The business models for iPhone applications

Author: Charles Parnot

[Note: many of the links in this story will open the page for an app in the iTunes Store. I realize it can be annoying. I have thus made sure that hovering on the link will clearly indicate in the title if it is a link to iTunes.]

The iTunes App Store opened its doors a little more than 5 months ago and has been a huge success, at least based on the numbers of applications available (more than 10,000) and the number of downloads (more than 300 millions). With a size getting close to 20 or 30 million owners worldwide (remember, iPod Touch!), the market for iPhone apps sure looks like a gold mine. However, several developers have recently voiced their concerns about the way the App Store is shaping up: the gold mine may in fact look more like a golden goose slowly choking in an overcrowded market. Is that really true?...

The way I see it, there are three 'business models' for iPhone apps (while calling these 'business models', I don't make any judgment on their viability at this point):

  1. Free apps
  2. Big fast sales
  3. Sustained sales

The distinction between the last 2 might seem arbitrary, but I want to explain here why I think there is a large conceptual gap between the 2 models, and why they are in most cases mutually exclusive. It boils down to this simple question: does the app need to be in the top 100 in the iTunes store? Let's see how these different business models work for iPhone developers in general, for niche markets, and for the scientific market.

Business model 1: free apps

There can many many different reasons for releasing a free app. The simplest is that the developer is not interested in monetary gain. The application Molecules is a great example in the realm of science-related software, and there are many other apps that simply don't have any business side to them. The developers can still benefit in other ways, such as reputation, career development or simply the satisfaction of releasing a cool app or of helping a worthy cause. For scientists that approach iPhone development as a hobby or an interesting challenge, that can be more than enough motivation.

When profits are expected, the business model is simply that the free app will promote... something else. That something else could be a 'pro' version of the app, or the next version of the app, or an entirely different app from the same company. It could be a web service, a movie or an internet radio. Or the app could be directly serving ads. In most cases, the scheme will only be worth the development cost if the 'viral' effect kicks in and many users get exposed to it. As we will see, this usually means making it to the top 100 and staying there long enough.

Business model 2: big fast sales

Ever heard these iPhone success stories? Some adventurous developer works on an iPhone app every night for 3 months, pays the $99 to enter the iPhone developer program, and a few months later has enough income to quit his day job, start a company and hire a whole team of developers. Thus, there is no denying that you can build a very successful business out of a paid iPhone app, in a very small amount of time. But it is critical to keep in mind that in many cases, the sales are ultimately driven by the iTunes App store. If your app is on the Top 100, is featured or is a staff pick, you are in a good shape. The more you sell, the more you stay in the Top 100. The more you stay there, the more you sell. And vice-versa (left as an exercise to the reader). Since this process is self-reinforcing, it is pretty much all or nothing. As soon as the honeymoon is over, the sales drop.

One critical parameter being price, one obvious strategy is to target impulse purchases with low prices, for instance 99 cents. Churn out a new app every 3 months, rinse, repeat, and hope that one will take off. Twiterrific developer Craig Hockenberry calls these apps 'Ringtone Apps' and concludes that they are driving the quality down and preventing the development of more complex apps. Some of the Ringtones Apps probably deserve other names that can not be published here, seeing how some developers do not hesitate to pay for positive reviews or play trick on the App Store search results. If you want to remain honest, the Tap Tap Tap developers have argued that by focusing on quality and applying clever marketing, it is possible to maintain high levels of sale and make a profit with a low-price app. However, luck and market opportunity also matter, since it worked for Where To but not for Tipulator. In fact, they are the first to admit that it is hard and it is risky.

Thus, the secret sauce for a successful iPhone app is likely to remain a secret to everyone for a long time. For now, here are a few obvious things you will need:

  • A large target audience, preferably every iPhone and iPod Touch owner
  • An immediately-appealing app, to push the impulse purchase
  • A low price, to help the impulse purchase... more
  • A good icon and a good description, to help the impulse purchase... even more
  • A well-crafted app
  • Optional but recommanded: a good marketing push in the first couple of weeks after launch
  • Luck
  • Money in the bank and/or a real job

The first 2 items explain why the iPhone has become such an appealing platform to game developers, and why it is not a good model for niche markets and for scientists, as was discovered by the PCalc developer.

To some extent, the proliferation of ringtone apps is a consequence of the iTunes App Store model and the difficulty at finding an app: the virtous (or vicious?) circle of sales, unreliable search, shallow categories, suboptimal browsing,... I also agree with many that allowing time-limited trials of applications would go a long way in encouraging higher-quality higher-price apps. But as pointed out by fellow MacResearch editor and Mental Case developer Drew McCormack, there will always only be 100 spots in the Top 100. If your only hope for profitability is to reach the Top 100, most of the current constraints will still apply.

