Deal Range

Inconsequential Apps Used by Many People Increase Stickiness

John Gruber was kind to link to The App Store: First Comes Power. In the original post, I argued that a lot of low priced apps create more stickiness than a few higher-quality apps would (if they were more expensive). And for now, it's the stickiness that Apple is after. He asked some smart questions:

But, just playing devil’s advocate, I’d say the counter-argument is obvious: there is no stickiness with truly inconsequential apps. Are people really going to be less likely to switch to a phone other than the iPhone just because their fart joke apps won’t run on the new phone? The sweet spot is clearly somewhere between quantity and quality — not just many apps, but many apps that you feel like you can’t do without.

First, there are many high-quality applications for the iPhone, in spite of the fact that more expensive applications aren't promoted well within the App Store. And, it's not clear to me that more expensive means better quality in the app store. Many of the best applications are free or very inexpensive.

Second, the reason that low-priced apps work to create platform stickiness is that they enable the network effect to happen for many applications (even if they seem silly) very quickly. While Windows' dominance was built on Microsoft Office, I believe that iPhone dominance will be built on cheap networked consumer applications. While it can be frustrating for some people to see Apple follow the Microsoft lock-in strategy (first with iPod/iTunes and now with the iPhone), that's what they're doing.

In 2009, expect for Apple to disproportionately promote "social" or "networked" applications whose utility depends on someone having an iPhone (i.e. more than just Facebook).

Apple has the right strategy and it's 1/2 Apple and 1/2 Microsoft.

• 1/2 Apple: Develop sexy technology that wins over the innovators and early adopters.
• 1/2 Microsoft: Lock users to the technology by connecting their content or their community to the technology. 

By developing an App Store that makes it easy for the masses to find popular apps that everyone can afford and whose value increases as more people get the app, they will be able to dominate the mobile market. That is their objective, and it may occasionally conflict with the objective of many iPhone app developers.

iPhone Developers Should Be Concerned About Signal Risk

If an iPhone application developer wants to charge more than $0.99 for an application, he should be concerned about signal risk.  Every time I see an application "on sale" for $0.99 when it is usually more expensive, I wonder if the developer has fully considered what future profits they are giving away by signaling their discounting intentions to the market. While the incremental $0.99 sales are incrementally profitable (probably), the discounting action will train many other customers (current and prospective) to delay their purchase to receive a similar discount.  When sales volume drops after the sale, the developer will probably fall back on the incentive strategy to pump volume back up.

Was the discounting ever necessary?

Maybe, but probably not. The temporary increase in profits will probably not counterbalance the future lost profit that will result from customers changing their purchasing habits.  The only way that I can see this strategy working out is if the developer is consistent and unapologetic. But, is your goal to take advantage of less informed customers that eventually will become upset about your pricing habits?  It's much better to build pricing power out of customer satisfaction than ignorance.  The Internet can't keep pricing secrets! It's better to expect that your customers are well informed (or will be) and focus your time on selling something that they truly value.

How do you protect yourself from discounting shrapnel?

Unfortunately, all iPhone developers are impacted each time any iPhone developer runs a temporary sale. And, like it or not, those bad incentive strategies are here to stay. So, it is reasonable to assume that customers will believe that all iPhone developers will eventually run a sale and will delay purchases accordingly. Heck, the #1 productivity app in the App Store right now is AppSniper, an application that watches for discounting actions so that customers can purchase the applications that they want at the lowest possible price!  The customers that you want are smart - plan for that.

The only strategy that will work in the long term is to maintain pricing discipline (don't run temporary discounts, except for in a few special cases).  You need to build that pricing discipline into your brand essence and market it aggressively. Customers HATE to feel like they've been taken advantage of.  You need to make a promise that you won't run temporary discounts and they won't pay more than they have to for the app at the current price.  If you build pricing integrity into your brand and communicate well, most customers will not delay their purchases and you will optimize your profits over the long run.

The App Store: First Comes Power

There is a frenzy of conversation on the Internet about pricing at the iPhone App Store (examples here, there and everywhere). While I'm interested in all of the different perspectives that are shared from users, developers and observers, I don't think that enough attention is paid to Apple's objective. They certainly don't want poor applications, or for developers of iPhone applications to have unsustainable business models. But, while they want to make short-term profit from iPhone applications, they're more interested in maximizing long-term profit for the entire iPhone franchise. The KEY to maximizing iPhone profit is to create very high switching costs for users, just as they did for the iPod via the iTunes Music Store. Apple is using the App Store to create switching costs, and they know that if all of their users have "invested" in many little applications that will only work on the iPhone (a la songs from the iTunes Music Store), they will eventually have users locked in to a long-term investment in the iPhone franchise. The profit from the successful execution of the iPhone franchise strategy will dwarf any amount of profit that they could suboptimize if they focused on what was best for the iPhone application development community.

There is no killer APP for the iPhone, but there is a killer APP STORE. Until they believe that their users have hit the point-of-no-return, they will continue to optimize the app store around volume, not quality or price. Volume = switching costs = long-term domination.

Can't Apple have its cake and eat it too?

Sure. There's no reason why Apple couldn't modify the app store to balance volume with quality and price. And they will. But, they know how close they are to becoming THE dominant mobile phone company in the world and they're not going to take any chances. Once they've locked users in, they'll shift focus to mine as much profit as possible from each of those users each year. That will mean having them purchase more expensive applications (in addition to the little knick knacks that dominate the store now), and driving increasingly tough bargains with the cell phone networks.

What's the lesson for developers?

Don't waste your time hoping that Apple will change its strategy to make it easier for you to sell your expensive applications and more difficult for other developers to sell their inexpensive applications. And, don't count on ever getting any more free advertising from Apple than you get now. One way or another, you'll have to pay for your exposure (marketing $s or pricing $s).

Do take note of their strategy and focus on switching costs.  If you take the long view and build a defensible competitive advantage by creating value for users and significant barriers to entry, you will do well.

To sum up Apple's strategy (and Tony Montana's):

Step #1: Get Power

Step #2: Use Power

It's a good strategy.