Amadeus Consulting Discusses Ten App Pricing Models

Author: Amadeus Consulting

We have previously written about the importance of iPhoneÔ App Marketing in order to help create successful apps. This article will focus on various pricing models that can help you determine how you will price and sell the app. This is only an overview meant to highlight some of the benefits of certain models and situations where one might be a preferable choice. We will do an in-depth look at exact pricing and revenue in an upcoming article. ™®

As a general guideline, the current average non-game app price on Apple'sÒ app store is $2.85, with the average game price a bit lower at $1.20. Even so, prices still vary broadly by category, which makes pricing a challenge. Also keep in mind that Apple, GoogleÔ, RIM, and MicrosoftÒ all take out a share of each app sale, which should be included in any pricing model.

As in the retail world, app pricing is an art as much as it is a science. Some publishers go with what feels right, what is competitive, what makes it feel valuable, what they think customers will pay, and what will put them on track to make a return on their investment.

Below, we will cover ten of the most popular pricing models, as well as some of the benefits or dangers of each.

App Pricing Models:

• Free

Free is usually the best option for people and companies using mobile devices to engage customers. In some ways, this is used as advertising and marketing, since publishers are using the app to encourage customers to buy products or promote their services. However, this also allows you to engage your customers directly and create a more meaningful relationship (such as using it as a medium to provide feedback, take advantage of sales and promotions, etc).

In this model, the cost of development is usually recovered by an increase in loyalty and sales.

• Free with Advertising

Many apps are funded by advertising placements within the application. This can be beneficial because you can continue to receive revenue long after the app has been sold, but it also depends heavily on the retention rate of the app – meaning the rate at which people continue to use the app after purchase. Also, the rate at which people click an app tends to be fairly low and pay-for-placement is very low. But even so, it is a nice passive source of revenue, which can add up over a longer period of time.

It is not recommended to include advertisements in paid apps, as people have generally become accustomed to being able to pay for an app to avoid ads.

• Start Free, convert to Paid

One intriguing option is to offer an app for free upon release, and then start charging for it a short time later. This strategy is focused on building a large fan base and positive reviews, which then help bolster sales once the app is offered for sale. This transition generally occurs once the app has received enough positive feedback, downloads and reviews that a rating will be shown on iTunesÒ.

This can backfire if you don't forewarn users that the app is only free for a short period of time, but it can also be a great way to build a large following that you can use to promote your app once it launches as a paid version.

• Start high and adjust down

After the marketing flurry that accompanies an app dies down, and sales begin to slow, one method for increasing visibility for an app and promoting downloads is to offer a discount, sale or price cut. This allows you to reignite interest in the app and boost sales. This can be a temporary promotion, such as a sale, or a permanent price cut.

This can be an okay strategy as long as you do not start too high and it helps you narrow in on the right price. On the other hand, this takes a lot of app marketing to work effectively, which adds additional time and costs.

• Free AND paid version

A common practice in some categories (such as games and entertainment) is to offer a free version of the app, and then an upgraded paid version. In many cases the free version may be a partial demo, allowing users to try the app before purchasing it, or may include advertising. The paid version would offer the full version of the app and usually not include advertising.

There are some benefits to this method as it allows people to try the app and test it out before buying it. However, creating two versions of the app also requires more development time and more initial costs, as well as additional time upgrading or bug-fixing the app.

• Free and Donate

Similar to the duplicate free and paid versions mentioned above, this option also has two connected versions. In this case, the free version is a full version of the app. However, also uploaded to the app store is a "dummy" app that is downloaded simply as a method to donate to the developer. This is common on the Android market especially, but is also seen on the other app stores.

The downside to this method is that it depends heavily on the goodwill of your customers. If you have a very good app, and a very loyal community, you may be able to make your money back, especially if you are developing something in your own free time. However, for more expensive apps or commercially developed apps, this is a less popular choice.

• Micropayments

Some apps rely on a completely different revenue model that allows people to buy things within the app. This is seen most commonly in the Facebook® game FarmVille, by Zynga. Through micro-payments, Zynga reportedly makes over $100 million a year.

Even though only a small percentage of users will make micropayments, the payments actually tend to be quite large, and much larger than most users would pay to download the app. Also, micropayments can be done outside of the app store, meaning that you can avoid the 30% share that the store would normally take.

Micropayments require some incentive in order to get people to use them. Usually this works well in certain types of games, in which users could purchase in-game items that offer some benefit (usually things that save real-life time, or offer some advantage in game).

• Subscription

Apple is currently working on a subscription model that would allow magazines and others to use a subscription model. This would allow users to "subscribe" to an app magazine, such as Sports Illustrated, and receive each edition as they are released. The benefit to this model is that users do not have to manually find and download each edition.

Although details are sparse, this likely would not be an option for most applications and would require an additional layer of approval. Google and Microsoft are also loosely rumored to be working on subscription app models, but will likely not release any details until a workable AndroidÔ/WindowsÒ Phone 7 tablet is released.

• Education and Bulk Discounts

Some apps are eligible for education discounts or bulk discounts. This requires specific approval, but if you intend to use your app as an educational tool in schools or something, then this can be a good promotion to encourage schools and/or organizations to buy large quantities of your app at a discounted price.

• Gift an App

This isn't a pricing model, however we thought it would be a good fit in this category, even though it is only available on iTunes (sorry Android users). When purchasing an app on iTunes, next to the "purchase app" button is a small drop-down menu. This contains the option to "gift this app", which will let you buy it and send a download code to a friend.

The code can only be used once, but can be a good way to send an app to a friend, relative, client or coworker. As the publisher, you can also build your app marketing and promotions campaign around this, which can be very successful depending on the app and the target market.

Other Resources

Amadeus Consulting is primarily a custom software development company, with extensive experience developing custom mobile applications on many different platforms. Over the years we have also become very successful at helping clients and publishers with marketing and promoting their applications to a new and quickly growing audience. If you are interested in our app promotion services, please don't hesitate to give us a call.

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About the Author

About Todd McMurtrey

The marketing team at Amadeus Consulting considers it part of their daily tasks to stay on top of what is going on in the technology marketplace. It is important to our company culture to be technology thought leaders, but we also want to share our knowledge and insights with readers excited about the latest and greatest tech news in the Tech Market Watch blog.