Developing Perspective

#125: Invisible App Store Hands.


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 and Mac developer based in Virginia. This is show number 125 and today

00:00:13   is Friday, May 17th. Developing Perspective is never longer than 15 minutes, so let's

00:00:17   get started. First, I just want to apologize for my voice and potentially the sound quality

00:00:23   of this. I have a cold and I'm at home rather than in my office. I'm recording this in a

00:00:27   a slightly different microphone with a slightly coarse voice.

00:00:29   So apologies, but hopefully you'll bear with me

00:00:32   and we can have a good show.

00:00:34   All right, so the topic I'm going to talk about today

00:00:36   is really just about--

00:00:40   it's like our semiannual discussion about pricing,

00:00:43   about App Store, I guess, sales models and things,

00:00:48   whether we should have trials, whether we

00:00:49   should have update pricing.

00:00:52   The prices are too low, too high.

00:00:54   It seems like we have this sort of semiannual discussion.

00:00:56   The thing that I was thinking about at this time that I thought was more interesting is

00:01:02   I started wondering, kept thinking about why we keep having this discussion.

00:01:07   I think that helped me think in some interesting and hopefully some useful sides to it that

00:01:12   hopefully are picking up and be helpful to further the discussion, I suppose, or maybe

00:01:16   put the discussion to bed.

00:01:20   The first thing I wanted to say is that any discussion about pricing, about the way essentially

00:01:26   the way that we make money in the App Store, at its core, is always going to have to start

00:01:31   from a place of deciding who should win in some ways.

00:01:35   And by that I mean, in order for, whenever you set up a store, whenever you set up a

00:01:41   market, maybe is a better term for it in this case, you're always kind of trying to optimize

00:01:46   for different things.

00:01:48   And so, would you prefer for there to be, for example, a small number of very well paid

00:01:55   developers, or would you rather have a large number of developers all making less money?

00:02:02   And these are the kinds of questions that you kind of have to navigate as you think

00:02:05   about how would you set up a store.

00:02:08   And I think, generally speaking, the approach Apple is taking, which I think makes sense,

00:02:13   is that they're generally trying to set up the store to distribute the income as fairly

00:02:21   as possible.

00:02:22   That's fairly, in some very vague sense of fairly, but in the sense that it's not creating

00:02:28   monopolies or advantages for specific people as much as possible.

00:02:33   Obviously there are things that aren't perfect about that, but generally speaking, that's

00:02:36   what they're doing.

00:02:38   The result of that, by having this broad, open, fair market in many ways, is that that

00:02:45   has created tremendous competition.

00:02:48   is the thing that most often drives pricing in any market.

00:02:53   And I think software, there are some aspects of software pricing and some of the economics

00:02:57   of making software applications that are unique to it, but for the most part they're the same

00:03:01   as the economics of almost any commercial business, anything that you do.

00:03:07   Your goal is to create a product and put it into the market and then sell it to recoup

00:03:14   as much money as possible.

00:03:16   the core of business is to create something for less money than you were able to bring

00:03:21   in and the difference is the profit that you can live on.

00:03:25   That's the core of business.

00:03:26   And it's led to a market where in the app store specifically, on iOS, I think there's

00:03:31   last time I checked, there was about 875,000 apps in that market.

00:03:38   And competition is a funny thing because one of the more core, like this is where I started

00:03:42   get into my economics, which I'm not an expert on by any means.

00:03:46   But sometimes I try to wear that hat.

00:03:48   It's the laws of supply and demand.

00:03:51   That the more supply of something that there is for a constant demand, that the price will

00:03:59   tend to fall.

00:04:00   And I think that's part of why App Store prices go down, is that there's a tremendous amount

00:04:06   of competition.

00:04:08   If you make an app that does anything, it probably already exists in the App Store.

00:04:16   There's probably more than one person who's already done almost the same thing in many

00:04:20   ways.

00:04:21   With that many apps, there's very few new ideas.

00:04:24   I'm not saying that there aren't any, but there are a lot of things that are more just

00:04:28   novel takes or remixes of existing ideas.

00:04:32   The other economic principle that comes into this a lot is the concept of marginal utility,

00:04:37   which I think I'm abusing slightly there, probably it's that for most competitive markets

00:04:43   the price of a product will tend towards its cost of production for the most recent unit.

00:04:51   So that's to say, you know, if I'm making t-shirts and maybe the first t-shirt cost

00:04:57   a lot of money to make because I had to get the machines and all the stuff, but after

00:05:00   I've been doing this for a long time and I have all these economies of scale, you know,

00:05:04   my last t-shirt will cost, is costing me $2 to make, then the price of that t-shirt is

00:05:09   probably going to be heading towards $2.

