Monday, September 22, 2008

The Cruel Economy of the App Store

A recent article in Wired suggests that Trism’s creator could become a millionaire soon, from Trism sales alone. I doubt it, let me explain why.

Wired's article explains that Steve Demeter, the sole author of Trism, made more than $250,000 in the first two months after the the launch of the App Store in July 11th. That is, without a doubt, a nice sum. They conclude: “If the game keeps selling at this rate for a year, he will have made $1.5 million. Not bad for a lone coder.”

However, what the article fails to analyze are the dynamics of sales in the App Store, probably assuming that they will work out in a similar fashion as desktop online sales. The Mac shareware market is a healthy business with an ever-expanding user base, and products have considerable longevity after being introduced; thus, it is reasonable to approximate sales linearly as a rough figure of yearly revenues. In our experience, however, the App Store is currently operating in a way that resembles the media business more than the shareware market. Like in sales for a movie or a music CD, if you are able to produce a hit like Trism the App Store will give you 30-45 days of glory. Those are the days when your application will be listed as one of the top sold apps, as very well explained by John Casasanta. Being featured in the App Store will have an echo effect in other media and your app will be reviewed, analyzed and blogged about.

The App Store, being a tremendous sales channel, is obviously acting as the most influential source for iPhone software. Think of it as if there was a single Top 40 music radio station everybody listened to: moving up or down in the list has a huge impact on sales, and dropping from the list means your sales will be easily reduced by one or two orders of magnitude.

Let's look at this further.

App Store Sales


There are basically 5 parameters that affect your sales on the App Store:

+Product
+Price
+Apple’s product placement
+Position in the charts
+Star rating

Your product is described and shown as a series of screenshots in iTunes. The better the description and appeal of the images, the better for your sales.

Prices on the App Store are quite low. Ever since Super Monkey Ball was announced at $9.99 a few weeks before its launch, the psychological barrier for all games, and most other applications, was set at that price point, and lots of users will not buy anything above $4.99. This was a big surprise for us, as we thought that a game that normally sells for $40 in other platforms would sell for $20-$25 on the App Store. Anyhow, the lower the price, the higher the probability that your application will sell more.

Apple has a lot of prescription power. Whatever they promote on “What’s new”, “What’s hot” on the iPhone, or the iTunes App Store home page, will sell. At this point this is completely managed by Apple.

Being on the Top 25 generates sales per se. Users trust other users, and if your application is on top, many others will buy. In addition, being among the first applications in a category, like Entertainment, will also facilitate people finding you application and buying it.

The star rating also has some influence. It is another mechanism from users to tell other users if they like the application or not. In the App Store, anyone can rate an application, irrespective of they having purchased it or not. This helps applications get votes and comments. Most users use the overall star rating as a guidance: if the application has 3 stars or more, it must be OK; otherwise, it must be no good.

What marketing tools do developers have?


Product


A quality product with certain appeal, will be more likely to sell well, than poor quality products. But having a good product is not enough. More and more apps arrive at the app store each day. Unless the application comes from a big game studio, or a known developer, it is easy that good new apps get their sales diluted among the list of thousands of applications in the App Store. As there is no “try before you buy” mechanism, visual appeal is very important. The screenshots and the description of its functionality of your product will be key.

Price


This one is really tricky. Depending on how you price your application, you will get better or worse reviews, even from people that may not be that interested in your app. As of today, 3 of the top 5 applications are priced at $0.99, the other 2 are $1.99 and $2.99. Thus, the influence of price is huge. Having seen this, there are many developers that are following the "first free, then charge strategy". It is the case of Air Sharing, currently free, but that will most probably be at the top of the sales chart, once they change the price to their announced amount of $6.99.

Picture 1009.png


Today, Pangea’s games are on sale. Cro-Mag Rally is being sold for $1.99 when it was $9.99 a few days back. It has climbed to the Top 3 paid apps ranking. Prior to lowering the price you could see this kind of reviews:

Picture 1017.png


That is people, even liking the game, lower the rating due to price. After lowering the price, however, you can see this:

Picture 1018.png


The text of the review reads as follows: "A lot of early adopters paid $10 for an app that is now 80% less... a lame attempt by devs to drive up their sales rank. REALLY terrible way to treat customers. As for the game, it's not for me. But I wouldn't be complaining if they hadn't decided to treat early supporters like garbage. Thanks a lot, guys. You've cost yourself at least one future customer."

The dilemma is served. If you lower the price for your application, you will hopefully attract more people, but users who have purchased your application at the previous price will post negative comments about it, lowering your star rating.

The issue derived out of this is that many developers are opting for creating simple, nice looking, low-price apps. This lowers the risk of developers and provides higher probability of success. But, how many of these apps will get maintained once the initial 30-45 days are over and sales have gone down dramatically?

