Now, you could spend the same time making an app that you sell for $0.99 but you would need to sell about a thousand of them just to break even (since Apple takes such a huge cut, plus it costs more money to service a thousand people than it does to serve one). Furthermore your cash flow is much more predictable under a SaaS model (hence, easier to raise on, exit with, hire on, or just plain sleep at night with) so it isn't even a 1:1000 ratio. More like 1:2000.
The psychology behind this is pretty simple. Most business owners know that saving time increases their billable hours. If you can do that, then great. They would be thrilled to hear that they will be paying you that 12 bucks for the next 4 years, because it would mean that they survived at least that long! Most of them think there is a good chance that they will be toast in their first 3 or 4 months, and what's $40 bucks compared to their other expenses?
Whereas a general app purchaser isn't costing in their saved time (for business or productivity apps), since they don't view their mobile device as a work tool, and consumers don't usually care that your game is good because their are plenty of alternatives to choose from when it comes to wasting time on the internet.
Where I would build an app:
For an existing product that exists in a browser, mostly as a sales gen tool. Possibly for functionality that people would like to be mobile but doesn't work in a traditional SaaS app (check-ins for a ticketing app, for example, could be done on an iPad).
Most other cases I just wouldn't bother.
 I'd say 1.5 to 2% is basically the floor because that is roughly what small businesses close at.
I like the way you identify the costing "point of reference" for various segments (web/mobile and business/consumer). To add to that, it seems the costing point of reference for mobile is the monthly phone bill. In comparison with that $1 is negligible (in the ballpark of carrier overage charges), but $10 or $20 extra is a "major expense".
While it is fun to watch folks figure out that business school is more than just a big party until graduation, watching them draw the wrong conclusions from their experiences hurts.
There is an old joke about a scientist who teaches a frog to jump when you yell "Jump!" he then proceeds to cut off the frog's legs and notes that it no longer jumps when he yells "Jump!". From this he concludes that removing a frog's legs makes it go deaf.
The same is true about concluding that the age of selling fixed price software is over. It is not economically viable at these prices. So people will go out of business, and the people who remain will raise their prices to the point needed to support themselves. Now it may be that its not economically viable to live off the revenue from a 'simple' application, but its also true its generally not possible to live off the revenue of a single paperback book either.
That said, its easier to see how a 'subscription' is a better model for somethings, but people aren't too excited about those either.
Of course, the key to being able to charge a premium comes down to marketing, and positioning yourself well in the market, but that's obviously not a fairly difficult thing to do, especially in these competitive markets.
The quantity of crap produced is large, it begins to swell and what emerges is a discrimination filter. Be it review magazines, web sites, or even word of mouth. Take a look at computer games, initially people were putting out what seemed like lunar lander clones in BASIC and selling them on the Apple II and becoming zillionaires. And a lot of crap followed in little baggies. Sometimes there were gems like Ultima, but a lot of times there was crap. And to filter through the crap came user groups and other communication venues where the goal was to not bother with the crap but buy the 'good stuff'.
The total crap fell by the wayside and the cost of entry got higher because you needed talent a few production points to make it past the crap filter. Lots of magazines made a ton of money being crap filters. PC Gamer was one of my favorites at the time. The market matured and you got the 'studio' system and even higher production values. Some people made it big in computer games but it required actual talent or at least a decent idea.
The 'AppStore' as an environment for software delivery has been around 5 years. We're in the Microsoft Flight Simulator 1.0 era relative to that. The arguments were the same "You can't make any money selling games, its too hard, no one buys them, the market is illusory." But the reality was that the market was developing, and during development early movers get an advantage but they don't necessarily win or even complete the race.
People have needs that can be filled by applications running on their phone/tablet that would serve them better than a similar application running on a laptop. Selling applications that can solve those problems can support a development team working on the problem. There are multiple ways to monetize now that didn't exist before. Solve a need, get paid. But understand that some great ideas solve no problems and are thus not convertible into cash.
Until you can talk to your computer and it can figure out what you want and synthesize a solution on the fly, there will be a market for 'apps.' Give it another 5 - 10 years before you write it off.
