The ESD Equation - Marketing Mobile Software – Part I, Distribution (Place)

Does it make sense to distribute your mobile software via the Electronic Software Distributors (ESD's)? Are the commissions too high to be worthwhile? Can listing be a win-win situation? Many blogs and developers have vented frustrations about commission rate increases at the ESD's, typically those run by Handango and Motricity. In some cases, commissions and fees have doubled from 25% to over 50% in the past five years. Many developers have packed their bags and delisted. Others refuse to start listing. On an emotional and moral principled level, not listing may be the right choice. But does it make sense from a business standpoint? Can we quantify the effects of listing, not listing, and the commission hikes? This post will discuss the numbers as related to increasing sales by using (or not) the ESD as a distribution and promotional tool.

Distribution, the Place “P” of the 4 P's of Marketing
In the latter part of 2003, when we started Creative Algorithms, we had set up a small website, with PayPal as our ecommerce method, and released an updated Date Wheel as shareware. We had had our freeware listed on PalmGear(PG) back in 1999, but in 2003 we were now dismayed to discover not only the commission had increased to 25%, but now PG required us to include a “Buy it at Palm Gear” message in our software—and NOT “Buy it at Creative Algorithms.” This requirement was also at Handango, PDAGreen (absorbed by Motricity), and other smaller ESD's. Our gut reaction was typical of many developers: “No way! This is OUR software and besides the configuration nightmare of different “versions”, it's just not right.” (At that time, we still were “allowed” to link to our website for bug fixes, which later changed as the ESD's became greedier and more paranoid about sales “leakage.”) We opted to avoid the ESD's for the time being.

Search Engine Optimization
Instead we focused on Search Engine Optimization (SEO) to get our name out there on the front pages of the search engines. Date Wheel was already popular and one that “broke” when Palm released OS5. People looking for updates would be searching for the exact name, and not more generic terms, like “Palm software” where it is difficult for an individual developer to place high in the results. SEO includes getting links to your site, and one of the best ways to do this is to find the sites that list “try before you buy” software for free, such as Palm Blvd, Euro Cool, Version Tracker, Palm Venue, and Tucows. Googling located many of these sites, and we listed on a dozen or so. Our sales started to trickle in. But we wanted more.

Distribution Revisited
So what about those ESD's? I believed that listing with them had merit, however hard 25% commission was to swallow (remember, this was over four years ago). After all, where does a “newbie” go to find software? Where do customers go to find a large number of software titles in one place? What comes up high in “Palm software” search results, but Palm Gear and Handango? My question was, “If we list at the ESD, will we see a net increase in revenue (after commission)?” If the answer was yes, then listing makes sense, despite the negative “feeling” of losing a large portion of sales revenue. However, my partner would not agree unless I proved it to him. So I did. I used a tool called a sensitivity analysis.

Simple Reasoning
If a developer adds an application onto an ESD, he should see an increase in sales because exposure increases—people visit ESD's to browse for software. So assume that the increased sales are only due to the new promotion via the ESD listing. Ideally, if ten extra copies of a $10 product are sold on the ESD, who takes a 25% commission, overall sales increase by ten, with a net of $75 more cash in the developer's pocket. However, actual events are not that straightforward. Two of those ten customers might have purchased directly from the developer's site, via word of mouth or Google search, if they didn't happen to see the software on the ESD. Then the extra sales are eight, minus commission—an extra $60. The two other sales have a higher commission per se (let's say it costs 5% for credit card processing on the developer's website). So he loses $4 : (2*10)*75%-(2*10)*95%. But he had gained $60 with the extra sales, so his net gain is now $56. Granted, the ESD's net gain is now $5 of the developer's revenue, but by listing on the ESD, both win, because the sales increase translates into increased revenue.

Sensitivity Analysis
The problem comes into play because customer cross-over sales to the ESD from the developer's site is difficult to measure. Likewise, there will be some cross-over (leakage) the other way as well. Many people browse on the ESD and then purchase directly from the developer. But for worst-case purposes, let's not take that into account in our sensitivity analysis—those reverse cross-overs are a bonus in the developer's favor. We want to know how much cross-over would make it no longer worthwhile to list with the ESD. We can also determine how sensitive revenue is to ESD commissions. So, I started by setting up a little Excel (Open Office Calc) spreadsheet. I found that cross-over sensitivity is also related to the increase in sales gained by listing on the ESD. For this model, we assume that there is no decrease in overall sales and that increased sales are solely due to the listing at the ESD. Also assume no cost at the developer site, to remove that variable from the equation.

Starting with a Break Even Point (BEP) analysis, using Excel's Goal Seek, we found that at 25% commission, with a worst-case 100% cross-over (all sales now on the ESD site), a developer would need a net increase of 33% in sales to see no change in revenue. Varying the amount of cross-over finds that ratio remains constant. So, for every three customers that cross-over, one extra sale is needed. Reference the graph of the effect here: Cross-over and Sales

An interesting point is that once sales increase beyond 33%, crossover is no longer an issue. So revenue is not sensitive to cross-over unless sales gains are low. One point in favor of listing at the ESD.

