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why is app pricing so elastic?

At the end of January, Distimo released a report which I suspect many app developers found disturbing. Backed with substantial data and analysis, the report demonstrated that drops in app pricing resulted in substantial boosts in downloads. We're not talking a small jump here:

"When the price drops for iPhone apps, on average, cumulative downloads grow by 1,665 percent for five days following the decrease."

1,665%? That is a remarkable increase.


(Fascinatingly, the comparable boost for iPad downloads is a mere 871%, which Distimo attributes to the higher price of iPads, and an associated lower price elasticity.)

Are app developers rapidly headed toward the problems of content creators, who can't seem to get paid for their work?

The report isn't entirely bad news. First, when the price is increased back to its pre-sale price, the drop in download volume is far smaller than the increase in volume associated with the price cut. Second, the increased download volume results in a net revenue boost, though I think the results Distimo has published to-date don't prove that a strategy of cutting and restoring pricing can result in longer-term success.

Last fall Gartner projected that free apps would account for 89 percent of total worldwide downloads in 2012.

No, the paid app isn't dead--not yet, anyway. As Readdle points out in an oft-quoted blog post, there are categories of apps where charging an app fee is the right choice. The poster points out that productivity apps still sell for good money. Capybara Games' CEO gave a talk at GDC a few days ago in which he said that reports of the death of paid apps have been greatly exaggerated.

Looking at these two trends--steady movement from paid to free, and serious price elasticity among those apps which are paid--I think the common denominator is consumer perception of value. One could explain both these trends by saying that consumers place binary value on the vast majority of apps: either zero or a little more than zero. How did that happen? In the world of physical goods, we take it as a given that goods have value across a continuum.

The obvious explanation is perceived value. Apps suffer from the same problem as traditional Internet content; so much is given away for free that consumers haven't been trained to reflect on when and how much they should pay.

There's a larger marketing opportunity here, then, which is to retrain consumers to perceive a range of perceived value, rather than the simply binary decision of value / no value they are making now. When a new category of physical goods is launched (in which no pricing expectations have been established), marketers follow decades-old thinking in coorelating the product to preexisting items of value. In the same way, it may be possible for app developers to communicate perceived value. Eric Tsai took a stab at this a few years ago, in an article directed at content companies. The same principles may apply to app marketing.

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