Business model 3: sustained sales

What should a developer do if his/her app is unlikely to reach the Top 100, for instance in a small market such as science? An analysis from developer Andy Finnell gives many useful pointers, including links to several real-world experiences, and some interesting comments. First and foremost, make sure you deliver a high-quality app, that looks good and will really help the user, without getting in the way. Then take a good conservative guess at the expected level of sale. It seems you may expect 5-50 sales a day after the first couple of weeks of exposure in the app store (I know, the s.e.m. is high). Estimate how much development effort you have or will put in it. Adjust the price accordingly. For relatively elaborate applications with several months of development, the right price is likely to be $9.99 or more.

Wait and see. The sales will have to be driven by costumers that think the app will help them in their daily personal or professional life. This could be through search within the App Store. But most likely, users will not know your app exists until they hear about it from a source outside the App Store. In other words, and following Apple's John Geleynse advice, you are back to what has been driving the sale of every other piece of software before the App Store: some advertising, a lot of word of mouth. For instance, it probably helps if you are already an established developer coming from the Mac market, with apps like Twitterrific, Enigmo or Where To. The iPhone market is still in its infancy, but in this day and age, I am confident the quality of an app will eventually be an important parameter of success.

To conclude on a positive note, I think that the market for science-related apps is very appealing, in fact more appealing than many other niche markets:

  • Scientists spend most of their day with other scientists, in the lab, at department talks, at conferences, at meetings. This creates many opportunities to spread the word about the iPhone apps that they like.
  • There are also many students in labs, as well as postdocs. These are typically young, early adopters, more likely to have an iPhone or iPod Touch. They meet outside the lab too and can spread the word even more. When they are at a party or a bar, what is in their pocket?
  • Many scientists spend time away from their desk, either at the bench or in the field, which makes the iPhone a very convenient tool and a good complement to a computer
  • And let's not forget it is a "pro" market, which means spending money to improve productivity is expected

In conclusion, if you have a great idea for an iPhone app that could help scientists get through the day, your prospects might be better than you think. Of course, this is just an educated guess. Getting real numbers about the iPhone app market is hard, and I am just relying on the few analyses already out there and on the anecdotal evidence I gathered from iPhone developers (posts on the web and private conversations). Hopefully, the developers of Molecules, Mental Case, PCalc, Grafly, OsiriX, Atom in a Box and the many many other science apps will have more insights in the comments...

Comments

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iPhone apps for science education

I am maintaining a list of iPhone apps for science education at:

http://web.me.com/planeten.paultje/Toepassingen/iPhone.html

My way of keeping up with new software releases is to follow the AppShopper.com RSS feeds.

Sustained Sales

Having released Mental Case 2.0 for the iPhone a few weeks ago, I have to say that I am a bit skeptical that there is real money to be made in the App Store in the longer term. There are unquestionably a few developers that have made lots of short term cash, but this just underlines to me the 'gold rush' nature of the app store: A few strike it rich, and the rest come a-runnin' in search of riches of their own only to discover they can barely scrape a living let alone make big bucks.

Sales of Mental Case have hardly set the World on fire, even though it is IMHO the best flash card application on a platform perfectly suited to flash cards. (If you don't believe me, try the free version and judge for yourself.)

Because we only have sales figures for a few weeks, it is difficult to say exactly what the long term will bring, but at this stage we are probably looking at 300-600 sales per month. At $7.99 a copy, you end up with a few grand a month, certainly not enough even to sustain a single developer.

Of course, having an iPhone app that works with our desktop app means that the iPhone could generate sales of our Mac app, so the App Store can have indirect benefits for developers like us. On the flip side, there will be categories of Mac apps — like flash cards — where not having an iPhone app will be a serious draw back. So many developers will actually be mandated to develop for the iPhone simply to keep up with the Jones.

Even if you aren't targeting the 'full stack', like we are, it's not all doom and gloom. It took us about 8 full developer weeks to produce Mental Case 2.0 for iPhone. If you assume a developer is worth something like $6000-10000 a month — in contrast to the rather extreme figure of $26000 recently proposed by Craig Hockenberry — it would probably take about 3-6 months to recoup initial development costs. With a few such apps, you could possibly make a living from the App Store without resorting to hype or top 100 listings.

If you are not a full time developer, the App Store is a nice way to make some pocket money, and what better way than by producing scientific software. In this, I think Charles has a good point. Just don't expect to be rich overnight — that boat has probably already set sail.

Drew

---------------------------
Drew McCormack
http://www.maccoremac.com
http://www.macanics.net
http://www.macresearch.org

App Store

My biggest frustration with the App store is the lack of a "science" section. Makes it difficult to find things when you're just browsing for interesting things. Some of the sections used for the science apps I do know about seem to be a bit ... strange.

great article!

