The $1 business model

There are two kinds of developers: those who want to sell their programs and those who write software for fun and/or for fame. The latter type is happy with writing freeware, most probably open source software. This article is about the former.

Of course, most developers want to get paid for their programs. As much as possible. The wiser usually analyses the market first:

• Would people be interested in the program?
  
• Would they be willing to pay for it?
• How much will they think the program is worth?
• What about competition, would our program fill a gap or it would just be one of the many?
• How can I sell my program, what distribution channels are available, what is the revenue share, etc?
• How much do I need to invest in writing the program financially, in terms of effort, etc.?

And the list is not over yet. But it contains the most important question from this article's point of view: how much is a program worth, how much can we ask for it? Note: the answers to these questions are not necessarily the same.

It is very difficult to foretell how much a program is worth for the users. The answer depends on so many factors, such as target group, their spending habits, type of software (e.g. leisure vs professional), what other programs with similar feature-set cost, etc. Naturally, price calculation is so often affected by that how much a developer appreciates his/her own software ("I put so many hours in creating it that it can't be cheap!") - and the expectations and the reality are not always in balance.

The available distribution channels also influence the final price: what they demand from the developer, what they offer to him, their revenue sharing model, etc. As to the latter, for example, although the 70-30 revenue share wasn't typical 1-2 years ago it is now becoming a standard. Apple's App Store, OHA's Android Market, Nokia's soon-to-be-opened Ovi Store all offer 70% off the revenue to the developer. Revenue share is not everything, though: for example, App Store is such a place where it's not uncommon to hear success stories and big earnings, whereas Android Market's community prefers free software. If you follow the news, you might have heard of the coming BlackBerry App World. I found it very interesting that they set the minimum price for a paid-for application to be $3. They said any software that is not worth this amount shall be freeware. I think it's ridiculous: these guys are not aware of how many developer they will alienate from themselves with this approach. Do they really want developers to sell BB apps or not?

The typical revenue models for developers are as follows:

• Release free application first with limited features and make it paid when it really gets traction (thousands, tens of thousand downloads per month). The application is available either for free or as paid-for (exclusive OR). Question: won't people turn away from your application once they have to pay for it?
• Write an always paid program, which means that your application must be really cool and advertised so well that despite the price (i.e. that it costs money) people buy it. Question: can you compete with free programs with similar features?
• Make a Lite and Pro version of your program, Lite being free and Pro paid. The free version supports a subset of Pro's features making it compelling enough to purchase the paid version. It is a very typical approach among developers. Notes: increased maintenance efforts + separation of free and paid-for features must be well thought-out.
• Free program with ads. Notes:
• Not all people like ads
• You need to find a good ad provider
• It is challenging to implement a good advertising solution on mobile devices, and there is no good framework available.
• Change model dynamically on an experimental basis: see if you can make it with paid version, if not then make it free, then make it paid again when it becomes popular (this is the path iStrip followed, actually). Question: when will people get bored with this behavior?
  

Please note that I did not include that model in the above list, where the client program is free, but it is essentially a light-weight interface to a server solution, which is exactly what your customers are paying for. Opera Mini's business model is based on this, for example: Opera Mini, the application, is available for anyone as a free download, however, it's Opera's customers (i.e network operators), who pay the price. This article is simply not about this model.

It's also worth noting how important user ratings have become recently. Some developers faced that ratings can kill: unhappy-uneducated users gave low ratings just because "game was too short", they "expected more", "it was free not too long ago", etc. Perhaps these users are not aware of how much power they have in their hands when they rate. Applications written for Android platform and distributed on Android Market are especially vulnerable to this effect. 

Finally, getting closer to the point: how much can we ask for a program? Even though this habit is changing, it's still quite typical from people that they think that "cheap cannot be good" or "if it's good it can't be cheap". However, App Store's success stories have proven right the opposite: developers claimed that their revenue had become much higher when they lowered the price to $0.99. You know, this is such a low price that basically anyone can afford around the world even for the silliest program. Developers are now facing the fact that unless they sell their software at the lowest price there will be others who ask less than them. This basically forces them to sell their apps for $1 from the beginning.

Is it the final price, though? Can a $1 hit be sold for $2, too? No-one knows. It's all about making experiments. If I were to sell my app that I think is worth more than being distributed as a freeware, I would ask $1 for it. If people don't buy it at this low price, then I saved the hassle of price calibration. If it gets successful and my program is (one of) the best(s) in its category, then I would increase the price gradually until the download rate gets stabilized and I couldn't expect more revenue from making it even more expensive.

And actually this is what I call the $1 business model.

