According to a report by app analytics company Distimo, you can make a lot of dollars when you drop app prices to pennies. When vendors drop their prices in the Apple App Store, downloads go up on average--fast and high.
Some websites are touting how you can increase iPhone app revenue by 159 percent by discounting. But before you get ready to slash your price, consider some key points:
Movement, movement, movement
According to the report, the firm measured app downloads before, during, and after price reductions during December in Apple's app stores for both the iPhone and iPad. First caveat: The analysis was based only on products that had reached the top 400 moving apps and that had a price change during the time period.
In other words, if your app doesn't already have a good amount of popularity, then the bump you get will be relatively small because your product is largely invisible. Without a large enough increase, you can't get enough gross margin dollars to make up the per-product margin you're giving up.
Price counts for more depending on the platform
Price elasticity--the effect that price changes have on buying behavior--is more pronounced in the App Store for the iPhone than for the iPad. According to Distimo, the average growth in cumulative downloads for iPhone apps after five days was 1665 percent. An impressive number.
However, the change in cumulative downloads for iPad apps was 871 percent. That's still a major increase, but it suggests that either iPhone users have greater price sensitivity or that the apparent magnitude of price change might have seemed different. (More on that in just a minute.)
Interestingly, the effect of price increases had the opposite relative effect. For price increases, the drop in cumulative downloads five days after the increase was 46 percent for iPhone apps. But for iPad apps, the drop was 57 percent. It would seem that iPad owners are less impressed with price drops, but more sensitive to increases.
Charging less can mean making more
Distimo looked at the difference in downloads and calculated the resulting revenue. (That should be as simple as multiplying the number of downloads by the price then in effect.) After five days, cumulative revenue went up by an average of 159 percent for iPhone apps and 71 percent for iPad apps.
As importantly, the longer an app was on sale, the more the revenue grew. There are two possible explanations, according to Distimo:
There is a two-fold explanation for this lagged revenue growth effect: either an increase in income from one-off fees or an increase in income generated by in-app purchases. An increase of revenue from one-off fees was partly the cause on both stores, because average downloads went up in the long run. Additionally, revenue generated by in-app purchases is a second explanation for this lagged revenue effect. The data shows that the growth in income gained by in-app features increased in the long run, especially for iPhone applications.
Are you making more money?
There are a couple of strategies that app vendors might be pursuing. One could be an emphasis on getting more users, with a willingness to make less money at the outset. That could make sense if the lifetime value of the customer is longer than the one transaction and eventually more revenue and margin come in from other areas that Distimo can't measure.
The other strategy would be to maximize revenue. In that case, not all apps are good candidates for the price drop strategy. The increase in revenue and margin have to be in relation to the selling price. According to Distimo, the average price elasticity in the iPhone App Store resulted after five days in a cumulative 1.2 percent revenue increase for a 1 percent price decrease. But in the iPad App Store, there is negative price elasticity. Each 1 percent decrease in price resulted in a 0.7 percent increase in revenue.
Part of the reason might be the price of apps for each device. Apps for the iPad tend to hit higher prices than those for the iPhone. But the majority of price changes overall were $1 to $3. Could it be that iPad owners perceived a smaller amount of savings and, therefore, were less responsive? You would need to test your own app to be sure.
Don't forget the time of year
The measurements took place in December, during the height of holiday shopping. With many millions of devices being sold and given as gifts, the result would be a surge of users who had no apps at all and might be stocking up. Another reason to test pricing strategies for your own products.