From our viewpoint (the developers of Grafly, which we believe in our heart of hearts is a breakthrough graphing calculator for any platform, desktop or mobile (http://grafly.com)), your comments are dead-on.

We had the good fortune of being both Daring Fireball'ed and right smack dead center on the front store "What's New" section for a few days (thanks to some sympathetic Apple employees) almost simultaneously, on release, and had great sales (75+/day). Once we fell off, things cooled off pretty quickly, and we're down to a handful of sales per day a few months later. We used to get a little boost at each release, being on the first page of Education apps, but now that the churn is so high with flashcard, language, etc. apps, we're instantly lost in the noise.

The main challenge is getting the word out, as you note. And so we do plan to advertise. Any ideas of where that would make sense? On this website as a start? ;-)

We've had some good feedback from the math/science community and even directed our planned improvements along user-suggested lines.

We do plan a Pro version someday that has more of what a high-end user would expect, with "projects" grouping equations conveniently, and with "macros" that enable you to set up equations that can be paramatrized en masse in a project, etc. But, again, we'd love to hear from the math/science folks here about your druthers.

I'd encourage anyone reading this to drop me us an email (support@grafly.com) and we'll send the first 50 responders a coupon for a free copy of Grafly, so we can get a wider exposure in the science community, and to get feedback on what would make it more attractive to you.

Cheers!
--Chris Ryland and John Whitney, Em Software

Re: Grafly

"The main challenge is getting the word out, as you note. And so we do plan to advertise. Any ideas of where that would make sense? On this website as a start? ;-)"

We do have a Showcase section on the site. As long as the product is related to Apple technology and science in some way, developers can write a "review" of their own product, highlighting some of the features, what sets it apart from other applications in its class and things you think are just plain cool about your app. You can include screenshots, and it can be as long or short as you like. You can even do a video Showcase if you choose. Showcase postings are completely free.

Showcase articles get posted to the main page, and are picked up as part of the RSS feed, so it's nice way to reach a wide audience of scientists using the Mac for their work. If you'd like to do a Showcase article see the following post for more information:

http://www.macresearch.org/showcase_reviews

Thanks,

Dave

Time

Thanks Drew, Chris, and John, for sharing your experience with us. Your description of the situation is not quite as rosy as I describe it in the post. But at least, the low volumes of sales are at a non-0.99 price. Once thing to keep in mind is that, like in the Mac business, it can take time to build a brand and a reputation. What is still unclear is how much people will be ready to drop on an app for a $199 device. This might be different from users that have purchased a $1500 laptop. Of course, the iPhone also costs $100 a month in the US, and it is thus all about habit and perception. In the end, it is also still about the perception that the device can be used for "serious" stuff. And this is dependent on how good the app is, and how much it changes the user's everyday life.

That reminds me that in addition to the option for demos, it would be nice if Apple allowed in the future for special upgrade prices. At present, the only upgrade is to pay for the full-price or make it free. In the world of Mac shareware, discount upgrades for current users are an important part of the business, where both the developers and the faithful costumers get something.

Science section

I can't say too much, but from what I've heard I believe it's an eventuality that there will be a Science section, given the new Medical category. I think there just need to be a critical mass of quality scientific applications in the store to justify it.
_______________
Brad Larson, Ph.D.
Sunset Lake Software ( www.sunsetlakesoftware.com )

Re: Time

While I have been disappointed that some of the quality applications I've been impressed with haven't yet had the kind of sales figures I thought they could, and applications like iFart dominate the charts, I'm still of the belief this will change. If Apple implemented a demo system, I think we'd see a sharp increase in sales of > $5 applications. Similarly, improvements in search and the organization of the store should also help matters.

I'm banking on all this happening relatively soon, because I'm working on my first for-pay application and I'm not going to bother playing the numbers game to get it in the top sales charts. I've been working on it for months (the positive response to Molecules motivated me to act on my idea), and I plan to provide long-term support for the application. I believe $10 is a fair price for what it does, but I know that won't get it anywhere near the top 100. I'm betting on a long tail for it, aided by the improvements I described.

Also, a lot of people have talked about how it's unfair that certain applications get highlighted by Apple and others ignored. I would suggest that developers build relationships with the outreach folks at Apple. They are friendly people who want to see quality applications succeed, because it helps their platform. Show off what you're working on, and if it's good they'll give it recognition. They have a pretty good eye for this. It's the same process scientists might be familiar with when submitting grants: it's always helpful to get to know the people at the federal agencies who hand out the money. Old-guard Mac developers (Omni, the Icon Factory) and big publishers (EA) have been highlighted because they have these connections already, but there's nothing stopping you from building your own.
_______________
Brad Larson, Ph.D.
Sunset Lake Software ( www.sunsetlakesoftware.com )

Outreach?

