Developing Perspective

#190: Everything but a Business Model


00:00:00   Hello and welcome to Developing Perspective. Developing Perspective is a podcast discussing

00:00:03   news of note and iOS development, Apple and the like. I'm your host, David Smith. I'm

00:00:08   an independent iOS developer based in Herndon, Virginia. This is show number 190 and today

00:00:13   is Thursday, July 3rd. Developing Perspective is never longer than 15 minutes, so let's

00:00:18   get started.

00:00:19   All right, so first before I dive into the actual topic for today's show, just a quick

00:00:22   note. I'm going to be going on vacation for the next two weeks. And so unless something

00:00:27   monumental happens between now and then, I don't expect to do any episodes. So just as a warning,

00:00:33   if you're wondering why next week and the week after there are no episodes,

00:00:35   because I'm enjoying myself traveling with my family. All right, so what I'm going to thought

00:00:41   would be interesting to dive into today is a bit maybe it's a bit more factual rather than opinion

00:00:47   oriented, which, you know, depending on yourself and how you view things could be good or better

00:00:52   or worse. But what I remember when I was back at WWDC, and I was basking in kind of that

00:00:58   back the glow of all the new announcements and everything was coming in, I remember quipping

00:01:02   to a friend, wow, they gave us everything but a business model. And obviously, that

00:01:08   that comment itself is kind of absurd and silly. But it was heading in a direction that

00:01:13   I think is something that I noticed a lot more for myself and just among my colleagues,

00:01:18   into this autumn of 2014, you know, looking for Yosemite and iOS 8 and the implications

00:01:24   of that. A lot of the challenges that I see us facing as a community and as developers,

00:01:29   and especially more on the independent side, is not about the technology or the tools.

00:01:34   You know, almost everything we've asked for or need in order to make awesome, great software

00:01:39   is now available to us, or at least will be shortly. The challenges I see us facing are

00:01:45   much more on the business side, are much more on can we continue to make a sustainable living

00:01:51   in this ecosystem. And I think a lot of that has to do with just a natural consequence

00:01:56   of some of the older inefficiencies that may have propped up less sustainable models having

00:02:01   kind of fallen away now. The App Store itself and the related ecosystems to it are incredibly

00:02:07   efficient, sometimes kind of scarily so. You know, if there's an opportunity to be exploited,

00:02:14   will be found and exploited with tremendous speed and accuracy. If you have this great

00:02:20   idea, you come up with something completely new and you put it out there, it will be immediately

00:02:25   analyzed, dissected, and all the interesting and useful parts copied, and often at a pace

00:02:31   which is kind of crazy. It can often be you see something new come out and within a few

00:02:35   days something that has tried to extract a core part of it, repackage it, and ship it

00:02:42   out, we'll be out there in just a few days. And that's including app review time. You know,

00:02:45   it's kind of crazy. This is the world in which we live. And so, while you may have been able to get

00:02:51   away with, you know, you just create something awesome and throw it over the wall. And hopefully

00:02:56   it all works out in days gone by. I'm not saying that was easy, but that was something that was

00:03:00   perhaps more possible. In the modern marketplace, I find you really have to be more thoughtful about

00:03:06   it. Because if you're doing something, someone else will want to do it too. And as it becomes

00:03:12   more and more successful, more and more people will want to do that. Whatever it is, you make an

00:03:17   app with a bird that flaps up and down going through pipes, there are now hundreds or thousands

00:03:21   of people doing exactly that same thing. And so in order for your business to be sustainable,

00:03:26   it can't just be based on novelty. It can't just be based on scarcity, that you have something that

00:03:31   no one else has. If you can do that, great. If you're Dark Sky, for example, who, you know,

00:03:36   they have this kind of, they've built this whole kind of unique and novel interface or way of

00:03:40   thinking about weather, like, okay, maybe you can package that up and be successful. Or you have