00:05:11   And this gets particularly interesting with digital products, software being included

00:05:16   or ebooks or music, where the marginal cost becomes zero, essentially.

00:05:22   Once I've built something and put it in the store, I have no additional costs in sort

00:05:26   of to create and maintain that product, with the obvious exceptions of a few things like

00:05:31   support and those types of things. But those are generally, the price gets low to a point that it

00:05:37   becomes a kind of rounding error per unit. And so those two things together are making it that

00:05:43   the price is always going to be pulled down. There is these external factors that are pushing

00:05:50   on prices to make them as low as possible. And I think that's just the reality. I think that's,

00:05:55   And it's driven by the fact that the marginal cost is zero and it's an incredibly competitive

00:06:02   market.

00:06:03   But it's also probably fair to say it's a competitive market on a global scale too.

00:06:07   This is actually something that I ran into a couple of years ago.

00:06:11   I was working on an app that was very similar to someone else in the store and we were working

00:06:16   and we were both doing pretty well.

00:06:17   We were kind of jockey back and forth for position, but we were sort of really very

00:06:23   comparable revenues, very comparable positions in the store.

00:06:27   I believe he was based in Hungary, if I remember the author of the competitive competing app.

00:06:36   For the similar revenue that we were getting, I was supporting myself, one person in Virginia

00:06:40   in the United States, a pretty expensive place to live.

00:06:43   I believe he was supporting a team of four or five people.

00:06:47   That is a complicated thing where you can say an app that makes whatever x dollars is

00:06:55   unsustainable for you, for someone living in the US or in Western Europe or whatever.

00:07:01   That may not be the case for someone who's living somewhere else in the world.

00:07:06   They may look at an app that makes $5,000 a year and say that's great because they're

00:07:12   able to take advantage and leverage lower cost of living, lower cost of variety of tax

00:07:17   rates, whatever it is.

00:07:19   And so it's just understanding that all these external factors are pushing on prices and

00:07:24   pulling them down.

00:07:26   So what do you do?

00:07:27   And I think the first thing to understand is that if that's the case, there are very

00:07:33   few things that Apple or anybody else could do that would raise the price of software

00:07:39   in the store.

00:07:40   And this is something a lot of people have been talking about recently with things like

00:07:43   trials, where the trials would raise the price of apps in the store, make it easier to sell

00:07:47   more expensive software.

00:07:48   And I think maybe the latter, definitely not the first.

00:07:52   I don't think trials would—what would increase the amount of revenue that most software developers

00:08:00   make, if anything—and this is something I think Marco Armit was talking about in his

00:08:04   His blog post about trials is that you'd lose a lot of money from the people who are trying

00:08:11   an app and are willing to pay for that trial, for the experience of exploring it and consuming

00:08:18   it.

00:08:19   That can get into an interesting question of whether that's a good thing, if it's good

00:08:23   to take money from people who don't ultimately use your software.

00:08:25   That's more like an ethical question.

00:08:27   But generally, I think for a lot of applications, you'd end up with actually a lot less revenue

00:08:31   coming back from this.

00:08:33   even just look at the Google Play Store, which has a trial system as well as I think the

00:08:37   Windows Phone Store.

00:08:39   They're not known for huge amounts of paid, high-cost software.

00:08:44   There are certainly instances of that.

00:08:45   I don't think it's trials that's driving that.

00:08:49   Trials may help for very expensive software, things where you're spending $50, $60, $100,

00:08:55   $200, $300, $500.

00:08:57   Using those types of things without a trial becomes much more intimidating.

00:09:01   But generally speaking, I don't think trials would address that, because now all of a sudden

00:09:05   you just have the same external factors pushing on prices in a context where customers can

00:09:10   essentially spend less money for the same experience.

00:09:16   And so, if anything, it would potentially reduce the amount of revenue that you'd get,

00:09:21   because if you lose the experiential sales, the people who are just trying it out, without

00:09:29   being able to raise prices, which I really don't think you can because of all the things

00:09:32   I was just talking about, you'd have less money available.

00:09:37   So one thing that is tricky about that is the App Store as it is right now is doing

00:09:41   very well.

00:09:42   And I think anybody who says that it isn't is kind of, you know, like I think they celebrated

00:09:49   their 50 billionth app download and it's a market that's growing well.

00:09:54   There's a lot of people who are making their living from it.

00:09:56   generating a solid amount of revenue for developers.

