Developing Perspective

#181: Unconventional wisdom, pricing.


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

00:00:04   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 181. And today

00:00:14   is Friday, April 18th. Developing Perspective is never longer than 15 minutes. So let's

00:00:18   get started. All right, first, I have a bit of a quick announcement. I will once again

00:00:23   be doing t-shirts for the show. Of course, it's the fashionable thing to do this time

00:00:27   of year as we get heading towards WWDC. But you know, I did one last fall, the campaign went well,

00:00:34   heard from a lot of people who were kind of disappointed that they hadn't heard about it

00:00:37   in time. So this year, I'm doing it again, and giving it a slightly longer run than I think I

00:00:41   did last year, I think last year I did it for a week. This year I'm doing it for about 10 days,

00:00:45   so it should be at least two episodes and two weekends. So hopefully you'll be able to

00:00:50   take advantage of it if it's something that you'd like to do. This year is the same kind of blue,

00:00:56   That's kind of my trademark color.

00:00:58   And it's an underscore followed by an opening and closing

00:01:00   square brackets in Menlo.

00:01:02   So that's decidedly geeky and perfectly appropriate

00:01:05   to walk around with in San Francisco,

00:01:08   should you want to do that.

00:01:10   It's 14.59, because of course, it's never longer than 15

00:01:12   minutes.

00:01:13   And you can get it at teespring.com/developing

00:01:15   if you're so inclined.

00:01:17   Next, a little random announcement.

00:01:19   I just wanted to mention here, I posted a consolidated,

00:01:23   summarized article of my Towards a Better App Store series over on my blog.

00:01:27   There's a link in the show notes.

00:01:28   So if you're kind of wanting to be able to reference back at all the different parts

00:01:31   and kind of see it all in one place, it's probably a useful place to start.

00:01:35   All right.

00:01:36   So let's get into the actual topic I'm going to talk through today.

00:01:40   And I'm starting another series, and we'll see how it goes.

00:01:44   I'm not sure if it'll work, but I'm kind of hopeful, and I think it will be an interesting

00:01:47   experiment nevertheless.

00:01:49   So I like doing series on the show

00:01:52   because it makes it a lot easier for me

00:01:53   to work out what I'm going to talk about next,

00:01:55   because it narrows the scope from everything I could ever

00:01:58   possibly discuss to something a bit more specific.

00:02:00   And so I was trying to think of something else that would work

00:02:03   kind of well as an ongoing series.

00:02:05   And so I came up with something based on a debate exercise.

00:02:09   And I never did a lot of debate myself,

00:02:11   but I'm familiar with it as a concept where

00:02:13   you're forgiven topic or statement.

00:02:16   You could be told to either take the pro

00:02:18   or against position, and you have to defend it just as vigorously as you would whether

00:02:23   or not you agree with it or not. And often that exercise of having to think about a topic

00:02:28   from a perspective that you don't necessarily have, or isn't necessarily what you would

00:02:33   have taken, you know, if you had choice, can often force you to think about things in more

00:02:38   interesting ways, and to, you know, to as a result to be more thoughtful generally.

00:02:45   And so what I thought it would be kind of interesting to do

00:02:47   is I'm going to take intentionally contrarian

00:02:50   positions against conventional wisdom in the software

00:02:54   business.

00:02:55   And when I say that intentionally contrarian,

00:02:57   I'm going to intentionally always take the con.

00:02:59   I'm going to try and attack something that is often

00:03:01   presented as conventional wisdom,

00:03:03   as something that is something that people should--

00:03:06   everyone knows this is the best way to do it.

00:03:08   I'm going to try and attack those as best I can.

00:03:11   And the result-- and this is probably

00:03:13   definitely worth pointing out.

00:03:14   This is like the disclaimer part.

00:03:16   The result isn't something that's 100% my actual position.

00:03:19   Well, the things that I'm saying I think are true.

00:03:22   They're not necessarily the things that comprise

00:03:25   the actual position I take.

00:03:27   Because often, a lot of these things are very nuanced.

00:03:30   And there's a lot of just opinion

00:03:31   that you have to apply for how you personally

00:03:33   feel about things.

00:03:35   But nevertheless, I'm going to be making sweeping,

00:03:37   unnuanced statements.