00:03:45   kind of a unique position in the eco, in the market where you say like, you're a Twitter

00:03:49   client right now, where you are essentially, you're given a monopoly by Twitter to make

00:03:55   applications because no one else really wants to make them because of all the strange limits

00:03:59   placed on them. Like maybe you can make that. But by and large, the industry as a whole

00:04:04   has tremendous veracity in attacking any other inefficiencies that it can find. So you have

00:04:10   to be really thoughtful about how you're going to market your software, how you're going

00:04:12   to build it, how you're going to price it, how you're going to sell it. Are you going

00:04:16   to sell it? Because ultimately, you need to have a model that was sustainable inside of

00:04:22   that competitive environment. And it can be kind of rough. And so what I wanted to do

00:04:26   do today is to just kind of walk through, as I see, kind of like the five-ish, five

00:04:33   or six different models that you can have for your software. And I'll talk a little

00:04:37   bit about some of their pros and cons, but mostly this is going to be a quick survey.

00:04:40   And I thought it would be interesting and useful to do because you can't really start

00:04:45   answering the question of how you should market or sell your software until you know which

00:04:49   model you want or which combinations of models you want. And in order for you to really do

00:04:53   that, you have to have thought about them all individually. And maybe you have, and

00:04:56   maybe if you're an experienced developer, this is kind of redundant for you. But hopefully,

00:05:01   at least for somebody, it'll be useful. So I'm going to kind of run through them in roughly

00:05:04   the order in which I think they're increasingly, they're starting with the most desirable and

00:05:11   working to the least desirable, at least from a sustainable development perspective. And

00:05:15   hopefully that'll make sense. These aren't, by and large, like, in order, do this, if

00:05:18   you can't do this, if you can't do that. But by and large, this is what I've found from

00:05:22   my own experience to be the most sustainable to the least sustainable. And so the first

00:05:26   is subscriptions, which is, you know, someone pays you on an ongoing basis to provide software

00:05:32   or software related services. Pretty straightforward. They say, I'm going to give you X dollars

00:05:37   a month, X dollars a year, and in exchange, you give them software or software related

00:05:41   services, which is pretty cool. And the biggest pro of obviously a subscription based thing

00:05:47   is as long as your subscription base is enough to cover your expenses and your renewal rate,

00:05:54   renewal slash signup rate exceeds your cancellations, you're running a profitable business. Hooray!

00:06:00   It has a very nice simplicity to it. You can see clearly the number of people who have

00:06:06   signed up to give you money, you can see how many of those people typically cancel, how

00:06:10   many people typically show up every day, and you can just look at that and you can build

00:06:15   a fairly sustainable business from it. It's not perfect, obviously, because obviously

00:06:19   it's often trickier to get somebody to make a long-term commitment to you and to make

00:06:24   a one-time or short-term commitment to you. So the cost and the difficulty that you'll

00:06:29   have in attracting new customers are often more complicated because, you know, if I'm

00:06:33   thinking about signing up for a service that's $9 a month, I'm kind of committing to quite

00:06:40   a lot of money in the long term. And so I'm going to be much more apprehensive about diving

00:06:44   into that than if I was even just $9 once or $1 once or free.

00:06:49   So you always have a much higher sort of difficulty

00:06:52   in grabbing somebody.

00:06:53   But once you get them, it can be pretty awesome.

00:06:55   You obviously also do things like manage their subscriptions

00:06:58   and their credit cards.

00:06:58   When these credit cards expire, deal with that.

00:07:01   So there's obviously a lot of bookkeeping that can often

00:07:03   go around subscriptions.

00:07:04   Another thing that's kind of nuanced

00:07:07   is that you often will have a smaller user base, which

00:07:10   is kind of cool, grie.

00:07:12   But often that user base will often feel that they are owed a lot more from you, just by

00:07:17   the nature of kind of having that long-term commitment, which is good and bad.

