the competition? The answer is the usual one. Design. Things have put a lot of effort into the look & feel of their products and because of this they believe in the value of their products to their end users. And therefore because they believe their products are worth more than a packet of chewing gum, their customers believe that too. And they value the app.
What are we saying exactly?
We are saying – don’t put your app in the bargain bucket by pricing it at 59 pence or even 99 pence, unless it is aimed at that market. Charge what the app is worth – and never charge less than £5 because if you do you devalue your app and create an expectation in the customer that apps of that quality are worth very little (note: the higher your price the more imperative it is you offer a lite/free version in order to allow customers to try before they buy – don’t expect them just to trust you). Instead of concentrating on what competitors are charging, concentrate on developing great quality experiences on the iphone and ipad that a customer wants to return to again and again, apps that create value and change.
Just to put some figures on this idea.
If it costs £30k to produce and market an app, and we charge £9.99 for it (instead of 59 pence) the break even point is 4,291 sales.
£9.99 x 70% = £6.99
£30,000 / £6.99 = 4,291 sales for break even.
That seems achievable for an app that solves a problem in an innovative and beautiful way with the added benefit of valuing the work, effort and creativity put into the development.
You get what you ask for.
Generally, and this is borne out by quite a few behavioural economics studies, you get what you ask for. If you ask for 59 pence, that is the value that will be assigned to your work. Therefore, the quality and value of future apps is dependent on customers’ altering their perception of the costs and value of a good app. And this perception will only change if App developers’ start valuing their work more by charging real prices, and letting the rest fight it out in the bargain buckets.
Justin Small is Design Director of Sumac, a London based Digital Agency.