Transformation of “Must Have”

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I’ve been thinking a lot lately about pricing and business models. When we started in the business, we developed high-functioning software calculators for Blackberry, Palm, Windows Mobile and Windows and were able to derive prices in the $60-$160 price range, depending on the product and niche. After a series of customer surveys, reading other developer blogs and books, and playing with our own prices in Apple’s App Store, it has become clear that these customers are no longer willing to pay these kinds of company-sustaining dollars. Instead, the price expected is diving toward 0 and there is now a disconnect between “price” and “value”, at least for digital goods, that had been there in the past.

(Please keep in mind: I’m not complaining. It’s reality and I’m trying to figure out how to adjust.)

In the old days, there were two classes of software: Nice To Have and Must Have. The Nice To Have software was just that. It was great if I had it but if it’s not there, I won’t fret about it. Since the customer really didn’t need it and there was no urgency to have it, customers didn’t value it and the price was low or free. Must Have products were the opposite: it was needed and there was urgency to have it, and thus prices were high. While we were developing a niche product, it was a high-need item within those niches and we could charge good money for that software.

Now it seems like the market has shifted. Now, because of the breadth of the Internet and the App Store and the ability to find people who Must Have your product or service, it seems that the Nice To Have category of products has disappeared. Instead, Must Have has split into two segments: Must Have for me personally and Must Have where I am a contributor.

If I’m a contributor — meaning that there is something I am creating that must be retained or stored or shared — than I am willing to pay for it. But if it’s for personal use than the expectation is free.

When did this change? I don’t know but it was occurring long before the price pressure of the App Store. Google has been rolling out “free” services (meaning free to the end-user) for years and the freemium model (where some stuff is free and other stuff is paid for) has become a predominant model for web applications.

We, too, have been going through a tremendous transformation, re-evaluating what should be paid for and what should be free in the FastFigures eco-system, re-evaluating whether we are a mobile application with web components or a web application with mobile extensions, and trying to figure out how we build a stable and growing company again.

Psychology of iPhone Pricing

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When I started in this business 12 years ago, there was tried-and-true consumer price points: $9.99, $19.99, $29.99, $49.99, $99.99. Only a few apps — Microsoft Office, Adobe Photo suites come to mind — were able to price above those levels. Anything under $19.99 was considered an impulse buy and anything above $49.99 was considered professional quality.

This never was in the mobile/smartphone/PDA world. In this world pricing seemed to break down as $10, $15, $20, $29.99, and $39.99. Only the rare app was able to get more. We charged $59.99 for powerOne Finance but bundled both the Palm OS and Windows Mobile version together for that price. If we had been in the old model of consumer pricing, we would have been between $100 and $200 (with slightly different presentation and functionality). Impulse buy was anything less than $15; professional apps were at $29.99 and above.

Now those prices have morphed again, at least for iPhone. For whatever reason — first products in the AppStore, lack of trials, single purchasing location, Apple’s devious plan, natural laws of commoditization, Chris Anderson (just kidding) — all pricing have depressed even further. It seems that the new scale is $0.99, $1.99, $2.99, $3.99 and $4.99. Only the rare app can charge more.

The interesting thing to me is that the mentality hasn’t changed. Now, $0.99 is an impulse buy and $4.99 denotes professional quality.

Case in point: In April, a competitor was at $5.99 then $4.99 then $3.99. Never really impacted FastFigures’ sales, but we could never catch up with him, either. For a week, he went free. When he went free our sales shot through the roof. When he came back to the paid side at $3.99 he made no headway. It didn’t impact my sales at all (I was way ahead of him in Top Paid) and the same was true when he dropped to $0.99. He sold a lot more, catapulted above me in Top Paid, but it didn’t impact my sales. Only when he went back to $3.99 did my sales start to fall off as I was clearly losing units to him and he was able to stay ahead of me in Top Paid.

One conclusion: Top Paid position has a clear impact on sales. I think most people try the 1) cheapest and 2) first found product that they were looking for.

