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Here's my logic - when customers have very limited information, and side-by-side pricing, they'll always minimise risk by getting the cheapest app. The cheapest app is free. And eyeballing statistics on sales, $1 apps don't do any better than $2 ones (depending on the platform and app - iPhone buyers can be very elastic). Many customers aren't so stingy they'll balk at paying an extra dollar, they simply flock to free apps because you can't beat free. Especially for an app which has lots of substitutes (todos, games).

If customers have good information (they are already using the app), and only one price (your IAP), or pricing you control (your IAP, with dummy prices - feature by feature unlocks, and maybe a premium feature or two), they'll spend be more likely to spend money.

The big money is in exploitive IAP. Skinner box games which use psychological tricks to goad big-spending "whales" (addicts) into spending more. But the small money is probably in IAP too - unlocking the demo.

There's no money (IMO) in $1 apps - they are too expensive (compared to free apps), and they sell themselves short.

True but not always true. Our application (http://syncpadapp.com) is free to download and to use up to 3 simultaneous users. If you need more we offer a "pro" plan at $5 for up to 30 simultaneous people. You'd be surprised by how many people are asking me for a discount rate on a $5/mo plan for an app that they use daily...

If someone is paying you, that means they have 4 or more users. That's gotta be worth $15-30/month. Have you tested your conversion rate with other pricing?

Increase the price...

Both the American Economic Review and the Review of Economic Studies rejected the paper for "triviality," while the reviewers for Journal of Political Economy rejected it as incorrect, arguing that if this paper was correct, then no goods could be traded.[2] Only on the fourth attempt did the paper get published in Quarterly Journal of Economics.[3] Today, the paper is one of the most-cited papers in modern economic theory

Looks like there's a market for lemons in academic papers, as well ;) Interesting that the paper's thesis applied to itself.

Everything you said is pretty much spot on, but I think the overarching point that isn't really spelled out, is that people do actually spend money on apps[1]. There are important pricing considerations in that going from .99 to 1.99 you don't normally lose >50% of buyers. Once you've crossed the barrier from free to paid, another dollar isn't a big deal. Also, IAP and other methods of giving people trials helps. Overall the point is though that people do in fact spend money on apps.

[1] My longer response to this article - https://news.ycombinator.com/item?id=6471131

Also, it's not "worth less than a cup of coffee".

My coffee costs under a dollar, because I buy the ingredients from a supermarket. A cup of coffee in a mall costs a lot more, because when you buy it you are comparing it to other cups of coffee in a mall.

People are idiot savants when it comes to side-by-side comparisons. They can only compare stuff in context. It's called Anchoring. And it's irrational.

The supermarket near me has cheap instant coffee for $3 a tin, reasonably coffee for $5 a pack, and expensive coffee for $10. People buy the one in the middle (because it's "good" value). It's something like 5 cents a cup, vs 20 cents a cup ... but they still fret about the cost of good coffee.

Then they'll walk out of the supermarket, and consider whether a $3, $3.50 or a $5 takeaway cup is better value.

People generally make decisions on whether a purchase is relatively good value, compared to the stuff beside it. Once you get people purchasing stuff in a place that's not in exactly the same context of a $1 app, or a Free app, they'll be less biased towards thinking that $1 is a ripoff.

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