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Market Pricing – Perception is Reality! Applying the 4 P's of Marketing to Apps, part 3

Your gut reaction is “Hey, I put in a lot of time and effort into this app, there's no way it's only worth 99c.” Yet in many cases, if it's not 99c, especially a game, it's dead-on-arrival at the AppStore. You can rant and you can rave, but market pricing rules in the mobile universe. On the plus side, the “wealth” is spread amongst many developers as consumers consume more apps than they would have if they had spent $35 or more on one game or app. The trick is to get more of them to consume your app! But let's start at the beginning, should all apps price to the bottom? If not, how do you select that perfect price? And how do you take advantage of that price selection (or change) in your marketing efforts? In this next post in my series, “Applying the 4P's of Marketing to Apps,” I'll focus on the third “P”—Pricing. I'm not covering business models (freemium vs paid, or free version vs IAP upgrade), but rather, how to pick your price from a marketing perspective.

Market Pricing vs Cost Plus Pricing

Two main ways to price apps exist: Market pricing, what the market will bear; and Cost Plus pricing, what your product costs, with a desired profit margin tacked on top. Cost Plus is the one we'd all prefer—who wouldn't want to dictate their profit margins? However, Cost Plus doesn't work in every industry and oftentimes works even less in a highly competitive market, especially where the cost of goods sold (labor and raw materials to create one more item) and capital investment (tooling to make a product) is very small. Manufacturers of physical goods use a mix of Cost Plus and Market Pricing. In many cases, the incremental costs to produce one more item must be considered, else the company loses money merely by making more product. (There are exceptions, but outside the scope of this post.) The market pricing side influences how much profit they can command, over the cost of the items. I elaborated on these two types of pricing in more details in another pricing post from a few years ago. But let's focus on Market Pricing for this discussion.

Product Life Cycle

When entering a market, you might join at any time in a product's life cycle, which is divided into four phases: Introduction, Growth, Maturity, and Decline (or end). The life cycle is set unless there is change in course—new technology, new product, new features. A parallel is a ball traveling through the air. The ball will eventually land unless something changes its direction. At the Introduction phase, early adopters are willing to pay more for a product. The competition has not discovered the potential for the market, so less producers are in the market. Costs have not been driven down by economies of scale, so costs are higher. This point in the cycle enjoys high market pricing, but low demand.

As more competition recognizes the potential, they start to copy and enter the market. Competition increases. Costs are lowered, but prices also decline. Mainstream customers, not willing to pay premium pricing, become interested as prices drop. Demand increases. As more customers join the market, even more competition enters, trying to capture the growing market. This process continues as demand and supply hit a frenzied pace. This is the growth phase.

As the market is saturated by producers, and the number of consumers maxes out, the market matures. Prices become stable; products become a commodity. New competition no longer enters the market.

Finally, the market no longer can support the number of competitors as prices and demand no longer increases. Producers drop out. Consumers become less interested in 'old technology' or a large percentage already own the product. Pricing starts to drop, costs increase again. The cycle is declining and coming to an end.

The lesson is to know what point in the life cycle you are entering, as it will affect your pricing. Know the point where the device hardware is, know the point where the software is, know the point where your category of software is, know the point where your niche is. Each related life cycle is important to know. For example, Palm hardware is dead (perhaps only kept alive on eBay for industrial applications) and in the decline/end phase. Smartphones are in the growth phase. Tablets are probably somewhere between the introduction and growth phases—introduction for producers, but the growth for consumers. With the introduction of Siri, voice control is in the introduction phase. Location-aware is getting close to saturation (everybody is using it), so may enter the maturity phase soon. Education apps are in a strong growth phase. On the other hand, doodling apps, could be heading more towards a maturity phase. Flashlight apps, declining phase. Pricing options will depend on the points in the life cycle(s) that apply to your app.

Value vs Price

One way to avoid competing only on price is through value. Apple is a perfect example of this point. Their products are in the throes of a growth market, with increasing competition, yet they can still command a higher price through value. How do they do this? Much of value is perception, but also through historical quality.

Historical quality is a combination of actual quality and perceived quality. For example, in the past, I've worked for both domestic and Japanese automakers and suppliers. In reality, the actual quality between the two is equal. But the perceived quality of imports is much higher. Perceived quality is gained by “tooting your own horn”—telling people about your quality, by satisfying your customers, and by making your customers 'forget' your mistakes by fixing them quickly and without much hassle or loss on your customer's behalf. Good customer service is key for quickly satisfying customers, which promotes the air of quality.

