May 15, 2017

Matt, Apple Isn't to Blame. Developers Are.

I have been following Matt Gemmell and his writing since he was a student. I am a fan. But his latest post on Apple, the App Store and the market economics of software is… tripe.

Matt says:

No company has done as much damage to the perceived value of software, and the sustainability of being an independent developer, as Apple.

The argument is flawed at the outset.

It's resolutely the fault of us as consumers, and it's actively encouraged by the App Store.

No. It is the fault of the developers. Developers have the ability to set the price for their product. Consumers can choose to buy or not depending on the perceived utility of the product and the price, but the power rests on the developer. Apple doesn't care. They are going to make 30% off any price the developer charges. The developers have complete responsibility for the race to the bottom in prices.

Take any market. Any product. There is a segment of the market who are happy paying the price the developer is asking for. There are a bunch of consumers who are willing to pay a lower price. The developer can choose to sell at the higher price and tell the ones who are seeking a cheaper price to go buy something else. They didn't. They rushed to the lower price and it is the fault of the consumer and Apple?

Matt goes on to state:

Target the largest customer base, so they get 30% of the biggest potential income. That means selling at a low price, because most customers will only pay low prices, and all customers prefer low prices. This teaches customers that software's average value is low.

Again. No. I am assuming that "biggest potential income" is revenue maximization because that is what it sounds like.

Revenue maximization would occur if you accounted for the different price elasticities in the marketplace. What that means is that you would charge the highest price the market would bear for the product. Let us assume that the highest price some consumers are willing to pay is $10. You would then charge $10 for the product, the customers in the marketplace who are willing to pay $10 for your product would enter the market. There are some customers who are willing to pay $9 but they are tired of waiting and they will enter the market. When you have covered this segment, you reduce the price to $9. All the folks who were willing to pay $9 and not $10, now enter the market. There are some people who were willing to pay $8 but they are by now, tired of waiting and they enter the market. This process goes on till you charge $0.99. What this pricing strategy does is charge consumers the highest price they are willing to pay. This is how you maximize revenue. You take full advantage of the different price elasticities in the marketplace. This strategy would net the highest revenue for both the developer and Apple. By jumping to the lowest possible price, you are leaving both revenue and profits on the table. The lowest price is far from the "biggest potential income."

The best low price is free. If all customers preferred low prices, people would only use free open source software. Let's put this another way. People obviously prefer a low price. If you charge them a lower price than their perceived utility for the product, obviously they are going to be happy and that is what they want. This doesn't mean anything. Their perceived utility also means that they are willing to pay a certain price for the product and if your price matches their notions of perceived utility, they will happily pay the price and move on with their lives.

To make sure that you are not counter-arguing with my analysis: As long as the size of each of those segments is a non-zero number, taking care of different price elasticities will give you higher revenue. If the whole market is only willing to pay $0.99, that is a price inelastic market. If that is the market the only price you can charge is $0.99. Software, which by definition is endowed with intangible benefits can never be an inelastic market. Any half-decent marketer should be able to change that price elasticity.

Build a universal app (iPhone and iPad versions, in the same package) to increase the attractiveness and convenience of owning multiple iOS devices. You'll earn a "+" in your app's buy-button on the Store. This teaches customers that supporting multiple devices isn't something to pay extra for.
Also include an Apple Watch version within the iPhone app. As above.

Apple did not force anyone to do any of these things. Developers wanted to differentiate their product from the competition. They made universal versions available to the consumer. Sometimes, the users put pressure on the developers. I remember Ulysses was supposed to have a separate SKU for the iPhone version and a few vocal users made some noise and the developer caved. They introduced an universal version.

Provide regular updates, at no cost; so much so that there's no mechanism for paid upgrades at all. This teaches customers that they should expect free upgrades for life, no matter how little they paid for the software initially.

Innovate. Look at iA Writer. There are a ton of minimal text editors in the marketplace. They have managed to iterate and charge new version prices for each new version. That is an extremely competitive space they are playing in, yet they manage to churn out new iterations with added functionality and charge a premium price in the iOS marketplace.

