Pricing a product is always tough. And pricing a digital product is even tougher.
If you’re creating a mobile app by hiring an app development company, I’m sure one of your key thoughts would be ‘How do I price my mobile app?’, ‘How much should I charge my users?’
The apps that are offered free or at lower prices stand a better chance of market penetration and gaining a higher market share but the ones that charge a higher price have the potential to generate a higher ROI resulting in the product becoming profitable much sooner.
In the competitive market, adopting the right pricing strategy can have a long term impact on the success your product achieves in terms of app downloads and user retention rates and give you a competitive advantage.
Related: How to start an app business.
We asked some experts from the industry about the product pricing strategy one should follow to ensure your app is attractive to the users as well as provide the potential to build a profitable mobile app business.
Here are some great insights they have shared for the aspiring entrepreneurs who are in the process of deciding the pricing model of their product.
#1 An app sells for what market is ready to pay for it
Chris Cayer, founder at Reyactive
To answer your question, there are really several ways companies decide to price their apps, and most of them are doing it the wrong ways and for the wrong reasons.
An app is exactly like any other product – it sells not simply for what it is worth, but for what the market is prepared to pay for it in the volumes that maximize the profit potential of the product, with the add on limitation that apps generally have a 6 month shelf life before needing to be upgraded to stay competitive, while, for example, a soft drink or a watch typically don’t.
The up side to apps is that they are generally recurring revenue streams, while traditional hard products and even a lot of software are one time or disposable purchases.
When you’re determining your profit model for your apps then you need to not only see what the revenue is per price point but also what the recurring revenue models look like at different price points so that you can maximize the overall revenue as opposed to just the original entry level purchase price, and that is a layer of modelling that also needs to be done in determining price points.
The best way to price any product is to test it at a variety of prices and see how the market responds to each test until you find the right levels for your product.
Unfortunately, for most app developers, they typically still incur most of their costs up front and have to cover those earlier on in the revenue model so they structure the price points to normalize their cash-flow up front and in the process forego much larger volumes of revenues and profits by alienating and excluding whole markets based on their all-or-nothing pricing models.
Alternatively, the app developer will offer their product for free trying to gain a large enough volume of subscribers to generate revenues from advertisers or alternative revenue sources first, and in doing so they devalue their product to the point that they really could never sell it or even an upgraded version for much because the perceived value is so low.
Great marketers in the app or SaaS business have been finding new audiences to test pricing through secondary or white labelled versions of the software and their software branding, sometimes throughout the development process, introducing the product in beta platforms and testing pricing models until they finally have it all figured out, then either keeping the models separately supported or migrating them all to one platform as a final upgrade when they’re ready to go to market with their fully ‘conversion rate’ and ‘retention rate’ tested models in place.
Arkenea Pricing Tip: Price of the product needs to take in consideration a number of factors including the actual costs involved, the money required for sustaining it as well as the perceived value the app has for the customers.
If you offer the users a stellar app that addresses their need, the money would automatically follow.
#2 Pricing is more about human behavior than about numbers
Amanda Phingbodhipakkiya, founder at The Leading Strand and co-founder of Ship Your Side Project
Daniel Khaneman’s winning the Nobel Prize in Economics as a psychologist should tell us that pricing is more about human behavior than about numbers.
As consumers, when we look at buying products our minds first conjure up comparable products, things we’ve come across before that are similar or could be complementary to the product and the price of those products anchors a number in our mind.
Buyers will then mentally compare the differences between your product and the comparable one to generate a price that “feels right” to them.
What’s really interesting is when we as consumers don’t have a reference point. In new markets, demand is uncertain and people are much more swayed by emotion and intuition.
For instance, Amazon’s Echo or a VR headset. Depending on how it’s framed and the story conveyed to the consumer, there can be many “correct” prices. But at the end of the day, the perceived value of the product must be greater than the price. This is what drives consumers to purchase.
For example, when my partner and I were pricing Ship Your Side Project, a 6-week side project boot-camp that takes participants from idea to launch, we were dealing with a relatively new market.
We’ve varied the price in each cohort, from $500, to $650, and now a tiered set of offerings that range from $100 – $650 based on user feedback and experimentation.
In an effort to promote the program, we gave an idea scoring tool away for free, knowing than some number of people would download it and move on and counting on a group of others to want to move forward to applying to Ship Your Side Project. Our hunch paid off.
The free tool drove a lot of interest and applicants and some people even paid us for it even though it was explicitly free. It just goes to show that perception is everything.
If the perceived value is greater than the price, consumers will be sold and willing to pay. The tricky part is crafting the value.
Arkenea Pricing Tip: Customer psychology plays a huge role in determining the pricing strategy of your product thus determining the subsequent profit margins.
