App Store Economics – High-Volume Pricing

The iOS App Store is an infuriating system for the geeks that are largely responsible for developing the software found on it. Data drives this curious subspecies – number of hits, funnel conversion rates, load times, download sizes. This information obsession is what makes apps on the store so delightful; every detail is accounted for.

Which is exactly why the App Store proper – and more specifically the sales data Apple provides to developers – is such a hair-pulling, frustrating system. Developers get almost no information. There’s little more information for developers than the system output. That is to say, the paycheck Apple cuts.

As a software developer, there’s nothing more infuriating than a lack of information. But as a bioengineer, this inability to see into the inner workings of a system is a normal thing. It’s our job to understand how systems work without having the luxury of prying them open to see their inner machinations.

In that spirit, I’d like to start a series of posts to try to understand how the App Store marketplace functions, and how developers can make the most out of the system.

I can’t claim that this is real hard science, but at the same time it’s no voodoo either. I’ll be relying on the observations of the talented and wonderful developers who have been thoughtful enough to share their experiences.

What’s the observed phenomenon? David Smith in his *Developing Perspective* Podcast put forth two (admittedly anecdotal) hypotheses:

1. Initially higher pricing signals an inherent value to the market.


2. If your app is in the top rankings, lowering the price serves to prolong ranked status and increases overall revenue.

What can be gleaned from these two observations? Can we determine how the market acts based on these phenomenon.

Let’s tackle these observations in reverse. First, some basic understanding of supply side economics for an iOS developer. Let’s consider a native application with no developer-supplied web assets; essentially, just the “app”, avoiding server costs that are dependent on the number of users that would needlessly complicate this already simple-minded analysis.

We should start of by asking what exactly does the supply curve of a software developer look like? In the iOS app store market, software is a rather unique offering; essentially supply is unlimited. Developers can set a price and meet whatever demand is placed upon their product because their product is truly digital. This gives developers complete price control, allowing developers to optimize for revenue.

The question then becomes, “how to maximize revenue”? Forgive the simple-mindedness, but just to review our ninth grade economics, revenue is a pretty simple equation: total number of units sold * average price of units. It’s a two-factor optimization - if you can double units sold by decreasing the price of your product by less than half, then you are increasing overall revenue.

Let’s go back to Smith’s observation: for a top-ranked app, lowering prices can increase overall revenue. What does this say about the App Store if this observation holds true? If small changes in app pricing create correspondingly larger number of downloads, then the market, at least under these high volume conditions, must be price sensitive. Economists like to call this price-elastic demand. Which is just a fancy term for saying price holds high sway in the market.

The final result for developers is a little nonsensical, though. If your app is doing well, well enough to make the incredibly competitive top charts, the least sensible-sounding thing would be to lower prices. And yet, given these observations, that seems to be the best way to make a few more dollars, and customers as well.

This would be as good a time as any to mention that I am no expert, and you take my advice at your own risk. But, if that risk pays off, feel free to send a beer or two my way…