Give some customers the finger. If your product fulfills a need, you are going to have a bunch of dedicated users and a whole host of others who are not wedded to your product. Look after the dedicated users. Ignore the others. Don't listen to them and please don't let them affect your product strategy.

Make exactly one sale of an app per person, ever, regardless of the number of devices they own, how often the app has been updated since they last used it, and so on. This also teaches customers that they're entitled to come back to a free app at any point in the future, no matter how long ago they paid for it.

The rules were laid out in advance. Every developer in the iOS space knew the parameters. If you don't like the parameters, go develop for Android. Okay, I am being an ass.

There are creative ways around this problem. A new SKU for every new version of the OS? Again, there would be some users who would complain and you would get a bunch of pissed off people but if your product provides value, you would also have users who understand that developers need to eat too. It is a truism in business, all business, work for those who are willing to feed you. Take care of those customers. Ignore the others.

In the App Stores Apple created an environment where consumers could give an application poor ratings without the developer having any recourse to a response. Consumers gave products a slew of 1-star ratings and developers got afraid. They had no way to respond to the negative ratings and the negative ratings affected their sales. The developers got intimidated by consumer power. If a consumer says that there should only be universal versions, the developer should have the ability to say, "It took me 17 months to make an iPhone version and 12 more months to come up with an iPad version, I need to get paid for the twelve months of work that I did on the project." Or, "I worked on the iPad version for twelve months and it is an extra SKU. If you don't like it, you are welcome to go pound sand." Or…, you get the idea. There was no way for the developer to respond so they folded. They were mortally afraid of negative ratings and the vocal minority of users got to define the culture of the iOS store. Apple is to blame for that. They took too long to give developers the opportunity to respond and by the time that came, it was probably too late.

One measure of the value of a person's creative output is what another person is willing to pay for it. Low prices actively court those who place less value on work. That's not an admonishment; it's just a simple fact.

I agree with Matt on this one.

And no, you can't balance the price-point and the sales figures to achieve the same income: there are far, far more people who will only buy at $1 (or free, if you're trying to sell in-app purchases). If you sell at $3 instead, your number of sales will go down by much more than the factor of three that you increased the price by.

If your goal is a "sustainable small software business," you should probably stay away from the iOS App Store. The data is actually noisy. There are a ton of developers who are not looking to build a software business. They are trying to make some money off a cutesy game they designed on the way to learning how to program or learning computer science. They are looking for a quick hit. Some of them get lucky. If you are interested in building a software business, you are not in that pool.

Your tasks are different.

  1. Design a product which has legs. A game usually doesn't. A product which the consumer is going to use for a long time. A product which is deep or has the potential to be deep. Deep in the sense that it is feature rich. A product which lets you reiterate.
  2. Design a product which is differentiated from the herd in the marketplace. This is a lot more difficult than it sounds. You need a hook and that hook has to have traction.
  3. Make noise. You need to find every avenue you can get your hands on to generate noise for your application. Work your socks off in this arena. The greatest product in the world will not have any traction without the noise which will let your prospective consumer know that you exist.
  4. Support your product.
  5. Price your product right. Right for you and right for the consumer.

This is by necessity an incomplete list with insufficient information. I am going to be writing an article on Reference price soon and that will have a lot of this better flushed out.

The Globalization Explanation

There are other explanations for this race to the bottom. The iOS App Store changed the dynamics of the competitive space. Software was a first world market. The developers and the consumers were primarily first world folks. Software pricing reflected that. The iOS App Store reduced the barriers of entry for developers from the rest of the world. So, engineers from India, Vietnam, China, Ukraine, Russia and other countries now had an infrastructure which they could access to sell their software. Their revenue needs were different from that of the developer based in Scotland or US.

