App Pricing Structures — Turn Your Hobby in to a Profitable and Sustainable Career

App Pricing Structures — Turn Your Hobby in to a Profitable and Sustainable Career

There's More to Charging For an App Than Picking a Number That Sounds Right

We all love Free, Open Source Software, but we must also remember that for many people the few dollars you spend on their app is their sole source of income. Spend some time in the forums or on any dev community social media account and you’ll eventually see the classic comment about the cost of 10 minutes worth of Starbucks coffee relative to the price of an app you’ll use often. They may have a point but there is far more to app pricing than just picking the right number and hitting publish.

Pricing is a very important part of your app as the subject tends to invoke strong feelings in your users, get it right and you can bring in a steady income and leave your users happy. Get it wrong and you infuriate and alienate your users and gain bad faith. In the worst cases, this bad faith can gain more attention than the app’s content. In 2010 even Gordon Brown the former Prime Minister of the UK spoke about changes to the business model for the digital edition of The Times when they introduced a paywall on top of the ad-supported revenue method. Getting it right may be difficult, but nail it and the sky’s the limit.

Customer Lifetime Values (CLTVs) are an incredibly important part of choosing a revenue method that is right for both you and your customers and is best explained as the total amount of money each of your customers will generate for you. It all comes down to three things: Monetization, Retention, and Virality. Monetization is the total each customer will contribute in terms of money, this includes purchases, ad revenue, and IAPs. Retention looks at how long you are likely to keep each customer and finally virality is how many new users each customer will introduce to your app. Strike a good balance of all three and you have a sustainable source of income. We will discuss how to calculate these values in a later article, for now, we will focus just on the methods you can implement to bring in income from your app.

Revenue Methods – Paid

The paid method like the others comes with its ups and downs. Unsurprisingly, charging to download your app is going to reduce the number of people installing your app straight away, you also have to consider the notorious “Refund” button. If your app is likely very infrequently used or doesn’t contain enough content to carry your users past that 2-hour refund deadline you could have a problem. The largest benefits of this method are the simplicity of implementing it and the larger download:revenue ratio over most of the other methods available.

With median installs of 750,000 indie app Five Night at Freddy's has generated around $1,500,000

With median installs of 750,000 indie app Five Night at Freddy’s has generated around $1,500,000

With median installs of 75K this app has generated about $1,585,000

With median downloads of 30,000,000 Minecraft has generated around $198,435,000

These apps may be extreme examples when it comes to downloads but they represent three different levels of the simplest method of revenue generation, a one-off payment for the app. FNAF, a simple app by Scott Cawthon an indie game dev and animator was virtually unheard of at its initial release. Which is likely why the game has the lowest price of the three above examples; however, 2 years, 4 sequels, and millions of downloads later the model has proven extremely effective for the developer.

FFIX is one of the most expensive commonly seen games on the Play Store and at $20.99 far surpasses other big ports on the Play Store such as Portal, Doom 3 and Half Life 2.  Charging this much for app is usually out of the question; but in this case it is likely that since the game was complete already and just had to be ported across, coupled with Square Enix’s large number of revenue streams this pricing model may indeed suit them if they do not require a large amounts of downloads, and could be aided by the veblen good effect of the app (it’s high price driving sales because “it must be good! It costs $20.99!”.

Between the two pricing models, we have Minecraft. On the upper end of what many users believe to be an acceptable price the games cross platform virality ensured downloads, the pricing could be deemed reasonable for both the developer and consumers and could certainly have been placed higher and still seen a great many purchases.

Revenue Methods – Ad-Supported

Ads are just as tricky to get right, when they work as intended they are an excellent source of revenue and while there is nothing stopping you including ads in a paid app be careful. While you may think of ads as a way of subsidizing the prize allowing you to sell it for less, your users may not realize this and see it instead as greed. If you want to combine the two methods you will want to ensure the ads are discreet and inoffensive so as not to trigger these feelings.

You will see more downloads for an ad-supported app than the same app on a paid model due to the lack of cost to the user but, you will also find that users hold a lower value for ad-supported, as the app cost your users nothing they are far more likely to abandon your app if they find an alternative that meets their required use case better.

With the growing popularity of ad-blockers you are going to immediately start losing some revenue, we’ve all heard both sides of the argument enough times by now, but the hard truth is they are not going away anytime soon and trying to stop your customers using them is only going to cause them to move on to the next app. A way to assuage this would be to bake individual ads directly into your app, whether via product placement or individually embedding ads as static images. You shouldn’t however, fear ad-blockers it is every customer’s right to use them and that is something you will have to account for in advance. You should be aware that if you discover ad blocking is not generating enough for you that you cannot change a free app to a paid app in the Play Store without creating an entirely new listing and app package name.