Indeed, the article's conclusion is flawed: the gold rush is not over. We blindfold ourselves with a scenario where a hypothetical gold rush would make every arriver rich, observe that it is currently not the case, and justify not trying our luck by saying that therefore, it's over and there's no use trying.
As long as there are constant or increasing numbers of people "thinking they're going to make $1b by making an app and getting acquired.", there's — by definition — a rush.
And rushes, by definition, inevitably end. I'm sure there were gold miners that showed up in the Sierra's and were disheartened by all of the claims everywhere. They, being in the later wave, no doubt cursed their luck at missing out on the 'easy' riches. I can tell you that very few independent miners are wandering the Sierras these days to stake a claim (surprisingly it is not zero but that is a different story).
Forming a rock band is not a viable business plan. Hasn't been for years, since long before the music industry's current woes. The music industry survived for years and years parasitically feeding on the free labor that would-be stars put into skills for their hoped-for careers. The movie industry and the sports industry similarly harvest the freely available talent of would-be stars. And some musicians, some actors and some athletes indeed make lots of money but total final rewards look like very little if you divide them by the effort expanded by those aspiring to success. And consideration of the problems involved here can easily avoided if everyone who fails in any of these fields is dismissed from consideration as a "loser".
This stuff may not sustainable but it can be sustained for longer than one might imagine.
I heard once that the only ones who got rich in the gold rush was the ones selling pans. Too bad Apples seems to have a monopoly on the mobile-app equivalent.
Not just Apple... The original pan seller's legacy isn't doing too badly, either: http://mashable.com/2012/07/01/stanford-top-major-computer-s...
"If something is free to reproduce and distribute, the marginal cost for an additional good is zero, so new entrants simply reduce the profit they take until the price of the good stabilizes at its lowest possible price (the bottom)"
The problem with this fallacy is that it doesn't capture the 'cost' of the good which involves creativity and implementation, combined with a system of copyrights. So while it may be true that a generic good like a text editor might reach a price point near the cost of maintenance, something like AngryBirds generates revenue over a longer life cycle. Things that people want, they pay money for if they cannot get value out of a 'free' offering. Capturing that value requires understanding a bit about what the actual user value is and how they weight it, but as we read in another set of comments about people weighing the pros and cons of an app vs plonking down $5 for a cup of coffee without even batting an eye, the market for coffee is mature, people know what they are going to get for their $5 so the value proposition is in the bag, not so with Apps yet, and perhaps not for many years yet. But that education process continues.
This sounds a lot like what newspaper people were saying a decade ago: current prices couldn't support professionals, so prices would have to rise. But that's not what's happened, in most cases.
The tools one needs in order to build and sell software are accessible to more and more people every year. The barrier to being an indie programmer is getting lower and lower. You can build and sell an app on the app store without having ever heard of quicksort. Indie developers may well go the way of indie journalists: while a few flourish, most wind up working for beer money.
Now that isn't really a problem because all things being equal you can be fantastically profitable at lower ad rates if you keep the subscriber base. But you need the subscribers. And for that you need people that have e-readers. The publisher of the NYTimes pointed out they could be wildly successful if they gave all of their subscribers an e-reader for free and took away the paper copy. Not everyone was willing to go there.
So you've got an industry in transition. I expect the Economist to be the first 'old world' journalism outfit to flip its profitability from the print publication to the digital one (they are furthest along the curve), but the Wall Street Journal has some great trending numbers as well.
Truth be told, people still read the news. And the folks who appreciate good news, are willing to pay for it, and if they are willing to pay for it they are pretty good folks for advertisers to have their ads in front of. But its all about stepping across that chasm of print to e-print.
The 'app' market was hugely disruptive because it kicked a huge chunk of infrastructure to the curb. That chunk added no value to the product they just did distribution and duplication. So you can sell a product for less than you would have if they were taking their cut, and still make money. Except Apple bends you over for 30%. Once the opportunities open up that price will fall, its not supported by actual costs (meaning others can get under it and still make a fair profit). But there are other pieces in the puzzle that have yet to fall out (like the horrible platform diversity on Android). The key though is that people continue to want to 'own' software and largely resist 'tax' type features. So as the business models flourish and die we will get to the place where things stabilize.
Regarding your second point, software is plagued by the zombie minimal-viable product. Sparrow is a pretty damned good email client right now. What could they offer to make me upgrade?
