Monday, March 16, 2009

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,


1 comment:

Artem Marchenko said...

$1 (ot to be precise "under $1") business model is great, because it opens your app to the whole big segment of somewhat bored impulse buyers resting on the sofa or bored in the bus. That is a huge market segment and it definitely makes sense to try reaching them.

However, as you correctly noted, it makes you loose money, by selling super-cheap to folks that would actually pay more and not selling at all to those who don't think super-cheap apps can be good. What every seller would love to do is, certainly, to offer an individual price by figuring out how much one would actually pay. That isn't easy to do, but looking at the flight pricing strategies, you can see that you can come close to it - airlines almost have an individual price for everybody.

I don't have a universal advice how to build a different price for different market segments, but the general direction for me is to target different market segments (and their problems) from the very beginning, not after the app is already done. This way you can end up not with just "lite" and "pro" that cries "I want to trick you into more money!", but with really different editions having some (or many) key features targeted at different user groups and maybe even sold under a different brand.

Think how Microsoft sells almost same stuff in a number of very differently priced editions including super-cheap just for those who can't afford more (MS Office student edition) ;)