Revenue Methods – Subscription/Paywalls

If your app generates new content on a regular basis or incurs an ongoing cost to you the developer then the subscription method may be your best choice.  The paywall business model in actually similar to the final method below however instead of locking features behind IAPs you lock the entire app or content. A common method is for apps to display a certain amount of content before seeking payment which allows users to try your app and decrease your churn levels.

This method is easy enough to implement via the Play Stores integrated in-app subscriptions options and can quickly add up even with a low monthly/yearly cost. This method will usually generate the highest CLTVs provided you can keep your content coming and your users engaged; subscriptions are most often found on media apps such as Netflix, Google Play Music, and many publications. Non-media apps include services such as LastPass and Adguard, the latter which is an exceptional case study for increasing revenue.

Screenshot 2016-06-28 at 02.47.49

Head to the Adguard purchases page and this is what you will see, everything here is designed to part users from their money, while at the same time making them feel good about it as though they just received an exceptional deal. After your initial trial of the app ends you will be asked to upgrade to a subscription. Here’s a breakdown of possible outcomes.

1 Year/1 Device$8.95Customer gets the product for one year, will potentially purchase again/recommend. Already costs more than many people would be happy paying for an app, subscription goes some of the way to offset this as it takes the cost away from the app and sets it against a service.
2 Year/1 Device$16.95Customer buys the same product in the belief that they will use the app for more than 2 years. Significantly larger revenue but the customer is happy as they have saved themselves $2.95 stylised as the much more consumer-pleasing 17%.
Lifetime/1 device$24.95Customer believes that they will be using the product for longer than two years, is more likely to continue using the app long term and will have a higher CLTV via recommendations to others and retention. Just purchased the equivalent of 2.8 years worth of usage, likely much higher than the average total user retention period.
1 Year/2 devices$19.95Two full priced purchases made, no financial benefit to the customer.
1 Year/3 devices$29.85Three full priced purchases made, still no financial benefit to the customer.
1 Year/4 devices$39.80You get the idea, but this continues right up to 9 devices and while the customer does not benefit from buying additional subscriptions at once apart from saving time, asking the consumer directly like this “how many copies do you want?” automatically starts them thinking “what if I need a copy for my tablet also, and my partner and what about for both the kids? I don’t want them seeing potentially inappropriate ads… ”  and instantly you have the potential to make another 5 sales with the click of a button.
1 Year/1 device/+ copy for Windows/OSX$24.95Customer is left happy from having saved money on buying the two separately, while the developer is left with a potentially lifelong customer happy to pay 1 year at a time
2 Years/1 devices + copy for Windows/OSX$34.95This is where things get very clever, suddenly the customer is greeted with the phrase “Save 42%” Which is true if your customer had decided to buy both their copy for Android and their PC copy separately each year instead. Obviously, this is not going to happen when the choice exists to buy them at the same time. Customer walks away with a great deal, developer gains a large source of revenue.

As can be seen, with the correct use of consumer psychology paywalls can bring in a massive boost to your income.

Revenue Methods – Freemium

Freemium, seen by many as almost a trap when implemented vigorously, is the process of adding IAPs to unlock additional features or content that can be accessed at any time. On the gentle side, we have games that allow you to purchase vanity items or additional lives. At the other end of the scale, we have apps that require you to buy IAPs to proceed while attempting to make it appear that the choice was the customers (commonly referred to as pay to win apps). Exceptional use of psychology aside, go too far and you are bound to draw negative attention to your app, driving customers away (see Dungeon Keeper)

Screenshot 2016-06-28 at 03.56.20

Vanity items such as themes are an exceptional way of implementing the freemium model, an example outside of mobile that came to the public attention in 2010 was the implementation of community made items in Valve’s Team Fortress 2. Five developers: Rob Laro, Shawn Spetch, Steven Skidmore, Spencer Kern, and Shaylyn Hamm created in-game items that Valve placed for sale via the game’s store and in two weeks generated up to $47,000 each in royalties (after Valve took their cut).

Head here for an in-depth look at how you can calculate your Customer Lifetime Values and use it to help your choice for a business model.

How did you settle on a method of income for your app? Leave a comment below!

About author

Mathew Bloomer
Mathew Bloomer

He fell in love with Android after buying a T-mobile G1 in 2008 and hasn't looked back since. He firmly believes the future of technology lies within bio-hacking and is an NFC implantee.