Looking forwad to your comments,

Tote

Smartphone market share, 2008

Gartner released their statistics about worldwide smartphone sales, which contains useful information not only the previous quarter (Q4 2008), but the whole past year. I'd like to share the following two figures with you:

Comments:

• Nokia is still #1, but it's market position is seriously challenged by RIM, Apple and HTC.
• Even Apple is suffering from decreased sales in Q4, but that didn't prevent them from being ranked as the third vendor by sales.

Comments:

• Symbian had lived better days a year ago, but it's still a bit more than 50% of smartphones that runs this operating system.
• RIM and Mac OS X performed exceptionally well even during the tough economical situation.
• Although the share of Windows Mobile shrank a bit, it still maintains its third position. Only blinds can't see that not for long.

Finally, some words on regional sales:

• Dramatic increase (69%) is experienced in sales of smartphone in North-America, which now accounts for 20% of mobile phones in this region. Carriers are agressively pushing data plans that is beneficial for vendors, too, offering vertical mobile solutions from hardware manufacturing to providing developer SDKs to cloud services.
• While overall device sales dropped, Asia/Pacific recorded a 2.3% growth in smartphone sales.
• EMEA region were up by only 2%, Western-Europe sales increased by 9.6%. Samsung drove sales in 2008 with Omnia as its most successful product.

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Mobile advertising - An experience

Background

I decided to give a try to a Reversi-like game found on the Internet just the other day. There was a link to an installation package, which I downloaded and manually installed on my Nokia N95. Even though there was nothing mentioned about that the application is ad-supported, I found the name of the program suspicious since it revealed something about this fact. Never mind, I thought I would still give it a try even though I don't like suprises that come in the form of embedded installation packages (for non-Symbianers: an installation package can contain other 3rd-party software, too, which the main application depends on - these additional programs are referred to as embedded installation packages). Nevertheless, the complementary software has become so intrusive during the installation process and wanted to know such information about me (surprise: it gave me a default birth year, which was exactly the year I was born in - was it an accident or it could find it out somehow?) that I was unwilling to give. Finally I gave up the installation with some bitter taste in my mouth. That was my first experience with Adtronic.

As to mobile advertisement

It's a cliché that there are three-times more mobile devices than desktop computers. If people believe that desktop computers are the homeland of Internet and advertising they will soon have to realize that the transition has already begun from one to the other. Undoubtedly, a device that is always with us is much more compelling platform for advertisers to reach their audience. Their are challenges, though:

• Generally the 'context' is an invaluable piece of information from advertising's point of view:
• What is the user's location so that those ads will be shown first that are more relevant at that place.
• Any kind of information can come in handy regarding the user's social network (gender, age, habits, relation to user, etc.) for better targeted ads.
• What the user really wants to do in the given moment, such as browsing to a car rental web page, calling a carpenter, receiving a status report SMS from the bank, etc.
• Mobile phones has different characteristics as desktop computers: one of the most notable differences is that they have smaller display giving less room for nice ads that can easily capture the user's attention.

Questions to the 'Audience'

There are couple of things that even I, as a advertisement target, have to answer. The root question is the same in all cases: How much am I willing to give up from my freedom when using my beloved gadget?

• How frequently may ads appear without disturbing me?
• How much should I let the ad-provider know about my context?
• What can an ad do without being too intrusive?
• Is it a single application that is 'ad-aware' or I let my entire phone user experience be 'ad-driven'?

Adtronic

Based on what I wrote above you can imagine that I classified Adtronic software as 'suspicious'. But I was surprised to read Forum Nokia Newsletter this morning giving fame to Adtronic. Was it early to judge this software, I asked. A brief summary to those not wanting to visit Forum Nokia:

• Adtronic offers advertising solution for S60 devices.
• Ads are shown upon new/missed calls, SMS, MMS. Ads usually appear above alert dialogs covering the majority of screen real estate.
• How many ads are shown a day can be limited by the user - one must not count on a lot of earned points if it's severely limited, though.
• Earned points can be used in various ways
• For reduction of phone bill (who will take care of this?)
• Points can be used to purchase other applications at a discounted price
• Or can be redeemed for GreenPeace, Unicef (nice feature)
• The whole solution relies on a working network connection resulting in some data traffic (how much?).

Adtronic offers better monetization to developers should they allow their applications to be bundled with this service. May I ask, though: is it really the price users (not the developers!) have to pay to use applications at a low price? Am I wrong with that selling $0.99 programs also works in Apple's App Store and I bet it will soon work on Android Market, too? Do we really need this?

Another question I'd like to be answered, too: where can I use my points to purchase applications? Is it Adtronic's own store? Or an operator store? How does the whole idea fit into the model of unified content store that all device/platform vendors are pushing lately?

I'm sure I've missed a lot of points with regards to the topic. Could you please make the picture clearer? Thanks!

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