00:03:38   And a lot of that's just for the effect.

00:03:39   I'm trying to convince you.

00:03:40   I'm in a debate trying to convince you

00:03:43   my contrarian position. And so I'm going to be taking that position and running it as hard as I

00:03:47   can. Obviously, for you, you need to understand if, if I say something that you disagree with,

00:03:52   the useful thing to do is to say, why do you disagree with that? Why was that not what you

00:03:57   think? Because hopefully thinking about that more thoughtfully will help you to have a better opinion

00:04:03   about your thing and people to more defend it to yourself and to others and to make better choices.

00:04:08   So anyway, here we go.

00:04:09   Hopefully it works.

00:04:11   So the first thing I'm going to be attacking

00:04:13   is the concept of paid software and pricing.

00:04:16   So paid software is like the statement

00:04:18   I'm going to be attacking is paid software

00:04:20   is good for customers and developers.

00:04:22   That's the general statement that I'm going to be attacking.

00:04:25   When I first got into this business six years ago,

00:04:28   the prevailing best practice, the way it had always been done,

00:04:30   if you went to any kind of conference

00:04:32   where people were talking about pricing and things,

00:04:34   you would hear people talking about this

00:04:35   is the great model of software development,

00:04:37   where you work on something for a while, you put it out there for a pretty reasonable upfront

00:04:41   price, and then you provide minor and bug fix updates for free for a period of time,

00:04:46   and then at some point you get to a point where you say, "Okay, I'm going to do a major

00:04:49   update," and you charge again, typically with some kind of upgrade pricing or something

00:04:53   like that.

00:04:54   And this is the model that had worked well for many, many years and had grown up in an

00:04:59   era of box software, where you would physically shrink wrap your software into a CD and send

00:05:05   it to somewhere on a diskette.

00:05:07   And more importantly, the system had been widely accepted by customers as a reasonable

00:05:11   and appropriate way to do things.

00:05:14   And while obviously that model of software has increasingly been under attack by things

00:05:20   like the advent of the App Store, I think even if it still worked, even if that was

00:05:25   still what customers expected, I think it's a terrible way to sell software.

00:05:29   And I think it's terrible for at least three reasons.

00:05:32   And the first is it creates this unnatural barrier to entry.

00:05:36   Because software-- you know, software is a funny thing.

00:05:40   It has an incredibly low marginal cost.

00:05:43   And marginal cost, if you're not familiar with it,

00:05:45   is an economics term for essentially the cost

00:05:48   to produce one more.

00:05:50   You know, the actual bits-- you know,

00:05:51   when I produce a binary out of Xcode,

00:05:54   the cost of duplicating that multiple times

00:05:56   is essentially free.

00:05:57   You know, that's the wonder of digital duplication.

00:06:01   And unless I'm actually hosting media for my customers

00:06:05   or something, the actual cost per user

00:06:07   is almost vanishingly small.

00:06:10   Even on a service like Feed Wrangler

00:06:12   that I have, which has a big server infrastructure,

00:06:14   my server infrastructure is largely

00:06:17   detached from the number of users I have.

00:06:20   Each user I add to the system, at some point,

00:06:23   I would need to upgrade my servers.

00:06:25   But by and large, typically, I'm way under capacity

00:06:28   at this point.

00:06:29   I could continue to add more and more customers with almost no cost to me.

00:06:34   And because of that, charging a large upfront price for my software doesn't really make

00:06:39   sense.

00:06:40   You know, it would only make sense and only be sustainable or maintainable in a completely

00:06:45   uncompetitive marketplace.

00:06:47   Because if I'm charging more for something than it costs for me to produce that next

00:06:53   one of, necessarily someone's going to come across and is going to be able to undercut

00:06:58   my pricing because they're able to, they're just going to say, well, look, once I've made

00:07:02   this thing, I can, each copy is free.

00:07:05   So if I charge, if I get anything for that, I'm making money.

00:07:09   So that's the first part of that.

00:07:11   And the second part, of course, is that you're scaring away potential customers by putting

00:07:14   a big upfront price on your software.

00:07:17   One of the hardest parts of selling something is to get it known by a potential customer.