This is why smart developers and good software will move into SaaS, whether users are excited about it or not.
I'd rather own myself, but I suspect we've got a lot of market education on all sides to go through before we figure out that you can't sell apps for $0.99 at anything other than lottery-ticket odds.
I'm starting to become a fan of base module free/low cost + pay per extra feature.
Back in my days, operating systems kept compatibility with applications. If you want it the other way around, you'll have to pay more for the application, one way or another.
If you want to buy software, then you need to pay buyer's pricing. Almost nobody is willing to do that.
I would say they did everything right except choosing to build an e-mail client. The days of paying for e-mail clients is long gone. The days of even using a local mail client are over for most people. It's just a tough sell to make money selling a paid client to a free service. I use Sparrow and will continue to use it but I can understand why they were going to have difficulties making any real money off it. Way too small of a market.
I'm not sure I totally agree with that. My first example is the ridiculously wide-scale enterprise adoption of Microsoft Outlook and Exchange -- sure, there's a bunch of features that are piled onto those "email clients," but at the heart of it, people are still paying for this stuff.
The second example is Sparrow itself. If people weren't paying for e-mail clients, then would Sparrow have such a huge, dedicated userbase? Or is this just the vocal minority we're hearing from?
What they are willing to pay for is a value proposition that goes beyond the mere mechanics of email. Outlook succeeds because it integrates email with calendaring (so does GMail, with less success), does a fantastic job with sortation, filtering, and highlighting, and also is a champ when dealing with unmanageably large address books.
The market for an amazing email management service is absolutely existent. The market for a rubber-stamp me-too mail client is not.
Sparrow became popular way before the iPhone version. Anyway, how is making an app more convenient supposed not to be an improvement worth at least a couple of bucks?
BTW, "All mail clients suck. This one just sucks less."
Yes but there is a completely different dynamic driving those sales: top-down adoption mandated by people whose main goal is not to get fired. Same reason as why you see so many middleware posters in the airport raving about security. Most users, given the choice, would not choose to use these products.
Who knows, ultimately it probably has to do with personal projects of theirs and I think it would be paternalistic to have a say in their lives.
There are people who really do not wish to have the lifestyle business life, it's not evil to seek more money as long as it's not something immoral that they're doing.
The problem is how they would continue to make money - next year, the year after and 10 after that - what plan did they have in store? If all they had was "better mail app", then sure, as you summarised it, the writing was on the wall and selling while still being hot property was the best decision to take.
It does GMail really really well and GMail users tend to be a bit more affluent or clueful - better customers.
I don't think RITLabs took any VC money... hmmm ;)
The upgrade-train model is over for a lot of software out there. Those of us who want good desktop software should be begging our favorites (I'm looking at you, JetBrains) to charge on a subscription basis.
I'm with you, man, I'm cheap too. But that's the reality of todays software.
I think it is a large problem, and we are seeing the manifestations of it now.
Time will tell, but I'm sure not gonna work on one-time charge software, nor would I recommend it to anyone. I'll work on free open source stuff, financed by work on whatever recurring models I can figure out.
Who wants to maintain an old code base when they could spend ten weeks trekking in New Zealand and then hunker down for the Great Rewrite That Fixes All The Problems?
(Not that I blame Odgaard; in fact, as an ST2 user this is my greatest fear about that product--selling thousands and thousands of copies at $60 is an extremely viable level of revenue for a one-man shop.)
I wonder if PixelMator is on a similar trajectory after Apple has featured them in nearly every possible spot on the Mac App Store.
A paid version 2 though produces a similar windfall again, rather than diminishing returns.
Marginal utility. The first million is worth a lot more than the second.
Why can't you give me fixes for the version I purchased and then sell the next major version ?
Years ago it was the same thing with Trillian IM. While I happily paid Reaper (a DAW) that gives me two major versions.
I think the SaaS model applied to desktop software would run into some problems. I think people would react with hostility if their desktop software stopped working once they stopped paying a license fee, even though they may very well accept this model for browser-based apps.
I think the sparrow guys charged too little for their email client, personally. People will pay for beautiful and quality, productivity tools.