00:10:00   Every time, I'm sure in a couple weeks at WWDC they'll have a big check that says, "Hey,

00:10:04   since the App Store just launched, we've given whatever, n billion dollars to developers."

00:10:10   It's doing well.

00:10:11   And any time you change fundamentally that model, you have no idea exactly how that's

00:10:16   going to happen.

00:10:17   There's going to be all kinds of unintended consequences.

00:10:18   There are going to be all kinds of strange things that come out of that that we may not

00:10:23   be able to predict or may not like.

00:10:25   It could be good, but generally speaking, as somebody who makes my living, who is paying

00:10:30   my mortgage based on making a living in the store, generally I'd rather not change it.

00:10:36   I'm able to adapt and coordinate my efforts based on a market that is fairly well understood

00:10:43   at this point.

00:10:44   It's something that's fairly mature, fairly established, it's been going for four or five

00:10:50   years now, and I can plan around that and give. If Apple comes out and starts radically

00:10:55   changing the way that store works, it could be good or it could be terrible, and that

00:11:01   makes me nervous.

00:11:02   And so then lastly, I just had kind of the LeBron-a-thon, it's like, so what do you do

00:11:06   then if you, for whatever reason, want to charge more for your software? If that's something

00:11:13   that's important to you. And I'm saying that not necessarily in wanting to raise your revenue,

00:11:17   In that, if for whatever reason you don't like making a living on 99 cents at a time.

00:11:23   If there are people who just rather make their living on smaller sales of bigger numbers.

00:11:29   That's totally cool.

00:11:31   It's just a difference in how you approach it.

00:11:33   What I tend to actually have done is I try and go for all sides of everything.

00:11:38   I have some products that are expensive, some products that are cheap, some products that

00:11:41   are free, and in aggregate it creates a sustainable and dependable income.

00:11:46   But if you're not, if that's important to you, the only thing that I could think of

00:11:49   is that the only way you can charge a premium in a competitive market with a lot of interchangeable

00:11:56   products is to be viewed as a premium brand.

00:12:00   And you can see this in a lot of areas where, in other markets, where there are clothes,

00:12:06   cars, jewelry, whatever it is.

00:12:09   There are brands who people pay more for, not necessarily because they're getting their

00:12:18   money's worth extra, but because they enjoy or trust or like the brand that they are supporting.

00:12:29   People who are buying an expensive car aren't necessarily getting something that gets them

00:12:35   from A to B better.

00:12:36   In some ways it does, but it gets very difficult to start justifying all of the increasing

00:12:42   costs where what you're really buying is that experience, is the external parts of that.

00:12:49   And so in order to do that, that's how you have to position yourself.

00:12:53   I think the reality is if it's important for you to charge a lot of money, then that's

00:12:57   the only way that you can really go at it is you have to be a premium brand, which means

00:13:00   you need to be incredibly high quality, you need to be incredibly polished and refined

00:13:06   in terms of messaging, in terms of support, in terms of customer experience, in terms

00:13:09   of all the things that go around with that.

00:13:13   Your design has to be 100 percent.

00:13:15   You've got to have rock solid everything.

00:13:18   And that's good, I suppose.

00:13:21   But it's also not necessarily for everybody.

00:13:24   There's a lot of effort and time that it takes, and the risk you take in doing that is also

00:13:28   much higher.

00:13:30   In order to create a premium product, it takes a premium amount of time, energy, and effort,

00:13:35   which if you have the resources to do is great, but if you are someone who is independent,

00:13:40   if you're someone who's smaller and starting out, that may not be a great or a sustainable

00:13:47   path for you necessarily.

00:13:48   You may pull out of time and effort into something and have it fall flat, which you fear too.

00:13:53   So that's just kind of some rambling thoughts I had about pricing and about the economics

00:13:56   of being in the store.

00:13:57   And generally, like I think I've said many times, my approach right now, and the thing

00:14:02   that I think is the most sustainable and dependable way to make a living in the app store right

00:14:07   now is through diversity.

00:14:08   Is to make your living on averages.

00:14:11   That you have a variety of things that are solid products that you put out that aggregate

00:14:16   can make a solid living for you.

00:14:18   That's what I do and that's what I've been doing for years and it seems to work pretty

00:14:21   well.

00:14:22   Alright that's it for today's show.

00:14:23   As always if you have questions, comments, concerns or complaints I'm on Twitter @_davidsmith,

00:14:28   I'm on AppNet @davidsmith.

00:14:29   And otherwise, we'll be happy to have you guys, have a great weekend, happy coding,

00:14:32   and I will talk to you next week.