BUSINESS REASONS BEHIND REVENUE MODELS

Free-to-play (freemium) and apps using in-app purchases may be taking the App Store by storm. But there are many reasons you may want to consider a paid app, especially because being paid and having in-app purchases are most definitely not mutually exclusive.

As such, you should be aware of some of the warning signs. According to 2010 research by Flurry/Pinch Media (and from just reading forum threads by developers such as on iphonedevsdk.com), the App Store is extremely top-heavy with regard to number of downloads of paid apps and the revenue generated. For example, this study revealed that the number of downloads in the top 10 percent of popular apps was roughly eight times that of the number of downloads in the top 20 percent. By the time you got to the 50th percentile (average app popularity), you were looking at 70 times less downloads than those in the top 10 percent, and 2.5 times less than those in the top 20 percent.

What does this mean for developers? Unless you aim for at least the top 20 percent of popular paid apps (not including in-app purchases), or you have other methods to filter users to your app (such as other apps on this or other platforms), your chances of sustained revenue are significantly reduced. The good news is that this study and others like it do not take into account in-app purchases, downloads of associated lite versions, or their conversion rates.

Essentially, there are a number of ways to mitigate low sales and increase the chance that your paid app will be able to maintain steady, profitable revenue. After all, should the rather well-known statistic that 80 percent of all small businesses fail within the first five years be a deterrent to a new business owner? The answer, of course, is “no” — as long as the business owner has a good plan and can separate from the norm. How to do that is what this chapter is all about.

Two Types of Paid Apps

It may have caught your attention that the title of this chapter implies a difference between paid and premium apps. While some believe a paid app is a paid app, and would even substitute “premium” as a synonym, there are, in fact, two main ways of going about making successful paid apps. The inexpensive paid apps and the considerations involved are different from the premium high-priced apps and what's needed to support them at that higher price point.

For the purpose of illustration, this book refers to the two types of paid apps as follows:

• Non-premium — These apps are typically priced under a certain variable threshold, depending on device.
• Premium — These apps are priced at and above a certain threshold.

These price thresholds change over time, are mostly determined by numbers of downloads or particular niche, and are mostly subjective. But what really matters is the way they're built, which is to fit certain expectations. Though, on the surface, it may appear that the difference is just price, it's a bit more complicated than that, and knowing what to deliver at these two rather subjective (yet distinct) price points can be called the paid app mentality. This is discussed later in this chapter in the section, “How to Succeed with Paid Apps.”

Entertainment versus Practicality or Education in Price Point Determination

Figure 8-1 compares initial price point justifiability between entertainment apps versus apps that have some usefulness or practicality in helping you advance in everyday life. In other words, are you using the app to be temporarily entertained until its value is depleted, then move on, or are you using an app to get things done to help you be more efficient, achieve more, or learn?

FIGURE 8-1: You can justifiably charge more initially for apps that have greater practicality than entertainment apps, even at high levels of entertainment

As you can probably guess, apps that focus on the latter can fetch much higher initial prices on average, which is why games (though valuable for escapism) generally are at the rock bottom in terms of initial price. The devious developer catch, of course, is that these same low-priced entertainment options can also fetch huge per-transaction in-app purchases because, once you become invested in the world/character, they are actually helping you to more quickly “achieve” a practical something in-game via your character.

In the end, you see a game like “Smurfs' Village” (an entertainment-only app, or, specifically a casual freemium model) sitting at or near the top of the iPhone and iPad charts for top-grossing apps for quite some time.

Non-Premium Paid App Considerations

Let's now consider the following business reasons for why you might want to build a non-premium priced app:

• You have a higher budget — Often, one of the first impulses when making a high-budget title is to make it paid, usually in order to recoup expenses more quickly. Though this is possibly the right call, take some time to consider reasons for whether or not it could make more sense to go free with in-app purchases. Many of the highest-grossing games and apps are now using the free plus in-app purchase (or freemium) model. This model was examined in Chapter 7.
• You'd like to generate immediate revenue — Sometimes this is for stakeholders, and sometimes you're just looking to make a quick buck. Either way, this is usually only possible with both a paid app and a strong launch.
• You can support it with a lite version — If the lite version of your app is ad-driven, this is even better, because that can be an additional in-app purchase incentive to upgrade to your full and paid version.
• You have one or more unique features — This can partially justify the cost, but only if your features can be perceived as in-demand and not a copy of another app's features. For games, it's rather tricky, because most features are fairly unique. So, for games, gauge the genre and how you're making it different from competitors.
• You have little to no competition in your niche — The difference between this and the preceding point is that you may have an idea that hasn't yet been done, or, perhaps, a new hybrid game genre, or, perhaps, there are only a few other paid competitors. Though this is sound reasoning, be sure to support your app with a lite version, unless you have a monopoly on a certain in-demand feature and can guarantee visibility for both your app and downloads. If that's the case, you may want to consider going premium.
• You can identify one or more in-app purchase possibilities — Supporting your app with in-app purchases is one of the best ways to sustain long-term revenue in today's App Store, as long as they aren't part of the core experience. However, be aware that (for paid apps in particular) the core experience should be complete, and any further purchases should be carefully considered as extras, not pieces that still need to be bought in order to make up the core experience. If that is the case, then it should be free.
• You have other apps that can feed visibility of your paid app — Once you start developing multiple apps and achieve a steady flow of users through them (for ad placement and other cross-sell opportunities), it's easier to justify a few of them as paid. You'll see one example of this later in this chapter in the section, “How to Succeed with Paid Apps.”
• You have the potential to lower price when sales slow — You can always go down as far as free to spike your existing sales curve.
• You have the potential to stand out from free apps as being more valuable — Because free apps are becoming more popular, a paid app in the right niche might capture a segment looking for something with a little more potential, and not using common upsell to in-app purchase methods.

