Is upfront app pricing over?

Marco Arment, who has been responsible for some popular apps including Instapaper, is a leader in the app world on discussions of mobile app strategy. For that reason, when he makes a pronouncement that tends to start a discussion. And in today’s instalment, he pronounced, upfront mobile app pricing over.

What is upfront app pricing? Basically, it is when you have to pay something to download an app. It is not when you buy something within an app (an in-app purchase) or when you buy something outside an app that makes it work (such as a subscription). Finally, it is not when you pay for an upgrade of an app (although Apple doesn’t currently provide the ability to do this).

There is a lot of dressing in his argument but near as I can tell it is this, there is almost always a free option for an app and consumers will choose the free option first. That means that if you put a price on an app, you are going to find it hard going.

As most of the readers of this blog have some economics background, I think the common reaction will be “and so?” This is just competition. Apps have zero marginal costs and if there are substitutes, then competition will end up driving the price down.

But there is something more to all this. This behaviour — searching for free and trying it first — is not confined to mobile apps. It is the commonplace strategy for shopping — especially for digital goods. For instance, it is how we search for news. In academia, it is how we search for papers. We are going to avoid paying so long as there is a free version out there to try.

The problem is this: the default matters. Once you search for and find a free version that is suitable, the search stops. It may be that there is a paid product out there that is superior and given no search costs you might evaluate it as being worth the price. Sadly, however, you don’t find it.

Now, of course, there is a broader question: why is there even a free version out there? It is hard to say but, of course, when you want Angry Birds, there isn’t a free version. But when you want an weather app there is. Somebody just trying their programming skills out has written it and there it is for consumers to enjoy. The problem, therefore, must be that producing a higher quality app takes lots of resources while producing a lower quality one can pretty much be done for free.

My point here is that this still sounds like general processes on competition — enter a market with close substitutes and it is harder to set a price. Enter a market where you are unique and there is opportunity. Arment is working currently on a better podcast app. To be sure, there are improvements to be made. Apple’s version is terrible. But the problem Arment faces is it is free. Few may download his if he puts a positive price on it.

So how is someone supposed to navigate this mess where an ‘outside the transaction’ consumer search issue can so bifurcate the market making higher quality apps that mass markets would pay for under full information become only niche market apps?

The answer of course is that you have to provide a demonstration of the quality. One route to this is to have the app as a free download. For a podcasting app, you do that, have people subscribe to all of their podcasts, let them enjoy it for a month or so and then charge them to keep using the app. The idea is that you lock them in and make it ‘not free’ for them to switch to a free app. This rules out several things that Arment may be toying with. For instance, he might be thinking of having a free app that charged consumers once they want to subscribe to a certain number of podcasts. Sounds good in that it targets higher users but it is bad in that it taxes high use and, therefore, the experience of high value. Alternatively, Arment may be thinking of disabling automatic subscription updates. Once again, it taxes using the app in its pure functionality and so robs consumers of experiencing any quality. My point is that in-app purchases are going to be most valuable when consumers have already made an investment in understanding what they are buying.

The other route is through social referrals. One of my favourite apps is Dark Sky. It costs, get this!, $3.99. And it is just a weather app. But it is a beautifully designed weather app that does one thing, tells you how much rain to expect in the next hour or so. If you go outside, this is what you want to know and you find it out just be opening the app. There are even alerts about this.

To be sure, you can also find this through weather apps but it takes a few clicks and isn’t such a neat package. So why did I buy it? Someone showed it to me. We discussed the $3.99 but I discovered it was worth it. Minutes later I had the app and it is one of my main ones. The price was irrelevant beyond that point. I’d have paid more given what I know now.

Dark Sky isn’t a perfect example as it received its initial backing through Kickstarter (not a bad way to go for pre-selling a paid app by the way). But it does demonstrate that if you find a way of getting social referrals, you can get people to pay.