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Not a week goes by without some outcry over App Store. Developers complain about dropping prices; users direct their hate at anybody who dares to raise price above $0.99. Or, at least, that's that picture that media portrays. It's a good, proven (even if old and tired) story that drives page views. Let's take a piece of "investigative journalism" from TechCrunch, named "Wolfram Alpha Miscalculates What Its iPhone App Should Cost", as an example: An app that costs $50, seemingly charging people for something that they can get for free by going to a website. Insane. Faulty logic. Tons of comments, waves of head-nodding from readers. Number of times the word "reality" appears (as in "realities of the App Store"): 7. Attempts at understanding Wolfram's potential or actual motives for doing this: 0. The first word that comes to mind that describes the article: shallow.
Just to be clear, I'm not picking on TechCrunch: they suggested that users should pay extra $2.99 to upgrade to Tweetie 2, and I wholeheartedly agree. It's just that a lot of people don't seem to get that there is a lot more to price than just "most people won't buy anything above $X", and TechCrunch fell into that particular trap this time.
Here is where I'm coming from: I've been interested in the marketing/financial side of the software development industry ever since starting Byteclub.com and realizing that I have no idea how to sell stuff. In the course of researching the topic, I started coming across books that talked about a relationship between psychology and economics. There is definitely a connection there, and if you are interested in learning more about what happens behind the scenes when we are participating in financial transactions, I would recommend reading "Predictably Irrational" by Dan Ariely and "Influence: The Psychology of Persuasion" by Robert B. Cialdini. Another great book on a related topic is "Information Rules: A Strategic Guide to the Network Economy" by Carl Shapiro and Hal R. Varian. It talks about how economic principles apply to the world where information is cheap to reproduce and distribute. The most remarkable aspect of that book is that even though it cites examples from a decade or more ago, same exact rules apply today, even in something as "super-modern" as Apple's App Store.
So, what lies below the surface?
Irrational is king
Research shows that human beings are not rational - far from it. Our behavior when it comes to making financial and economic decisions is and always has been affected by emotions and cognitive biases. That's one of the reasons why they invented something called "marketing": in a perfectly rational environment, your purchasing decisions would be based strictly on value proposition and you wouldn't need a sleazy salesman to tell you why this car is better for your family than that one. (The other reason for having marketing is that we can only process limited amount of information - and brands need to find ways to squeeze their message into our mental pipe somehow). Real world studies show again and again that consumers are influenced by factors other than the true value of the product. The dreaded "race to the bottom" in App Store prices is a good example: a never-ending stream of cheap ($0.99) disposable apps creates an "anchoring effect" in consumers' minds, predisposing them to treat higher priced offerings as something out of the norm, to some degree. (That's what TechCrunch called "realities of the App Store"). But there is no rational reason why some of those apps should be priced so low. And that's exactly what makes picking the right price such a difficult task. Dan Grigsby over at MobileOrchard wrote a great article on the topic, titled "App Store Heresies: Higher Price, Better Ratings. Don’t Discount Your App At Launch".
So, does it make sense for Wolfram to charge a seemingly outrageous price for what appears to be a portal to their free website?
Price and publicity
Regardless of what their true motives were, the very fact that the population of tech blogs and Twitter spent a non-trivial time discussing Wolfram's move and forwarding links around is a win in terms of marketing. Any publicity is good publicity. And all they used for this is price of their app. They didn't have to release an outrageous app that was later pulled by Apple; they didn't have to hide questionable adult content inside of their application - all they did is add an extra 0 to the price, and got an Internet minute of fame in return.
They didn't pioneer this technique, by any means. You must have heard about another recent example, developer of a game called "Alchemize" raising the price to $40 as a means of protest against "cheapskates". How did that move work out for Schiau Studios in terms of publicity? I bet there was a publicity-related bump.
I don't know how much money Wolfram spent on developing their iPhone app or how much they would have to generate in sales to cover the cost, but I bet that publicity that they received is absolutely worth it, at least in terms of brand recognition.
But that's not all. Price has a few more tricks up it's sleeve.
Price and perception-of-value
Studies show that higher priced painkillers work better than lower priced ones. Even if the pill itself is nothing more than a placebo. (See "Predictably Irrational" for details, or MSNBC's article). Does this apply to other things, like perceiving app's quality? I haven't heard of any studies that addressed this particular question, but there is an abundance of evidence that people commonly associate high price with higher quality. So much so, that in some industries it's a standard practice to set artificially high prices on certain products in order to attract a particular kind of consumers and create an aura of exclusivity and quality (Bentley? Tiffany & Co? Rolex?).