Who are these outreach folks? And how would you get in touch with them?
My impression has been that Apple is a tightly sealed company and not reaching out all that much. It would be great if you could share how you managed to build relationships with those key people inside Apple.

Re: Outreach?

The people you would talk to are with Apple's Worldwide Developer Relations. Unfortunately, I don't think the individuals I've met would appreciate me sharing their contact information, and I can't seem to find a good public email address for you to get your foot in the door.

The best way, by far, to meet the right people at Apple is to initiate contact in person at WWDC. Short of that, I've heard that the iPhone Tech Talks are also great networking opportunities. It may be more difficult to get a timely response to a cold email through the Apple Developer Connection contact form.

Sorry I can't be more helpful.
_______________
Brad Larson, Ph.D.
Sunset Lake Software ( www.sunsetlakesoftware.com )

some numbers, and comments from an iPhone developer

As the developer of TouchPlot I can share a bit of my experience as an iPhone developer. I began developing TouchPlot in the early summer, first working on the iPhone sdk and the simulator, and got accepted about at the same time as many other developers, that is when the appstore opened, in mid july. It was an exciting period, especially when, at that time, I was relieved to see no other grapher in the store, so it motivated me to work very hard (every developer knows that fever I guess, working day and night to finish a project) to submit TouchPlot, of which I did submit the first version on the 24th of july...

After managing (successfully, albeit painfully) the necessary banking information, the IRS, TouchPlot appeared in the Appstore at the end of july, as the first grapher in the store, in the Education category. This is not the place to describe TouchPlot in many details, but suffices to say I made design decisions that I knew could make it impopular, making it a difficult application to master at first, but the teacher I am was confident (I still am) they were the best ones in the long term.

I priced TouchPlot at 4,99$, which I think was quite fair for what it did, expecting to raise the price a bit when TouchPlot became mature.

The first sales came quickly, and to my greatest surprise, some excellent reviews as well, with quite a few favorable 5 stars reviews. Sales averaged 50 a day for a few days, but that did not last long... First competitor entered the market, named grafunc, with a 0.99$ price. Sales dropped to 25 a day immediately, and my first annoyances came reading the reviews of grafunc, with customers asking for the many features TouchPlot had, but not grafunc... Some bad reviews of TouchPlot appeared at the same time, and I understood a bit later that some came from a future competitor.

I did not do one thing about it, letting the market decide, and the said competitor got very bad reviews for his quite unfinished product, which disappeared it seemed from the appstore right now, probably to reappear later with a clean history of reviews... (If you're curious, go to the US Appstore with iTunes, have a look at the reviews of TouchPlot, and look for one written by Michael of Andover, then click on the name of the reviewer to have the history of the reviews he wrote...) But it probably did harm the sales number in the US...

I kept on improving TouchPlot while the sales were slowly declining in the end of the summer, and got a very good surprise soon after the Touch v2 keynote, advertising the funniest ever iPod, when apple staff made TouchPlot, then reaching version 3.0, a favorite in many stores. Sales grew up to 70 a day, but TouchPlot could only be seen on the front page for a couple of days, and quickly the sales plunged again... then the free so-called Graphing calculator appeared, which needless to say did not make any good to the sales.

I decided to add a free counterpart to TouchPlot, called TouchPlotLite, but it got a wrong start, and to my great surprise and disappointment, download numbers did stay small. It is very difficult to say if the free TouchPlotLite did have any impact in the sales of TouchPlot, positively or negatively, but I guess that if it did, it was minimal. In fact, I do have seen much better sales numbers since mid-december, but the last version of TouchPlotLite has nothing to do with it, but rather the fact that TouchPlot has appeared again as a recommended application by apple staff in three stores (UK, French and German). Thanks to that, sales are again two digits numbers daily (averaging 15 daily maybe since three weeks), but I'd be surprised if it lasts much longer...

All in all, I might have sold about 2900 copies of TouchPlot so far, so I certainly did not strike gold with it, especially regarding the many weeks I spend working on this application (more than two months of hard labor I think), and the many little costs associated with it (including hiring a graphic designer at one point), but it was a good experience and it might motivate me to develop a second application when I get enough time on my hands... Time is not something I have that much though, as I do have a real full-time job, and I know by now that time has not come to swap career...

Pierre-Henri Jondot

Here is a link to my application : TouchPlot in the AppStore

And a link to its free counterpart ; TouchPlotLite in the Appstore

Sales numbers

You can follow the sales of 7 iPhone applications at
http://blog.ilm-informatique.fr/archives/2009/01/entry_36.html. The numbers are very low (less than 800 in 6 months), it could be explained by a simple fact: people are buying a phone, not a portable mac !

Thanks for the comments

Thanks to the developers that added their thoughts and experiences in the comments section. It will be interesting to see where things go in a few months...