So, right price handling is very complex. It will influence your sales, charts, ratings and comments, and, the product itself, in the medium term.

Apple’s product placement


Most developers have no control over this factor. Big corporations, like EA, will obviously get some attention. But Apple will also promote products from other developers. We were lucky enough to be among this group for the App Store launch. Sketches was highlighted in several countries. And today you can go into Apple’s physical stores in the US and see the Sketches icon (Top line, 3rd from the right):



It was Apple, though, who decided to promote Sketches. We, of course, provided all the material and information they required. But it was Apple contacting us, not the other way around. Thus, there is little a developer can do, apart from creating a great product and get some visibility, then hope for Apple to like the product.

Product Position


The position your app has in the charts can only be managed by 2 factors: price, as discussed before, and updates. Price will influence the sales chart. Updates will allow for your application to be shown sooner in the category it belongs to.

Ideally, updating often would allow for your application to be listed before other apps in the category, making you sell more. Unfortunately, updating in the App Store is not fast. What's more important, the developer has no way to know how much time it will take for an update to be approved, possibly affecting your options to create marketing and advertising campaigns. Sketches 1.3 has been in review for more than a month now. In terms of positioning, we are totally lost towards the end of the Entertainment category. In addition, Apple discourages frequent updates, unless they fix severe bugs.



Star Rating


The App Store has no barriers for comments. As anyone can post an opinion on your application, developers are out of control on this. The good thing is that nice apps, will attract nice users, who will post nice reviews. On the other side, depending on different factors, mostly unrelated to the product itself, your app will also attract some unhappy users that will punish your every move.

Currently the global rating is built as the arithmetic mean of all votes. A destructive, even unreasonable rating will count as much as a well thought out review of your application. It would be nice if individual ratings were weighed by the "helpfulness" factor, indicating how many other people thought the review was relevant for them.

Marketing outside the App Store


There is some marketing that can be done outside the App Store. Blogging, news and press releases do help. We have even joined other developers in creating AppStoreGems. However, given the margin per sale, it is hard to buy advertising and get a profit out of it. Given that developers get 70% of each sale, acquisition costs for a $4.99 app have to be below $3.5. That quantity of money will buy you a few guaranteed clicks, but I am not sure if the sales will cover the cost.



Other popular marketing tools that are well proven in the Mac shareware business are also not possible in the App Store. Daily offers like MacZot or MacUpdate promo, hugely successful bundles such as MacHeist, discounts or even cross-product sales (buy AppZapper and get a discount on Disco, iClip or Picturesque) cannot be achieved today.

Trends


Even though the App Store is only two months old, the way it has been working so far seems to signal towards two very different app trends, if the mechanisms keep being the same.

+ On one hand, blockbuster productions from established companies will be hits in the App Store. Given the enormous value of the precious few "Top App" spaces, competition will become more and more fierce (more so as the number of iPhones sold increases), and I expect big companies investing considerable amounts of money to release new titles and get one of the spots. This is basically games from big studios we are talking about.

+ In the short term, we will be seeing more "disposable" apps: short-lived apps that can be crafted in a short time and that explore a good, original or fun idea. These apps will be offered at $0.99 with the expectation to hit the list and make a profit for a few days. After the app is out of the list, it will be basically forgotten since the operation costs (support, improvements) will not be justified by the very low vegetative revenue. The trick to succeed in this space is to launch many apps and expect that one out of 10 will make it. The success ratio will lower as time goes by and game studios take the top places.

This prospect basically leaves out the space for small but carefully crafted apps with a long time-span, such as those from indie shops we are so familiar about in the Mac shareware market. Creating a good app is hard, even for the iPhone, and sustaining it takes a lot of work. In the case we know best, we started working in Sketches in August 2007. Of course it was not a full time job then, but it was a necessary training that allowed us to create the app we wanted to, and to do it in such a nice way that Apple decided to feature it at App Store launch. Today we keep working on it, adding improvements, answering to emails from our existing customers and planning the next major release.

There is a catch in our previous statement: those are the trends _if_ the status quo is not changed and things keep being the same. Our bet is that the App Store will evolve, simply because customers will demand apps other than big games or little smart toys. When we decided to put effort in Sketches, it was a bet that someday we could even sell it, and now we have something as revolutionary as the App Store. Likewise, we still believe that there will be a place for companies like ours in the future.

Reality


Today, Trism is ranked as the application number 499 in popularity, 63 in the paid apps rankings, as per the information medialets provides. I am betting though, that it has gone up during the last few days after the article was published and made popular in digg. Thus, as anticipated in the introduction, it is becoming subject to the App Store "Top Apps" dynamics and it will be hard for its author to keep the past sales level.