00:07:21   You know, you've put a lot of time, energy, and effort into marketing, into trying to

00:07:26   put your product finally in front of someone's eyes at a position where they're able to consider

00:07:31   purchasing it. And that's often long and drawn out and tricky. And the last thing that seems

00:07:37   like you'd want to do once you finally got that person to that point where they're looking

00:07:40   at your piece of software, this thing that if they if they decide they want to download

00:07:44   will cost you almost nothing. The last thing you want to do is to put a huge barrier up

00:07:49   and say make that a hard choice for them. If you finally got them to that point where

00:07:53   where they're thinking about buying your software,

00:07:54   give it to them.

00:07:55   Let them have it.

00:07:56   Download it.

00:07:57   And then work out ways to get a return on that in ways

00:08:03   other than putting up a big barrier

00:08:05   in that initial purchase.

00:08:07   You're necessarily reducing the reach of your software

00:08:12   in a way that just doesn't make sense.

00:08:14   If you have something whose marginal cost is essentially

00:08:16   zero, your price, at least the upfront price,

00:08:20   should be essentially zero as well.

00:08:23   Secondly, it's also kind of a fundamentally unsustainable

00:08:27   business model in the sense that you're getting money from people

00:08:35   and making commitments to them, essentially,

00:08:38   in either an explicit or an implicit way,

00:08:40   that if you have that classic model of you

00:08:43   buy a version of a piece of software

00:08:45   and then they expect to receive free bug fix and minor updates

00:08:49   to that software, you then have this very awfully

00:08:53   unsustainable model where all the money you will ever

00:08:58   have received from that customer,

00:09:00   you've received all at once.

00:09:01   And so all the work you're doing from then on,

00:09:04   you are essentially doing on risk.

00:09:06   You're doing in the hopes that you'll be able to recoup it

00:09:11   in some ways.

00:09:13   And so the simplest way to kind of imagine this

00:09:15   is if you imagine a world where you've put out

00:09:17   piece of software, its sales are going great, things are going great, you're building up

00:09:21   this nice big customer base of people who really use your software a lot, it's going

00:09:26   wonderfully, you're living the dream, and then suddenly your sales drop off.

00:09:32   And say they drop off dramatically.

00:09:33   And exactly why they drop off doesn't really matter so much as the situation you then find

00:09:38   yourself in.

00:09:40   Because you continue to have expenses and you've made tremendous number of commitments

00:09:45   to those customers for all those bug fix updates,

00:09:47   for all those minor updates.

00:09:49   And suddenly you have no income to back them up.

00:09:52   You have to either have scrolled enough away in your storehouse

00:09:56   to be able to manage that, or you're

00:09:59   going to need to go to your customers

00:10:00   and start kind of squeezing them out more and more aggressively

00:10:04   in terms of, oh, maybe I'll do my next major update sooner

00:10:07   than I would have thought for whatever that means,

00:10:10   creating this kind of arbitrary break that, oh, now it's

00:10:12   a major update.

00:10:13   Really, all you're doing is you're going back

00:10:14   and shaking the tree a few times to see

00:10:16   if you can squeeze a bit more money out of these customers.

00:10:19   Or you're going to go out of business.

00:10:21   The fundamental flaw of this model

00:10:23   is that each purchase is kind of short-lived.

00:10:26   There's no plan for a continuous income stream from that product.

00:10:31   What you would want, in an ideal sense,

00:10:34   is to have each customer have some type of ongoing income

00:10:38   stream coming back to you.

00:10:40   Because then you have this delightfully virtuous cycle.

00:10:43   That if your software is doing well and your user base is growing, your usership is going

00:10:48   up, that suddenly you have this great virtuous cycle that you have more and more money to

00:10:52   support that development.

00:10:53   And from the flip side, it goes down.

00:10:55   If your usership starts to fall off dramatically, so then your income starts to drop as well,

00:11:01   because you've connected those two things, then your commitments are also disappearing

00:11:06   because people aren't using your software.

