October 1st, 2013 – apps, business-model

Paid Apps are a Ponzi Scheme

Related to the posts from Marco “Underscore Price Dynamics” and Florian “Worth Less than a Cup of Coffee”.

Imagine that you have a good idea for an app and after a couple of months you launch the app for iPhone and you charge $1.99 for it. The app proves to be successful and you have 2,000 sales in a few weeks (2,000 * $1.99 * 70% (30 % commission Apple) = $2,786 before tax). However, you feel that it can be much more successful so you hire someone to release it for Android.

In the following months you need to sell twice what you sold before to make it profitable, because you have twice the expenses. Besides, you have to maintain all existing users. Sales and reviews keep going well and you decide to synchronize both versions by developing an API and you also decide to develop it for iPad. At the end you need to hire two developers and a designer who pays more attention to the UI and UX and you decide to focus on marketing techniques in order to obtain more people spending money on mobile advertisement.

After a year you have a team with 5 workers, you have marketing costs and you have to maintain all the existing users. Basically you need the revenue that comes from new users to pay the costs of the old users (marginal but they exist). If you stop having new users, you are in a big problem. Something very similar to a Ponzi scheme.

WhatsApp example

How many successful apps, which are just based on selling the app, do you know? WhatsApp can be the best example. In four years they have managed to acquire 300M active users, of which 50% may have paid. So they could have earned around $100M (150M * $0.99 * 70%) plus a $8M investment from Sequoia. They may have an annual expenditure of $20M (45 employees in Silicon Valley %2B servers). Doing some basic sums, you will see that if they only charge once per user the model is not sustainable. That’s why they are migrating to an annual subscription model. And they are migrating despite the huge amount of downloads they have achieved.

Recursive income

If instead of selling the app or one IAP (in-app-purchases), you plan your model so there is recursive income (via IAPs, monthly fees, advertisement, leads) you will have a much greater chance of survival in the bloody war of the apps.

Virtually all apps with more income follow this model. Free apps with payment options.

Free app vs Paid app

In the example at the beginning, we supposed that it was a paid app. However, the trend is very clear and it will not be long enough before all the apps are free with paid options so they can compete. There is an order of magnitude (10x) in the number of downloads between paid apps and free apps during the first days. And you also have to take into account that having more downloads at the beginning improves your ranking for the future.

If a user finds a paid app, he will seek free alternatives before buying it. If he finds something decent, the user will not buy your app. But if your app is free and he/she likes it, it is much more likely that this person will buy the paid option.

There will always be free apps that compete with you, and there are always students or developers who do not mind not earning anything at first.

Note: Forget about launching a free app with limited options and another paid app with all options. You need to concentrate all downloads and ratings in just one app. It was previously done but with IAPs is now unnecessary.

Note 2: Forget about launching a paid version first and after a few months launching another paid app with more features. You’re going to piss off old users and lose reputation in the App Store as it’s another app. Clear did that a few days ago with a version just for iOS7 and they had to reinstate the original app because of the user backslash.

Note 3: How different would be the economy of app stores if apps had to cost at least $0.10 instead of being free. People would start to compare between paid apps and I believe the quality would increase.

Game apps are different

Games is a special category because users usually play with them for a few weeks/months. Game apps go up and down in the ranking very quickly. Users do not use them after a few months. And developers know this, so they concentrate on building new games. Also, the vast majority of them have no server costs.

Virtually, everyone still uses this model. Free games that continuously offer you paid options to progress faster. You just need to go to the ranking of highest grossing apps in both the App Store and Google Play.

Apps require no maintenance!

This is a fundamental mistake among a big amount of people and companies that hire agencies to develop their app. Building an app consists first on designing, coding and testing it. Then you have to fix bugs, add new functionality, remove functionality, improve the design, support new APIs and new hardware, etc. And you also have to devote an important amount of time to distribution, marketing and customer service.

So no, it’s not launching an app and then going to the pool to relax. And all that is only if you have the app on one platform. Because you need at least iOS and Android for the marketing strategy and word of mouth to work best. The most downloaded apps are on both platforms, leveraging the network effect. And that also means that you often need servers to store all the data.

What if I only want to launch an app and make some money?

If you will only work by yourself and you have another job or other freelance projects you do not need to worry about all the above mentioned. Or well, maybe you do, because you usually know how you start but not how you will end up. In Spain we have the example of Go!Chat, that after following all the steps in our example they reached over 20 million downloads on Android and a really good income but at the end they had to close and lay off their team because new downloads, usage and income were clearly going down.

Conclusion

Having a successful app for several years is not easy. If you have a medium-long term vision, you need to think on a recursive model from the first day. As I said before, there is a bloody war in the world of apps and your app is just one more in a million. Quality and customer service are your allies. Never lose sight of that.

Further reading

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