00:07:20   I'm putting it more in the con part just because it's something that you have to keep in mind

00:07:24   and manage, that people are, in order for you to stay in control of your software, will

00:07:31   often be a bit trickier because people are going to feel like they're owed something

00:07:34   and ultimately, you know, and that's just something that I found is sometimes hard to

00:07:38   manage.

00:07:39   So that's subscriptions.

00:07:40   Next, let's dive into advertising. So this is people use your software, and while using

00:07:46   it, they are presented a message from someone else, and that third party is the one who

00:07:50   is paying you money. This is, you know, as old as business probably, there's been advertising.

00:07:58   And the strongest pro I see with advertising is, of course, that it has a tremendous possibility

00:08:03   for ongoing revenue. It is, in my experience, it is the best at ongoing revenue in a lot

00:08:09   of ways because the revenue that you get is directly correlated to the usage of your application.

00:08:17   If a lot of people are still using your application, then you will continue to get money. And if

00:08:21   they stop using your application, you'll stop to get money, but those two are sort of directly

00:08:26   tied to each other, which is really, really convenient in terms of as you need to think

00:08:30   about a product going forward, if it's still making money, that means it's still getting

00:08:34   used. Great.

00:08:35   It also means you can make your software free, which makes it a tremendously powerful marketing

00:08:40   tool in terms of having people try it out. It opens up your software to a much broader

00:08:45   audience than if you required actual money to be coming out of their wallet and into

00:08:49   your hand. The con is obviously that you have to show third parties messages inside your

00:08:54   applications, which may or may not be desirable, and also requires a pretty large customer

00:09:01   base to get reasonable revenue. You're talking about customer bases in probably the hundreds

00:09:05   of thousands, if not millions, before you're able to make a reasonable living from advertising.

00:09:11   So something to keep in mind. Next are consumable in-app purchases. And so a consumable in-app

00:09:18   purchase is when someone makes a typically small, but it doesn't have to be, but they

00:09:23   make a small, repeated payment inside of your software in order to gain access to some aspect

00:09:29   of it. And I want to also mention that this is a similar kind of model to what I've been

00:09:33   doing in Perometer where I have a tip jar, which is a consumable in-app purchase, somewhere

00:09:37   where someone can kind of keep putting money into your application.

00:09:40   Obviously, the big plus side of consumable in-app purchase is that it has a very strong

00:09:45   possibility for ongoing revenue. Kind of by the nature of it is they make a purchase,

00:09:51   they consume whatever it is that that result that that resulted in, and then if they're

00:09:57   if they like that, they can do it again, and they can do it again, and they can do it again.

00:10:00   So there isn't really a limit on how much you can get from each customer.

00:10:05   And it also lets you segment your customer base by how much they're willing to spend.

00:10:09   Because obviously, you know, people who want to spend lots of money in your application,

00:10:13   they love it or whatever reason they want to spend lots of money, they can.

00:10:16   They can just keep doing it over and over again.

00:10:19   Versus somebody who just wants to, for example, make the purchase once, they can just do that.

00:10:24   And so you have a really nice sort of capturing of the entire demand curve for your application.

00:10:29   The biggest downside, obviously, to consumer line-up purchases is, depending on how they're

00:10:34   implemented, they can very quickly get very dodgy. So you start to think of, obviously,

00:10:38   the free-to-play game type of thing, where you're creating these loss aversion scenarios

00:10:44   or sort of psychological manipulation on people to make them feel like they need to keep putting

00:10:50   money into your application. You can create addictions. You can do all kinds of things

00:10:54   that are very dodgy, and you can head in that direction. That's not to say all of them are,

00:10:58   But there it is something that you always

00:11:00   have to keep in mind as you do that type of in-app purchase.

00:11:04   Next is kind of like the more the one-time in-app purchase,

00:11:07   so the non-consumable in-app purchase.