Two data points:
Per capita GDP Ukraine $8,230
Scotland $45,904
US $57,220

Average Salary Ukraine $200-300/month
Scotland $2900/month
US $3200/month

What this means is that the definition of a sustainable software business is different in different countries. Developers in first world countries are suddenly faced with competition from less developed country developers and the pricing of products has reflected that.

Some Other Explanations

Some more alternatives to the "Apple destroyed the software business":

  1. A large number of software developers have the creativity of a piece of wood. They clone successful products and provide no reason for the consumer to be loyal to them. They know their product is horrible and their pricing reflects that.
  2. Even when you have success in the marketplace, it doesn't mean that you are going to sustain it. A lot of the developers are good at developing software but not very good at running a business. I am looking at Editorial.
  3. A large number of developers would gain from employing a professional when it comes to pricing their products or marketing their products. These skills have value and too many developers don't get that.

The Nature of the iOS Software Marketplace

I know Federico Viticci and Ben Brooks are using the iPad as their main computer. I am sure there are many more. However, there are also people who having given the form factor a chance, have run up against its limitations, and gone back to the laptop/desktop as their main device and the tablets are used for a subset of activities like reading, drawing, playing games and so on. Maybe the device is not yet the product Apple wants it to be. In other words, the iPad is good for certain kinds of software and not for others.

The iPhone is a hugely successful device for Apple. It has achieved huge sales all over the world, but what does it mean for software sales? What do people use these devices for? What is the kind of software that makes sense on the platform?

I gather that Panic is not happy with the sales of pro level apps in the iOS space. Take Coda on iOS, it is a pro app. Panic did a great job with it. But is there a market for it? Are people seriously going to be using their iOS devices to design major web sites? Probably not. The occasional tweak, the addition of a blog article is probably the extent to which the iOS device is going to be useful. Maybe Coda at $24.99 is the wrong product for that marketplace. Textastic Code Editor 6 at $9.99 might be a better product for that task.

We need a better understanding of the kind of tasks that people are willing to do on the iOS devices. We are getting there but slowly.

This process is helped significantly by the notion of segmentation. Let me explain this in a little more detail. Take Final Draft Writer, a screenwriting software which is available on iOS. Final Draft is the dominant player in the world of screenwriting. They have versions for Windows, and macOS. They charge $249.99 for the Windows and macOS version. The iOS version? $19.99.

Now lets break up the segments of consumers on the iOS side:

  1. Group 1: These are people who are professional screenwriters who use the desktop version and want an iOS version to take their work mobile.
  2. Group 2:These are the amateurs who would like to try their hand at scriptwriting on their iOS devices.
  3. Group 3: People who have no idea that scriptwriting needs specialized software but are interested in trying to create a movie.

Obviously the size of Group 3 is larger than the others. Significantly larger. Group 1 is the low-hanging fruit. They are already wedded to the desktop versions and by virtue of being professionals are not particularly price sensitive. The price could have been $49.99 and they would have paid up. They would have complained but everyone complains about Final Draft, they are used to it. They charge $19.99 for the product, they are targeting Group 2. These are people who are more price sensitive than Group 1 but not as price sensitive as Group 3. It is an in-between price. Frankly, I am surprised, I think Final Draft can be $29.99 or even $39.99 without there being much of an impact on sales volume.

It is specialized software for a particular task, therefore consumers are relatively price insensitive. The low price of the iOS version makes me feel that Fountain is having an impact in that marketplace.

As an exercise in pricing learn to segment your marketplace. Find the needs of the price insensitive segment and cater to that. Ignore the masses. Focus your attentions on a segment of the total market and be the best solution for the needs of that segment.

What Do We Do Now?

There are about 700 million iPhones in use in the world. It should be possible to build a sustainable business in that marketplace. Maybe it is not Apple's fault and you are doing it wrong?

The first thing I would do is get a copy of this book, and read it. Again and again. And again.

The second thing you do is bookmark this video and watch it periodically. It doesn't deal with software pricing but it gives you the essence of a world view you need to be successful in business. Any business.

macosxguru at the gmail thingie

App Stores Pricing Developers

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