Use of psychological pricing hacks such as bundling of the in-app purchases or offering them for $0.99 instead of $1.00 can lower the emotional barrier to app purchases.
#3 Consider all the factors while deciding the price
Lindi Wheaton, president & CEO at The Pixel
Before you can think about the cost of your app you need to make sure you designing an app that users WANT to buy.
Of course you have great ideas but will you be able to develop those ideas into an interface that is not only attractive but functional for the end-user who will be buying your product/app.
In order to determine the app development cost you’ll need to figure business costs. The business cost has many factors such as:
- How many full-time employees are required?
- Do you need a web designer or can you get by outsourcing?
If a business/individual chooses to create an app and rely on subscribers per month as an income, I would suggest new releases every quarter.
You must be knowledgeable in your own market and understand trends along with current events to direct your app releases towards something the average mobile users would want to use. Every four months release new enhancements which will retain your current users.
You will have long term and short term enhancements and each one should be treated as its own separate project. By separating the phases into teams, appoint a project manager to each team and make sure all lines of communication are open.
Put a price on the updates as well as enhancements. Figure in any business overhead you’ll have such as: social security, insurance, taxes, etc.
By doing this you can accurately quote your subscription cost while covering any business cost. Once you have your application created design promotional material: content, images, videos, etc and use social media platforms to create a buzz about your new release.
Think of social media as a resource/funnel to drive users to your website. Your website is the only location where you have ultimate control over your brand and message.
All social media platforms have one feature they focus on but do that one feature really well – no character limits, image only, video only, 30 sec clips, and so on. This requires businesses to use multiple social media platforms to get their product buzz out.
Arkenea Pricing Tip: A pricing strategy that isn’t backed by a robust marketing strategy is a half baked plan. You need to have a plan of action in place to ensure that the word of your app reaches your target audience.
Only then can you expect the mobile app to achieve downloads and generate profit as a result of the pricing strategy you implement.
#4. Figure out what does the competition demand for the app
Marvin Eichsteller, founder at MJPE Design & eMobility Blog
I did experience pricing of apps very differently, very much depending of the context. For example in a big German Business Consultancy I work for, we let a startup company design an app for our employer branding campaign and they got over 15,000 € – in comparison to established ad agencies they used to worked with a moderate price.
For developers who develop apps themselves and depend on downloads or app purchases there would be a long way to get 15,000 €, related to how many people the app will play and investments in own advertising.
In general, pricing is related to 4 points when the app will be distributed through stores:
- What makes my app special?
- How does it stand out from other apps?
- More important to me: What does the competition demand for the app?
- What cost I have to develop this app?
After all, any app developer wants to make money with his app and he has to reach the break even as quickly and safely as possible.
Arkenea Pricing Tip: Competitive pricing also known as reference pricing involves analysis of the competitor’s pricing and marketing strategy in order to discover their weakness.
Launching the app at lower prices than that of the competitor gives your product a competitive advantage in the market.
#5. Make it affordable for the users
Ilir Alka, CEO & founder at Flickpic Inc.
Creating a quote for app purchases whether it be charging for subscription or in-app purchases is quite simple! You have to know your users. Depending on the type of app, a different kind of purchase would apply.
In the case of Flickpic, in-app purchases are a definite go.
This creates a pressure free environment for our users, and whoever wants to buy is free to do so. Essentially, you want to make it affordable to your users. At the end of the day, is it worth the bucks?
Arkenea Pricing Tip: The reason behind the success of penetrative marketing is that it employs behavioral psychology in order to drive the customers to sale.
In case where there is no pressure upon the customers to buy your product, the level of engagement that your app produces would eventually lead to success.
#6. The real value isn’t in the app itself but the data that comes out of it
Fares Alaboud, founder at The Medic App
I like the WhatsApp model, where the real value isn’t in the app itself but the data that comes out of it. Most categories of applications (excluding games) can result in valuable data that is useful to someone.
If you’re building a fitness app, gyms would love access to it to integrate it with their services. If you’re building a health app, doctors would love the data that comes out of that.
A social network/chat app? Advertising companies will pay huge money for targeted advertisements.
Arkenea Pricing Tip: The use of innovative and novel strategies to make money has led so many businesses to find success.
All you need to do to succeed is to think outside the box and find out alternate means of generating revenue for your business rather than following the traditional models.
#7. When an app costs money, users expect all the functionalities
Will Feldman, founder of Chrome Commands and Spotlight
The price of an app should be decided based upon the needed amount of users for the service to successfully work.
If the app requires a lot of users for it to work, it should not cost money. For example, social networks are free because they base their revenue off of advertisements and a large user base.