It's unfortunate, but the desktop model just doesn't pencil out in many places in todays world. That means that stuff will end up in the cloud and on the web, not because that's where it can be best implemented (I far prefer a good thick client over a good web app) but rather because that's where the economics force it. And users will end up being held ransom by a cloud service anyway.
It's a funny economics problem.
iCloud/Dropbox has really set the expectation that syncing should be free.
The economics of the upgrade-train desktop model are bad and getting worse, and the market will supply less of that. I may be proposing something not inherently appealing to you, but I think increasingly that's where people smart enough to build great software will focus their efforts.
Right now they have customers who do stuff like buy CS Design licenses for every computer in their organization because a few people wanted it. If customers like that jump on SaaS options while normal folks do the math (hmm after eighteen months am I ahead or not?) it's a net loss.
These SaaS options aren't necessarily the net loss you describe.
I don't mean this to sound like an ad for Adobe's subscription model, but as someone who's used a lot of their products for over a decade, it's hands-down the best way for companies to get access.
In Adobe's case, per-app pricing is really there to set value for the Creative Suite bundles, which in turn set the value for subscriptions.
Let's say I need Photoshop. I have 3 primary options:
- Buy Photoshop CS6 for $700 right now. It's on a 2 year release cycle, and was recently updated, so that's a solid 2 years of guilt-free use until the next rev.
- Buy a CS bundle - eg Design & Web Premium for $1,900. Includes Photoshop Extended, Illustrator, InDesign, Acrobat, Flash, and Fireworks.
- Subscribe at $50/mo for 1 year ($75/mo w/ no commitment). Gets everything above, plus Premiere Pro, After Effects, et al.
If I buy the bundle, that's a $4150 value for a mere $1200 more than Photoshop by itself. This is why the bundles have always sold so well.
If I subscribe for 2 years, it's $500 more than Photoshop by itself, and $700 cheaper than buying a standard CS bundle. Also, I get the latest version of every Adobe tool for the duration, so if different people in the org have different needs I don't need to care.
Meanwhile all the small shops who could not afford to buy licenses just to equip the 3 freelancers for a month will suddenly be able to justify the small cost of a month's subscription. I almost expect them to roll it into each job's billings, whereas previously they would either use a hooky copy or suffer the pain of juggling licenses and old software.
There are a lot of small shops using hooky Adobe software.
Under the subscription model, don't you think the software you're subscribing for will end up like IE6, left to stagnate because there's no incentive to spend developer time on it?
Both business models can work, and both business models can fail. I haven't seen any evidence that SaaS is immune to competitive pricing, which is the issue being described in the post.
Developers publish feature lists for an upgrade cycle, users vote with their dollars, different features can be funded, etc etc? There are a couple of open source projects (like PostGIS) that have similar programs...
This is not a long term solution. The only viable solution was to reduce burn rate as close to zero as possible. This means producing a new software.
The word 'just' has no place here. If Sparrow cost $5/month I imagine that 99% of their customers would never have used it to begin with.
Because of Spam? Perhaps indefinite. Because of new file types? New authentication schemes? New mobile platforms? New user interface technology? Perhaps indefinite.
That way existing users still have a core product that will see upgrades.
For instance, if I buy Photoshop today, I get all the features. If I had bought the last version, I'd have an upgrade price to pay for the new features. In the in-app purchase world, does everyone always have to pay the original price + in-app purchase price? Do you just make the new base price lower (but with the low prices of apps in the first place, there's not room for many versions if you knock a buck off each one...)? And even that seems to still be new-user-unfriendly: I would be bummed if I bought an app for $1 and found out that the coolest features required another $3 in purchases, even if the app cost $4 when it first came out a couple of years ago (I probably don't even know that).
The app is free and revenue is made from in-app purchases.
The basic app is structured so that upgrades are infrequent, because of the time lag.
However, the app connects to back-end servers which contain much of the smarts of the app. Thus they can upgrade them whenever they like, without having to upgrade the app. Then can also introduce premium features to be sold with the existing in-app purchases.
How you achieve this in a non-game setting is a challenge, but I believe it is the key.
As a user, I don't want to be nickel-and-dimed for every little feature.
As a developer, I don't want to shoehorn every change I make into an IAP feature.