00:11:10   And this is where someone makes a one-time payment,

00:11:12   and as a result, gains access to some part of your application

00:11:16   or some content therein.

00:11:19   And so the great part about a one-time in-app purchase

00:11:22   is that it gives your users a clear trial of the experience

00:11:25   they're going to get before having to make a commitment.

00:11:28   So it's sort of like the try before you buy model.

00:11:31   And so typically you will have some part of your feature set, some part of your application

00:11:35   that is only available if you make the purchase, but hopefully you've proven the app's worth

00:11:40   to that user before they hit that point.

00:11:42   And so it's usually not quite so bad.

00:11:45   The hardest part of this, and this is why I struggle with using this in a lot of my

00:11:48   applications, is that you are often dependent on having a very good segmentation of your

00:11:57   where this is often incredibly hard to say like, "This part of my application is what

00:12:03   I'm not going to open up to users," or "This part of my application is limited in some

00:12:07   way. You can only have so many of these," or "You'll only get the first so many," or

00:12:11   whatever. Because if you're too generous in what you give out for free, then nobody's

00:12:16   going to buy. But also, if you're too stingy in terms of feature set, then nobody's going

00:12:20   to buy either, because they won't feel like they're getting--they won't have a rich enough

00:12:25   experience with your application in the first place to then want to be by. And so finding

00:12:30   that line is just incredibly difficult. And so it's something that I found really hard

00:12:36   to do in my own experience. It's easier with things like content, where it's they're buying

00:12:40   a book or they're buying a magazine or whatever it is inside of your app, because obviously

00:12:45   there's a clear indication of what it is they're getting. But in terms of feature set, I find,

00:12:50   at least in my own experience, it's very hard to do that well.

00:12:55   Next is obviously the upfront in at one upfront one time purchase. So this is someone pays

00:12:59   you money, you give them software. It's pro is obviously it's very simple and straightforward.

00:13:03   You know, they give you money, you give them software, great. It's trickier to make sustainable

00:13:08   though, because you are effectively capping your income per user at one time, they give

00:13:13   you money, they give you give them software. And then the question then becomes, what do

00:13:17   you do? And what's your relationship going forward? How do you provide long term support

00:13:21   to them should you provide one term support. It's also kind of complicated in terms of

00:13:25   segmenting your customer base because you typically have to charge a single price if

00:13:30   not something similar to a single price. And so you're not really segmenting your population

00:13:35   in a way that you perhaps would most benefit from. And lastly, obviously, you can just

00:13:39   give your software away for free, you make something, you give it away. You lots of people

00:13:42   may use it, but obviously you're not making any money. So this only works if you are have

00:13:46   some kind of altruistic thing in mind, or if it's a venture based scheme where you're

00:13:51   trying to just build a user base. So those are kind of the six models of making money

00:13:56   from software that I see. And like I said, that's roughly in the order in which I use

00:13:59   them. And what's best is always a bit of a complicated question. It's going to vary a

00:14:04   lot based on your business. And what I found most in, you know, in the last six years is

00:14:10   that the most sustainable models are ones that focus on ongoing revenue, like I said

00:14:13   at the beginning. So things like subscriptions, advertising, consumable in-app purchases are

00:14:18   the best in my experience for creating long-term sustainability. And often the better, the

00:14:23   more that you can mix them together, the better the overall result will be. But ultimately,

00:14:28   the last thing, this is what I want to close on, is that before you can decide your business

00:14:31   model, this is something that I've said many times before, is that you have to understand

00:14:35   what success looks like for you before you can make a choice. Is it the most important

00:14:40   thing for you to do to make great software for whatever definition of great you have

00:14:44   in your mind isn't more important for you to make lots of money. Those are things that

00:14:48   are going to drive dramatically what choices you make.

00:14:51   Alright, that's it for today's show. Like I said, I'll be back after vacation. I hope

00:14:54   you have a great week or two, and I'll see you talk to you later. Bye.