However, when the app is not focused on the amount of users, the initial pricing of the app becomes more flexible. Smaller apps tend to either rely on IAP (in-app purchases) or the price of the app to make money.
IAP are a great way for apps to obtain downloads and make money off of a free app by providing users with additional features that cost.
Adding an initial cost to an app decreases the number of times an app is downloaded. When an app costs money, users expect that most functionalities of the app will be available right away, without the need to pay any more money.
Arkenea Pricing Tip: Value of the product drives more sales. If the customers are spending money to purchase your app or avail in-app purchases, make sure that your product offers sufficient value to justify the price tag you decide on.
#8. Pricing should be based on the market you are targeting
Vivek Vyas, founder at Keep Quoting
As Tom Peters once said “we are in a brawl with no rules”. In this case too “No thumb rules”.
Be it SaaS model of web service, any paid mobile application or in app purchases most of the times if they are startups (new ventures) they would try to get traction by keeping price as low as possible and will see the experience as trial and error method.
What they look at is their revenues only which should not be the goal. Couple of other factors also impact their decision like what is the target market.
I have seen some app startups starting with freemium to pay-to-download then again back to freemium models. I have also seen gaming startups charging as high as USD 5 for letting user chose color of badminton bat and ball.
In some parts freemium model also doesn’t work, where to paid user you show ad-less content and to free users you will display ads.
Some of the biggest companies also have fumbled in deciding pricing of their software and this is precisely the reason of piracy.
All in all, pricing model should be decided keeping in mind the market you are targeting.
Arkenea Pricing Tip: A one-size-fit-all approach seldom works in determination of the pricing strategy. What worked out in the past may no longer be applicable today.
What works for the competitor may not bring much success to you. The variable costs need to be factored in and the needs of the customer base must be given utmost priority while deciding on the pricing strategy.
#9 The price should be sustainable for your business in the long term
Tobyn Sowden, CEO at Redbrick
We ask ourselves this question before we dive into any product development cycle – and that happens a lot at Redbrick!
Before we can answer it, we run through a series of three important considerations. These tend to be quite revealing, and helpful, for streamlining our decision-making process.
- First off, would it work as a subscription? Subscriptions indicate commitment, build loyalty among customers, and create a meaningful recurring revenue stream.
- How much can the market afford? E.g. is it for personal, or business? If it is the latter, you’ll likely have more opportunities to provide in-app upgrades, and even enterprise plans down the road. Personal consumer products are extremely competitive, and stringent, so make sure the value you’re providing is priced appropriately.
- 3) Finally, what will make for a sustainable business? Does a one time fee of $10 mean we can build a team around this, or do we need $20/month recurring revenue to support the venture? Nobody likes the idea of using software that may or may not be around in six months. Make sure the price is fair and reasonable for your consumers, and also sustainable for your business in the long term.
Arkenea Pricing Tip: Instead of one-tip revenue, target the long term profit. Invest in building customer relations and focus on giving a seamless user experience in order to result in maximum customer satisfaction and long term earnings.
#10 Convince the customer that your product is useful
Prawesh Khanal, founder at Lets Go Buddy App
There are few things to consider while pricing your app.
- What kind of service or product that you are actually providing to your customer?
First things first, we have to understand the product that we are trying to sell to our customer. Customers are only willing to pay for the app if they can get something useful out of it.
Let’s say for ex: if your pricing your app for games, you have to make sure that this game is good enough to make customer want to pay for it. UI/UX, graphics, what devices will this app be used in are all the things that needs to be considered.
- Who are your competitors, and what are their pricing?
It is very important to find out if there are other similar apps out there, and if there is make sure you find out what they are charging vs. what you want to charge your customers.
If customer can get away with paying lets say $0.99 for an app, they rather buy that then pay $1 for your app unless your app is significantly improved version than your competitor’s app. It again goes same with weather in-app purchase or subscription or pay to download.
However subscription method could be a little different. There is premium version where customers will pay a premium price to use an app, and there is freemium version where the app is free to use for certain things, but if customer wants to use the full feature in an app then they have to pay to use all those features.
- If your app is one of a kind.
Well if you have an app that is one of a kind out in the market, great that’s a awesome start. Now you know that there is no competition in the market, you can really price your app according to your convenience.
However do make sure that the price that you have for your app will actually make your some profit.
Arkenea Pricing Tip: The price of a product depends upon multiple factors that need to be computed in order to determine the final price.
If the cost of production and the perceived value of the app is high, the its price increases and you can adopt a price skimming strategy.
Conversely, if there is high competition in your niche with the competitors offering similar products at lower prices, Premium pricing cannot be justified.