Innovative Pricing Model Drives App Store Success

by Rocco Tarasi

Innovative Pricing Model Drives App Store SucccessIn the early days of the Apple App Store, there were free apps and there were paid apps. With the release last year of the iPhone 3.0 software, Apple began to support “in-app purchases”, and there were great expectations (and a little trepidation) that it would help developers make more money off of their apps by offering them for free, and then charging for various things like new levels, hints, or virtual goods within the apps.

Apparently this simple pricing innovation is indeed reaping big rewards. According to a GigaOM article, 34 of the top 100 grossing apps on the iPhone are free, and make their money from in-app purchases. While the model wouldn’t work with every type of app (a calculator app where you pay for every 10 calculations probably wouldn’t fly), it makes sense for a lot of apps, including just about every type of game.

The reason this pricing model works is that you’re prompted to make the purchase at the exact right time that you’re psychologically ready to make it. If I just completed a level in a game I was playing, that is the right time to sell me the next level. It reminds me of one of my first articles, where I praised my tire dealer’s sales model of selling me a steering alignment right when the car is jacked up and all the tires are off. In-app purchases are similar. And one of my first book reviews covered Free by Chris Anderson, a book entirely focused on the freemium business model (and still a must read today).

Is anyone in the newspaper industry listening?

I’m surprised though that I haven’t heard anyone talk about applying this model to the newspaper industry. I’m not interested in paying a monthly fee to the USA Today, or the New York Times, or any other newspaper or magazine – not because I don’t think they should be compensated for their work, but because their subscription business model just doesn’t work in a world where there are so many other sources of news. Judging by the results of recent newspaper paywall experiments, I’d say I’m not alone in that opinion.

However, if a newspaper or magazine had a free app that provided the first few paragraphs of an article, and then charged a $.99 fee, not to read just the one article but to read that one plus let’s say 4 more articles of my choosing (either in the current issue or future issues), that is a model that I would get behind. Plus, it’s important to keep in mind that the publication can still advertise on all of the article snippets that I can peruse through for free. In fact, I personally would download an app like this from a LOT of magazines that I don’t even look at today.

When it comes to consuming news, the world has changed. The old model of paying a fixed monthly fee, regardless of whether I read the articles or not, is dying (if not dead already) – and it should be, not just in news but in television too. In a model where everyone pays the same amount for something with a variable value to consumers, one group inevitably pays more than the value they receive and end up subsidizing the group of users getting more value than what they are paying.

Guess what? I’m not interested in subsidizing people anymore. It’s why I don’t have a problem with mobile data tiers for internet usage (at least if they’re done reasonably) – I want to pay for what I use, not subsidize someone else’s data-hogging needs. I have 300 channels of TV and only watch seven; I’m not interested in subsidizing everyone that wants to watch more.

I’m ready for an a la carte world.

Photo by Flickr user jking89

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Rocco TarasiRocco Tarasi was an accountant, investment banker, and CFO before becoming a technology entrepreneur.

No comments

  1. Only paying for what you use makes perfect sense when you say it like that – but if I say ‘ the more you use, the more you pay’ it starts sounding a little more ominous, and when you get a surprise bill because you forgot how much you used, you might start pining for security.
    Similarly, a menu is great, if you like making decisions.
    But decisions are work.

    In the end, you can have simplicity, or flexibility. They are opposite ends of a spectrum. If I have a product that is familiar, that’s easy to predict, and the options are easy to distinguish, choice is good. If my product is new, my customers don’t have a familiar usage pattern to draw on and are still figuring it all out, there is value to be created by shielding them from risk.

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