So by example, if a developer has 100 sales of a $10 product on his site, he would have revenue of $1000. If he lists on the ESD and has over 33% more sales (134), but all customers cross-over and buy from the ESD with a 25% commission, he has revenue of $1005. (134*$10*75%=$1005) So his bottom line remains the same by listing. But what if sales double? Now he has $1500, which is a nice increase in revenue. Granted, the ESD has $500, but from a promotional standpoint, it's a decent Return On Investment (ROI), especially because no cost occurs until a sale is made. A business should expect to spend money on promotion, which is how these commissions should be classified.

Additionally, it's more than likely that 100% crossover will not occur, and a much greater increase in sales will be realized. (Anecdotally, we saw a 275% increase in sales when we first listed.) Most developers will also see an increase in sales on their site (the reverse cross-over) by the promotional benefit of listing at the ESD. More points in favor of listing at the ESD.

Who would not benefit by listing at the ESD? One scenario would be a developer who lists at the ESD, but then closes his website store. Until sales increase above the threshold, the net revenue would decrease. In addition, if all sales transfer to the ESD and the net sales do not increase enough, then the benefit of listing is gone.

Commission Amplification
So what happens when the commissions increase, or double, as they have in the past five years? Using the Cross-over and Salesspreadsheet analysis, we find that the threshold of sales increases needed increases. The BEP with 100% cross-over for 40% commission requires a 67% increase in sales. For 55% commission and fees (typical for ESD's today), sales would require a whopping 122% increase! The sensitivity of cross-over is much greater. However, after reaching the sales increase threshold, cross-over still no longer comes into play. As commissions increase, a developer must examine his changes in sales and make a choice. It may take some trial and error. Developers should keep in mind again that 100% crossover is not typical and that reverse-crossover does temper the effect.

The iPhone App Store Effect
Recently Apple announced a 30% commission for its iPhone application store. However, the App Store is the only distribution channel available. But we can use our data to understand if this is reasonable enough to pursue. Looking at 30% commission, the BEP is a 43% increase in sales from selling on your own. Considering that Apple will promote purchasing third party software, unlike the current negative practices of many carriers (warning against installation of software), and its store will ensure easy download, installation, and purchase, the likelihood of healthy sales is high. Taking into account that iPhone apps are relatively new (except for ones on jailbroken devices), most developers would see a gradual sales curve if they sold product on their own sites. Until developers were able to brand their software and drive customers to their own sites, sales on the App Store would more likely be higher, and quite likely to surpass the 43% threshold. Therefore, it is reasonable to pursue iPhone native applications, despite the single distribution point.

Conclusion
If listing on the ESD greatly increases your sales, cross-over will have no effect and you should see increased revenue. As the commission rates increase, the sales generated by the ESD listing also need to increase to insulate you from the effects of cross-over. If you are able to determine the cross-over rate, you can determine if a smaller increase in sales is still effective. If you suspect cross-over is high, and see low sales increases, look for ESD's with lower commission rates. Our experience shows that the sales increase realized by listing on the ESD can be high, so our revenue is not sensitive to cross-over and today's commissions. However, as commissions continue to increase and sales volumes at the ESD's decrease, these calculations will require reevaluation.

ESD Options
For mobile software, the three main ESD's are Handango, Motricity (e.g. PalmGear/PocketGear), and Mobihand, which generally have the most traffic. We've found Mobihand to be the lowest of the three for commission, while the other two have higher commissions. Handango powers many of the hardware software stores (Microsoft and Blackberry) and Motricity powers the Palm software store. Mobihand powers many of the mobile blog, news, and hobbyist sites. Other smaller electronic distributors have lower traffic which may lead to lower sales, but these sites usually have lower commissions, so the sales threshold to eliminate cross-over concerns is lower. These smaller sites will prove beneficial if the cross-over effect is minimal or if the reverse cross-over effect provides an effective counterbalance. Some smaller sites we recommend are SmartPhoneTools, MyTreo.net, and ClickApps. One site we do not recommend is PDATopSoft, as they have yet to pay us our royalties and do not respond to our emails.
Update: See comments below for an update on PDATopSoft.
Update2: Motricity has sold its ESD's to PocketGear, who has in turn re-opened the PalmGear storefront. Pocket Gear now powers the Palm store.
Update3: Many developers are still reporting that PDATopSoft does not pay out in a timely fashion, if at all. Be aware when you consider using their service. All the ESD's are hurting, due to being shut out of the iPhone market, so things may have changed. Be careful. Personally, we now only list with Mobihand.

While it's difficult to measure cross-over, sales increases due solely to listing at the ESD, we've enjoyed increased revenue by listing. We've also discovered additional promotional effects that are not easily measured in revenue. Our name recognition has increased, we've gained new customers who sometimes purchase additional software directly from us, and we have benefited by additional individual promotion by the ESD's. The overall ROI, while difficult to measure, is evidenced by exponential, rather than linear, revenue increases. We attribute some of that increase by listing on ESD's.