Author: Marc Fawzi
If the price of an app was demand-indexed, starting at some arbitrary price near $0 when the app is launched and then going up and down with demand, then that would have interesting consequences.
Obviously, how that is tuned varies from app to app. For example, for a given class of apps, the demand-indexed price may be e.g. $0.50 at 1,000 downloads a day and $0.99 at 10,000 downloads. Many factors would go into deciding that curve (1), but the point is that the price should change with the rate of demand just like the price of scarce goods. However, unlike scarce goods, where there is the concept of an optimal [market] price at which the most profit is generated, the demand-indexed price would be optimal within the entire range of ‘FREE to CHEAP.’
This way if a developer has a great app with a great potential they get the most adoption upfront, helped by the near-free price, and as the market for that app heats up they get to enjoy higher profits from a higher price.
I think Apple got the idea for $0.99 for music singles from the publishing business where the price of e.g. music CD or a book is fixed and does not go up and down with demand.
The assumption is that a book or music CD can be replicated infinitely at a fixed cost per unit, so why slow down sales with a higher price if the demand is shooting up? However, when we’re talking about an mp3 or an .app the cost of replication is so negligible that pricing an app or mp3 at $0.01 produces a profit (after initial sunk cost of development/creation and assuming no recurring costs like cloud usage fees or bandwidth exist other than those paid for by Apple and factored into their model) so increasing the price from $0.10 to $0.25 will NOT slow down sales with rising demand because people are willing to pay ANYTHING between FREE and CHEAP for something they think is good and the perception of how good the app is increases with demand for that app (as that leads to more chatter among connected consumers and more hype in the press) …. So all one has to do is to figure out what is “CHEAP” for the given class of app (via a user survey) and then introduce the app at e.g $0.01 and change the price daily (or even in real time) while keeping it less than or equal to CHEAP.
There are a couple of key considerations to take into account when attempting this model. It has to do with the nature of demand in the long tail market for content.