Can you imagine if you had to "upgrade" OS X, Aperture, Photoshop, or Office by purchasing a bunch of "features"?
(Serious question, I'm not familiar with the mechanics of IAPs.)
You sort of could deal with something like OS X Mountain Lion as an IAP, but it would be incredibly ugly - you'd essentially have to ship both code bases, and "unlock" the new one based on whether or not they purchased the "upgrade".
IAP works pretty well if you have new features that are fairly discrete and are worth paying for individually. As a substitute for an actual upgrade, it is an ugly hack.
For games, one-time app payment makes more sense: usually, you complete the game or there is finite set of game rules that is implemented.
For most apps one uses day to day, one-time-pay model works against the user by mis-incentivizing the developer, just like TFA said.
It's somewhat ironic that AppCubby itself is an illustration of the same problem: their GasCubby app, which I use several times a month, has been effectively abandoned. Now, I would gladly pay at least $4 a year for that app, if it were actively developed, as it continuously delivers value AND getting improvements is important to me. However, since I've paid for the app once and that's the end of story, the app's own development reflects the same.
Pay to get updates is really the way to go.
Now, I am afraid to go shopping on the App Store for the same kind of app, as I'm wary of another disappointment. If I were to develop a competing app that filled the same need, but was critically more usable on several subtle, but important fronts, I would have a very uphill battle against the established stalwarts, which have been reviewed and rated since the early days of the App Store.
Thus, we are stuck in a situation where, given a popular app category, existing/old school apps tend to dominate based on reputation, but stagnate due to the lack of incentive to update or innovate, and the new apps a tough time breaking through.
Thus, when Dominique revealed to Ellis Hamburger in August 2011 that Sparrow had made at least $350k in it’s first 6 months in the Mac App Store, they had already been working at least a year on the app.
The article actually states they made over half a million in the first 6 months
DL: In terms of numbers we've made more than half a million dollars in the past six months since Sparrow was introduced in February.
I do. You really can't take iOS App Store sales trends and extrapolate them to the Mac App Store, the markets are quite different.
1. Sparrow is first and foremost a Mac app, and its target demographic is (or was) Mac users. The iOS version is supplementary. Without the ability to do push on iOS they wouldn't have been able to deliver as great of a user experience on iOS anyway. I would bet that the vast majority of their sales actually come from the Mac version.
2. Mac apps don't drop out of visibility nearly as quickly as they do on the iOS App Store. Part of this is because it takes a LOT more effort to produce a quality Mac app compared to an iOS app.
3. The Mac version of Sparrow has been pretty consistently in the Top 50 Grossing on the Mac App Store since launch. I would be surprised if they weren't averaging at least $1000-1500/day on sales of the Mac app alone, with much higher spikes when they hit the Top 10 Grossing.
That said, I will agree that whatever they were making was probably not sustainable for a team of 5, especially compared to the $25M that Google was offering.
Maybe Sparrow's aspirations were too big for an email client?
If you can't make it with a team of 3 or fewer, you're not going to have a sustainable business.
The community needs an "App Escrow" organization which developers can sign copyrights to their software over to. In the event of a "acquhire," the app developers won't be able to kill their app. In essence, the app developers who sign up for this "escrow" have made a precommitment to not killing their app. (Perhaps the app the software can be licensed to a new development team for a fee commensurate with the app's earnings history. Perhaps it could also be open sourced.)
The market wants it. I still believe.
Add to the equation the spammers who would be delighted to know if their mail was red.
At the last full-time gig I had we had a plugin installed on the mail server to strip out external read-receipts
Mail.app is free, Outlook is free. How much better is Sparrow? Is the improvement worth $60 a year? Cause if it's not worth even $5 a month to your users (2 cups of coffee) - then it's probably not worth doing.
No matter how much people say they love your product, if they aren't willing to pay $5 per month, $60 per year or $200 one-off - they are kidding themselves. Think everyone loves Facebook? How many of those folks love Facebook enough to pay $5 per month to use it?
People aren't stupid. They will pay for stuff that translates into the bottom line - just like businesses. They may pay for Photoshop - if that's their work tool. They'll pay for a Mac - cause it helps them be more productive and earn more money.