A whole plethora of psychological effects could potentially be in play here: from "choice-supportive bias" where you ascribe positive attributes to an option that you ended up selecting, to "social proof" that makes you buy more expensive things to confirm certain social status, to "endowment effect" where you place higher value on objects that you own over the ones that you don't. Regardless of the exact mechanism behind all this, marketers have been exploiting this bias for a long time now, and you yourself have surely been a "victim" of this technique.
Let's take a moment and talk about Tweetie 2. Here's why Loren Brichter's decision to charge users to upgrade to Tweetie 2, even if you already paid for Tweetie, was the only right one: value of the brand must be upheld at all costs. This means keeping up the quality of your products, but it also requires you to charge users premium for the privilege of using your products (if it's warranted, of course). You absolutely want some users to say "I really want X, but it's a bit pricey right now and I cannot afford it", especially after they have had a taste of the quality in the form of a Lite version or one of your other products. Want proof? Look in the mirror: Chances are that you have been upgrading your Apple laptop/iMac/iPhone at least once-per-two-years in the recent history, just because something new and awesome has come out and "that machine does seem to not be enough anymore". If not, then you must know somebody who does. Apple has been skillfully and profitably playing this game for a while now. And let's face it: their products are usually worth it (and so is Tweetie 2).
That's not to say that you can just slap an outrageous price on a turd and expect consumers to fall over themselves to get in on the action. If your product sucks, your scheme will come undone faster than you can say "information propagation".
Setting a high price and maintaining quality are necessary but not sufficient conditions to achieving financial success with your apps. Obviously, there is a whole lot more to it than meets the eye. Just remember: It should be a privilege to use a quality product - price and treat it as such.
I'd also like to mention TextMate, an excellent text editor for OS X. TextMate 2 is in development and Allan Odgaard, its author, promised free upgrades-for-life for those that paid for the original version. I personally think that was a big mistake: those that use the editor often will be more than happy to pay for a significant upgrade, and the developer would be a lot more financially incentivized to work on the upgrade. Plus, TextMate is a valuable brand, and its value should be upheld (and a lot of users seem to agree in the comments here) But Allan has been saying "free upgrade" for so long that it might be difficult to backtrack on it without generating an outcry. I wish him all the luck - hopefully he can find a way to make money on the new version, because he deserves it (we want him to stay in business and make more awesome products!), and keep users happy.
Wolfram is in an interesting position: they don't want their product to become a commodity, but in order to spur adoption, they have to give something away for free (access to the main website) to compete with the likes of Google. $50 price tag reinforces the message of "we are not just some cheap-o graphing calculator app for $0.99". Having started very high, they have a lot of room to play with the pricing if they choose to. In addition to that, they can always try to "pull a Goldilocks" by releasing a lower priced product that will be accepted a lot more favorably. More about that next.
Price as a tool of persuasion
There is another interestingly subtle marketing practice called "Goldilocks pricing" that I'd like to bring up. For some reason, I haven't seen it being widely applied in the App Store (but I haven't specifically looked for it, either). It involves offering consumers several versions of the product: cheap, medium priced, and very expensive one. Given such a spread, consumers usually go for the middle option. On psychological level, this technique might have something to do with an effect called "extremeness aversion", which is a tendency to stay away from fringes and stick to the middle. Regardless of what exactly makes this interesting mechanism tick, the idea here is that the highest priced item doesn't actually have to sell well, or at all, because you will make your money on customers inevitably gravitating towards the middle of the pricing spectrum. The decision-making doesn't seem to work that way if you only offer 2 options, because the higher priced item automatically becomes "the most expensive one" in customer's eyes.
To make things more complicated, some researchers are arguing that there exists an opposite effect, called "extremeness seeking". It comes into play if you, once again, have versions of a product varying from cheap to very expensive, but there are a whole bunch of similarly priced but difficult-to-compare-and-choose-from options that reside in the middle of the pricing spectrum. Example: for a reasonable price, I can either have that car with a DVD plus an awesome subwoofer, or a bigger engine and alloy wheels, or more room for kids in the back. The theory is that, when faced with these choices, consumers will gravitate towards some sort of a "premium package": a higher-priced option that doesn't involve nearly as much compromise and trade-offs. Think about it next time you order a slightly higher priced Surf-and-turf because you couldn't decide between lobster and steak.
Be smart about how you price it
The bottom line is: think carefully about how you price your apps. Don't let a vocal minority that isn't willing to spend money, fueled by mass media, drive your decisions. Understand what your target audience is (read "The two App Stores" by Marco Arment). Think about what message your price sends to potential buyers. Be careful about how you position your brand.
Once again: Ability to use a product is not a right - it's a privilege, regardless of what your users might think. Price it right.
-- Peter Bakhirev
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