Now, following are a few main reasons that may give you some pause when considering whether to create a non-premium paid app:

• There is less risk for a free app — If you're unsure that you have the unique features, content, polish, marketing push, potential visibility, or incentive from your lite version to compete with the paid competition, it could be better to come up with a plan to release in-app purchases along with a free or ad-supported app, or else keep it low at $0.99. Essentially, if you've cut costs or quality, consider a free (or nearly free) model, unless you have a competitive edge.
• Your app integrates with another platform's proprietary features — If you already have a PC/Mac or web app — for example, Pandora “Internet Radio” or “LogMeIn,” which lets you access your files remotely — depending on its practicality versus entertainment value as well as competition, consider either free or premium instead. In the case of “LogMeIn,” its features are difficult to emulate, and because it already has a strong user base, it went premium. In the case of Pandora, it went the opposite way, releasing for free for a few reasons. It's geared for entertainment, the web app is mostly free (or cheap) anyway, and it has strong competition.
• You face more complexity — Especially if this is your first app, tying it in with a lite version can be more complex and cost more in the end than a similarly featured free app.
• $0.99 apps along with lite or free versions can do well — If you want the benefits of a paid app — in particular, immediate revenue on strong sales and the possible perception as a high-quality brand — then making your app $0.99 can be easier to digest once users are minimally invested in your free and lite app.

None of the negative reasons for creating a non-premium app are meant to deter, just to give you reason to carefully consider whether to go paid at all or free. There is no right answer, and it all depends on what you're offering, compared to the potential demand and existing competition.

Let's now look at factors to consider for premium apps, which, according to the rough guidelines presented earlier and the most current info from 148apps.biz, account for anywhere from 10 to 15 percent of all active apps.

Premium Paid App Considerations

Making the decision on whether to create a premium app is something you'll want to do as soon as possible, because there are clear expectations as to what a premium app is expected to provide. Here are some of the main business reasons for choosing to do a premium app:

• You have a uniquely marketable feature — This is the number one reason you might be able to succeed with a premium-priced app. Are you working with a popular license? Are you using proprietary information/features that can only be found in your app? Do you have a unique educational spin on traditionally difficult material? Whatever your selling point, when you're in premium territory, you should have something that adds a level of advancement or unique utility for the user.
• You are supporting your other platform app — “LogMeIn Ignition” (a top 100 grossing app on both iPhone and iPad from LogMeIn, Inc.) is a great example of this (see Figure 8-2). They have a popular free PC/Mac app named “LogMeIn” that allows remote access to your files and can be upgraded to the Pro version, which can get relatively expensive per year for multiple computers. Their associated “Ignition” app (on both i-devices) is currently $29.99, and allows access to your PC/Mac via your mobile device. So, whether you're using their free or Pro versions, this mobile version can sync with them. What's interesting about this is that there is no lite or free version. Obviously, their core business is the computer version, and they're supporting it with their mobile version. However, could they be missing an opportunity (however small, relative to their bigger business) to cross-sell their computer version, too?

  

  FIGURE 8-2: “LogMeIn Ignition” is a great example of an app developed to support another-platform application or service

• You will deliver exceptional value — Let's say you've created a game, you're in premium territory (but likely not too deep into it), and you offer an unparalleled game experience for the device, both long and full of lasting value. Perhaps you might simultaneously be educational or tied in with a more expensive platform app or software. If the app you've created isn't a game, your value is measured strictly in its utility to further the user's efficiency or learning, period. Remember, the key consideration is initial price here. “Smurfs' Village,” though free to play, has a $99.99 option for its virtual currency as an in-app purchase, which demolishes the prices of most premium apps, and is yet an option many users choose because of the relative value over other lesser-priced options. Plus, this is a currency that actually runs out, so there are some users who take advantage of this option multiple times.
• Future price drops can stimulate sales — This can be seen as a “defensive” maneuver, a better-safe-than-sorry approach. Though this tactic can come in handy should sales sour, it is recommended not to use this as your overall strategy, or else you'll lose focus on what makes your app special and worth downloading in the first place. Instead, focus on bringing out your unique qualities and making sure you have a polished, bug-free app.
• iPad has great potential for premium apps — If you're planning on releasing for iPad, not only does the marketplace have significantly less competition, but given the rise in tablet popularity, as well as the increased functionality, there are some real opportunities for producing premium apps.

If you're not solidly delivering on one of the first three previous points, you should strongly consider a different price point.

Let's briefly move on to potential risks and rewards before diving into what to include in your next paid or premium app.