My personal benchmark is dating sites. When most guys in the world are prepared to pay north of $20 per month to access a dating site, and if you are charging less you have to ask yourself - if people don't value my product more than a dating site, should I be working on something else? It's kinda sad but true.
The graphs are rankings not revenue (understandably he doesn't want to share). But this introduces the problem that a week in the top 10 and a week at #500 does not equal to two weeks at #250. Not even close.
Further 250th place today =/= 250th place in 2009 or 250th place in 2016 or 2030.
Ron Nicholson  roughly fits the following formula for app store sales:
unitSales = totalPaidApps * ((1 + rank) ^ -1.0) - 1.5
This suggests that a week at #5-10 is worth about 23-42 weeks at #250.
The app store and the mentality behind it is a race to the bottom. So unless you are insanely lucky (angry birds), app store devs will be living with their moms just like drug dealers. :)
One thing I think could have worked to bring in substantially more revenue is price differentiation.
A number of people have claimed that a significant number of Sparrow users were on paid Gmail plans. If Sparrow had split their pricing in a similar way (eg, $3 if you are on the free plan, $20 if you pay to use Gmail) then they might have brought in significantly more revenue. Additionally, the people paying for Gmail are already known to be to be people who spend money on email services.
Joel Spolsky's essay is the best resource on this: http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...
Of course, some kind of recurring revenue is the real "solution" here.
But then again, maybe it was.
Sell email client for X, then build additional plugins for client that solve a problem for a subset of users and offer that as an upsell. You avoid bloating the original app for those that want a sleek solution but offer enough plugin functionality to let users tailor to their purposes.
And each of those plugins can have a paid upgrade cycle as well, a long with the ability to bundle plugins with app for "Enterprise" or "Power User" price points.
PS: This is probably wrong in some fundamental way (I'm not an economist)!
Sparrow seemed more complex than a typical 0.99c app, and it seems like they had their fans. I wonder if they followed the subscription model if their finances would have looked better and gave them the ground to stay independent.
I'll tell you one thing -- both of these guys and almost everyone I've met in the Valley deeply misunderstand how to make sustained profits in an app store. I'd say, from what I can tell, Gameloft (not my company) is one of the few companies that gets it.
These can be games, but they can also be many other types of content. Everytime I see a guy betting on one app, on one platform, trying to make it perfect, I try to explain to him it has a snowballs chance in hell of working, he doesn't listen. No one wants to face that profitable apps are mass produced at medium to low quality on every platform.
I'm still learning mobile (iOS) development having got back to software development last year although I've been doing Rails contract work for much of the time. I released my first real experiment http://itunes.com/apps/fastlists (yes it's another lists app but it is currently free, with no ads and has a couple of useful features making it especially useful for reusable lists for shopping, packing etc. The design is functional rather than beautiful).
I'm currently adding some in-app purchase options to test the reactions of the users.
My current idea is to offer the following options:
1) No-ads (tier 1 price)
2) Privacy - No anonymous usage collection.(tier 1 price)
3) Raise item limit (by 100 to 200 items) (tier 1 price)
4) Unlimited items (tier 3 price)
5) Everything including future in-app features (tier 5)
For me option 5 is important because like several other commenters I hate feeling I will need to keep paying bit by bit for something. It will include everything that doesn't need server side support and expense. I actually hope most customers choose this, the other items are there largely to justify the pricing of this item.
Ads and anonymous usage monitoring will come in releases after the purchases have become available and for ads I will probably make the first month of use add free to try and get the user stuck in. I may also add some alternate skins as in-app purchases too later although that is lower priority than using the iOS 6 social framework as a way to try to get users promoting the app for me by sharing lists.
There is currently no item limit so I will allow users with more than 50 current items to have their initial limit be 50 higher than the current level.
At the moment this is just a small scale test because I haven't done any promotion for the app yet so the current numbers of users is small although the reviews are currently very good (despite a usability issue leading someone not to work out how to reorder items - but I'll add some help in the release after next).
To become self sustaining as an independent developer I'm expecting to need to keep a small suite of apps ticking over. Some will be more ambitious than this although others may be even simpler with different unique features or niche target markets.
Any thoughts on the pricing model? Or the app?
I may have to revise some of my opinions about Sparrow's sale. New data means new conclusions.