So, if anyone wants to become a millionaire on the App Store, think again. I am not saying it is impossible, but it is not as easy as some people have put it.

8 comments:

Jon Trainer said...

Very well said.

While my iPhone game never made it into one of the "Top" lists, sales have definitely been heavily influenced by placement in the recent updates lists.

On the desktop, I carefully plan releases to coincide with days and times that generate the most sales. This is impossible with the long and unpredictable wait times in the app store.

Much of the things you've written about have played a large part in my decisions on how often to update my iphone game and what my next product will be.

It will certainly be interesting to see how this all plays out.

MarkM said...

This is a great article and so much describes my concerns about the AppStore. I have been using every angle that I have to communicate to Apple that they need to seriously re-think how the AppStore works if they want to keep the store fresh with new and interesting applications. They are not responding to me either.

What you did leave out is how developers themselves are a bit "dog eat dog". I had a case (that I can prove) where another developer 1 star'd my application. A discussion with them and not Apple got the review removed. I have no idea how prevalent this is--but the fact that it happened to me probably means it happens to others.

I think another issue that is also not mentioned is that the iPhone is far from perfect. Developers get ridiculed for crashes in their applications that are not caused by the application. I can't go into details because of the @#$# NDA--but developers know what I am talking about.

Great article. Frankly Apple really needs to democratize the AppStore further and give developers a bit more control on what appears. I don't mind a 1 star from someone who actually bought the software and has legitimate concerns. What I don't like however is that the voting system is such that there is little do to if a 1 star that is inaccurate becomes popular. We should not have to suffer a "Don't Buy Me" sign outside our shop on the AppStore without the ability to respond or at least be able to contact the person who left it.

Great article.

julian said...

Good essay.

I want to believe the App Store is yet unfinished and that it will be adapted (slowly I'm afraid) to the software business in the near future.

In my opinion the single must-have feature for the store is try-before-buy mechanism. This feature will impact both pricing strategies and unfair user reviews.

I don't understand why developers price their valuable apps so extremely low. I know, short-term profits are tempting. But they should take advantage of the loads of patience cultivated during the apple approval process to think at least mid-term.

Pedro said...

@julian

I totally agree. I think we are all learning as we go, including Apple, and I completely understand there is a lot of caution involved. I expect a lot of small changes in the following months.

I also second your try-before-buy comment. I think it is the next step after just having noticed that reviews are now only accepted from people who have bought or downloaded your app (http://twitter.com/mattgemmell/statuses/936992473).

Regarding pricing, so far it is a matter of not standing out too much and being ridiculed. Our initial price idea was $9.99, we decided to go $7.99 during WWDC when Sega announced Super Monkey Ball was going to be that price. When the App Store launched we lowered it further to $5.99 because all prices were much lower than we anticipated.

Contrary to popular belief, a good app is not done in 2 weeks then you just magically get loads of cash. We have been working on Sketches for one year (not full time), and have yielded results for just the three initial weeks after launch. I think people will realize soon that not all apps are equally complex, useful or fun, so it is sensible to expect different prices. Again, this would happen faster if trials could be offered and people could compare more easily.

Anonymous said...

Potential sales will increase as more and more people buy iPhones and iPod Touches.

Most of the reason I don't buy applications is that they're not good or useful enough. Developers can complain all they want, but improving (or sometimes even rethinking) the application is the best way to get sales.

Ability to grab foreign sales will also be important. The U.S. is just part of the market.

Anonymous said...

you can browse app store without itunes here

Ben Gotow said...

Very, very well said. I'm the developer of NetSketch, and you've summed up my feelings exactly:

"This prospect basically leaves out the space for small but carefully crafted apps with a long time-span, such as those from indie shops we are so familiar about in the Mac shareware market".

I love writing software and I've tried my best to create a solid, reliable app. It looks like I need to adopt a much more "one-hit-wonder" approach, though.

Also: I noticed today that an update to my app didn't bring it to the top of the "Entertainment" category. It has in the past - maybe Apple has changed the way it works in the last week or so?

Thanks guys!

Jorge said...

@jon I agree. Release planning is very hard. You have to get everything ready for the moment Apple publishes your update. I hope that Apple can provide an estimate in the future.

@markm I agree that being pioneers, we suffered from the bad things at the beginning (our star rating is 3.5 due to lots of people disliking our price), but we also enjoyed the additional exposure. Now there is no NDA, so feel free to comment further.

@ben There have been a couple of major changes in the App Store. One of them is that people cannot post comments without buying or downloading the app first. Second, updates do not affect the sorting order of the apps.

Thanks for the positive feedback. Next, I would like to write a post about possible improvements for the App Store. I hope to get down to it soon.