00:11:07   So they don't really have an expectation or a commitment from you to support them going

00:11:12   forward. You know, it makes sense, it seems if you want to build a sustainable business,

00:11:16   a sustainable business in the sense that can have a lot of longevity, you want to be able

00:11:21   to from day one have a plan to make money every day going forward. You know, again,

00:11:26   getting in a way that isn't doesn't rely on finding more and more and more customers,

00:11:30   a process that necessarily will get harder and harder to do. You're going to initially,

00:11:34   you know, be able to capitalize on your that ripe, low hanging fruit customers, then where

00:11:40   And where are you going to go from there?

00:11:41   You're going to have to keep trying harder and harder to get new customers.

00:11:45   So you're kind of unsustainable.

00:11:47   It's not going to be a good, comfortable place to be.

00:11:50   You're not having a constant income source.

00:11:52   So approaching models like subscriptions or advertising or anything that has a reasonable

00:11:58   expectation of an ongoing revenue stream is far better than just straight paid software.

00:12:03   And lastly, it's horribly abrupt.

00:12:07   The nature of paid software markets,

00:12:09   if you spend any amount of time doing it yourself or talking

00:12:12   to people who do, is that your sales are often

00:12:15   come in these huge bundles.

00:12:17   You'll launch a new piece of software

00:12:18   and it'll have this huge spike in sales,

00:12:20   and then you'll suddenly have this fairly abrupt drop off.

00:12:23   And you suddenly have this big pile of money,

00:12:26   hopefully, that you are then needing to essentially support

00:12:31   all of your development efforts going forward.

00:12:34   And the awkward thing about that-- and then this

00:12:37   a question more of human nature than it is of actual, you know, economics where conceptually,

00:12:43   as I can only speak for myself, it's much, much more stressful. If you have a big pile of money

00:12:49   that you that someone says you need to live, you can, you know, this is all you're ever going to

00:12:52   get for the next six months, you need to make sure it lasts. That's a lot more stressful than

00:12:58   if they'd taken that same amount of thing, split it into six months into six increments, and then

00:13:02   handed you one every month. That's just the way human nature works. It doesn't necessarily

00:13:06   make sense, but I know from my own experience, it's a much, much more stressful in that first

00:13:11   case than in that second case. And it doesn't even really, you know, whether that makes

00:13:14   sense or not, from an economics perspective, it makes a big difference for you as a, as

00:13:18   a, you know, as a businessman, as a developer, because you're going to be the one who has

00:13:22   to live with that, who has to kind of understand, you know, every time you look to do an expense,

00:13:27   you start looking at it and saying, Ooh, I don't know. I mean, it's going to take a chunk

00:13:31   out of my storehouse here and then what am I going to do if I can't find a way to put

00:13:38   money back into the storehouse? That's stressful. First is having a consistent dependable income

00:13:44   stream from something more like advertising or subscriptions, something or anything that

00:13:49   has an ongoing attribute to it is much better than having this kind of one-time sort of

00:13:55   blow all your income all at once and then have to try and live and survive on that.

00:14:01   All right, so that's sort of the exercise.

00:14:03   Hopefully that was interesting.

00:14:04   Hopefully it got you thinking.

00:14:05   Like I said, I'm not 100% exactly what I--

00:14:08   my personal beliefs and the way that I attach things.

00:14:11   And if you've been listening to this show for any amount of time,

00:14:13   you probably know the areas where that's not exactly true.

00:14:16   But hopefully that was instructive.

00:14:18   And I'll look-- really, I would appreciate some feedback on this

00:14:20   if you think this is an interesting exercise for me

00:14:22   to try and take contrarian positions

00:14:25   and defend them as best I can in the hopes of making us all kind of be

00:14:29   more thoughtful.

00:14:30   So if that is the case and you have feedback, questions,

00:14:32   comments, concerns, complaints, as always,

00:14:34   you can find me on _DavidSmith on Twitter.

00:14:37   You can email me, david@developingperspective.com.

00:14:40   Otherwise, I hope you have a great week, weekend.

00:14:42   Happy coding.

00:14:43   And I'll talk to you next week.

00:14:45   And a quick reminder, like I said,

00:14:47   if you want to get a shirt, you've got about a week.

00:14:48   I'm not going to push it too much more.

00:14:50   I'll probably mention it in the next show.

00:14:51   But just wanted to put that out there so you don't miss out.

00:14:54   Bye.

00:14:56   [