Value perception can be gained by a brand name, a rich feature set, a simpler feature set (easier to use), great customer service, and/or frequent updates (or at least recent updates, so the app isn't appear abandoned). Your app's look/feel is a major influence on quality. This trait is especially apparent on the iPad, which has a different market demographic than the iPhone. Certain norms exist, and must be kept, or an app is considered less valuable. An app name, an icon, or even a company name, all convey the perception of value. Plus, since try-before-you-buy is not possible, people do judge a book by its cover in the AppStore.

Surprisingly, another way higher value is perceived is by HIGHER pricing. If you see a non-game app priced at 99c and one priced at $9.99, the first thought is, “wow, that $9.99 app must be better.” Alternately, when comparing $1.99 vs 99c, the $1.99 might be perceived as just more expensive. Pricing brackets are tricky. Sometimes a dollar difference can give the impression of higher quality, but only when the pricing is very low to begin with.

Value is very subjective, and may not actually be reality. However, if someone perceives value, that is their reality. Considering perceived value in a price choice can help you ask a higher price with success.

Competitive Analysis

Competitive Analysis is the core to choosing a market price. You've considered the life cycle and the value, but how do you pick a price? Look at the market! You have tons of data right at your fingertips in the AppStore. Check out the rankings, but on several levels. At what prices are the top apps selling? How are the top grossing apps priced? You are looking to maximize revenue, which is simply Price x Volume. However, don't just look at apps in general, because most apps are not designed for mass market appeal. Study the apps in your niche, in your category, your direct and indirect competition. Make a list by type and pricing. Do apps increase in price as they become more niche? What price range are you seeing in your type of app? When choosing a price, start by staying in the price range of your micro-market, your competition. If you underprice, you'll leave money on the table. If you overprice, you won't sell, and miss out on more revenue.

Investigate what price groups are most popular. Is there an odd price that is rarely selected? Stay away from this price point. A while ago, one of the analytics groups did a list comparing the most common prices on the iPhone. 99c, $1.99, $2.99, $4.99 were common price points. $3.99 was not. Most likely the reason is that 99c-$2.99 is a price range for simple apps. $2.99 considered a premium simple app. $4.99 priced apps are perceived to have more complexity and features. The perception could be that $3.99 apps are either expensive simple apps or less quality complex apps. Try to choose the right price tier that matches your app's type, unless you are discounting. These tight tiers emulate perceived value, even in small increments. Now you're ready to determine which tier you should target.

Once you have a list of competitors, make a spreadsheet of features, along with prices and rankings. (This list is also helpful for product planning.) Consider if the apps are for iPhone, iPad, or universal, as pricing will vary. What is the price range of your direct competition? How do the feature sets compare? Lastly, where do these apps rank? Rank will give you an idea of relative volumes.

For example, take four competing apps. One app is priced at $1.99, two at $3.99, one at $4.99. The $4.99 app has the largest feature set. The $1.99 app is ranked highest, with almost as many features as the highest priced competitor. Next ranked is the $4.99 app. One $3.99 app has a nicer appearance, and is ranked considerably higher than the other same-priced app, even though the feature set is essentially equal. Both $3.99 apps are short a few features from the $4.99 app. What does this tell you?

Consider features. Price makes a difference when the features are equal or better. Don't price your app higher if your feature set isn't there. Meet that price or go lower. Customers are willing to pay for some features. Compare the $4.99 and $3.99 app feature sets to see which features might be affecting sales. The $1.99 app is competing mostly on price, but its feature set is comparable, so it has that option.

Next, consider appearance. Appearance trumps price. Appearance is a perceived value. Never underestimate the power of eye candy. However, given equal value in appearance, features still can command a premium.

After studying the competition, move on and list your app's features. Compare feature sets with your competition. Then compare and rank your app with the competition on appearance. Where does your app fall? Look at the pricing of the competition. Use its position in comparison to the competitors to determine its starting price point. (You can also use this analysis to create a product update roadmap.) You now have determined the market pricing for your app, based on perceived value. Where it fits in with the competition gives you confidence in your choice.

Setting an initial price is not as difficult as it may have seemed. The next logical step is to promote your app to the point where value becomes the main consideration for purchase. Price and value alone do not determine the success of your app. Your app will not rank immediately with its competition because first the app must be found. In a previous post, I covered getting found through marketing with Place (keywords, etc.); I'll cover promotion in the next part of this series. Finally, you might try pricing experimentation to maximize your ranking and/or place within your group of competitors.

Summary

Choosing the right price is important so that you attract the most customers and maximize your revenue potential. However, it is very easy, as well, to choose the wrong price and discourage sales. Put yourself in your customer's shoes and do a proper competitive analysis. What decisions will they make in the buying process? Unless it's an impulse buy, understanding this process is essential for securing a purchase. By coordinating the right price to the matching product look and feature set. you can increase your revenue possibilities.

Be sure to catch the other posts in this series, Applying the 4P's of Marketing to Apps: Product part 1, Place part 2a, Place part 2b

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