Price, though, also impacts sales. So where’s this cut-off point that attracts the alternative, professional customer we were looking for? Is the connotation that anything under $0.99 is a throw-away app? Or is that point $1.99 or $2.99? Clearly, $3.99 has a different connotation but I’m curious if that “professional level” actually falls in somewhere lower.

Or is my entire theory flawed, and the reality is that software is diving toward $0 price points, as my Building an iPhone Business surmises? I can definitely say the market is shifting. And I don’t believe, unlike other developers, that it’s Apple’s fault. I think they are just accelerating the curve.

Cheap or Free?

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A couple of us walked into Powell’s Book Store near the office yesterday to find this:

Someone’s got a sense of humor. Dick Luebke, an advisor, took a snapshot with his new iPhone 3Gs. The irony is we had spent the morning discussing two important issues illustrated in this photo.

The first is the difference between free and, well, cheap. Josh Kopelman of First Round Capital wrote an article called The Penny Gap in which he talked about the problems with getting someone to go from $0 cost to $0.01 cost. The point Mr. Kopelman makes is that going from free to paid isn’t a consistent curve, that there’s a significant drop off in customer demand even when charging a penny. He points out that if you want a highly viral business then you have to figure out how to charge the consumer $0 because “premium” services are not viral.

The second is straight from Chris Anderson’s Free. Mr. Anderson argues that commodity information is trying to be free while customized information is trying to be expensive. A commodity, he argues, is when everybody gets the same thing and custom is when the thing I get is unique and meaningful to me. Dick supplemented Mr. Anderson’s argument by adding the concept of priceless. The more important and longer I want to keep the customized information, the more I am willing to pay.

We have been struggling here with the commoditization of our old business. At one time, people paid upwards of $130-$400 for a sophisticated hardware calculator. powerOne, our software version for Palm, Windows Mobile and BlackBerry, were priced between $60 and $100. But now it seems calculations are available everywhere. They are cheap in the App Store. They are free on the web. It has become clearer to me that while we have some unique customization features, that these features give us an edge to be the winner in a commoditized world but don’t allow us to charge a premium. It’s not even clear that it can get us to our modest break even goals.

I’m excited to add these customization features to FastFigures, but it’s past time for us to turn our attention to the bigger product goals and vision, hopefully those that we can build a sustainable business around.

Two World’s Apart

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I have been hearing more and more developers getting all excited about the world of mobile, comparing it to the early days of web. There are some similarities: rapid adoption, increased awareness of capabilities, increased expectations.

There’s a difference between what’s happening in mobile and what’s happened on the web, though. The web was an open standard, evolved from government creation and collaborative efforts. This openness allowed anyone to participate and to use the web as they saw fit. Ideas flourished, advances happened, new development environments were born and we were allowed to grow by connecting with customers in unique ways. If you had/have a great idea, you buy server space and throw your app out there and find an audience that you can directly connect with. It works on every platform (read: browser), more or less.

Mobile has not been and likely will never be like this. It’s a series of walled gardens and closed connections. Look at how far down the value chain we as developers are. Between us and the customer is the carrier then the hardware vendor then the store manager. Our products and prices are being commoditized. Our value as developers is only valuable in creating customer loyalty to a piece of hardware, with enough get rich stories to make everyone believe in gold. Have a unique idea? It can only come to fruition after learning a specific device’s nuances, paying the company for the right to develop, paying for certification, being subjected to weeks of testing, and then being tossed into a pit with 50,000 other applications, never being allowed to touch the customer or derive additional income from them again. Oh, and this is one platform. Do it again for every platform in existence.

Will this change? Likely never for software that runs on the devices. It’s impossible, once these opolies develop to break them down and open them up. But there is a way out. For those of us trying to make a living, pray that combination of 4G, Wi-max and Wifi makes the pipe wide and the connections constant. For it’s the web that bails us out of this mess.

Leaving the V, Entering the W

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We are about to dip into the second half of the W.

When you talk to economists, they will tell you that there are three types of recessions: U, V and W. We are very used to V recessions in this country, where we quickly go into a recession and then quickly leave it. U recessions are where we enter a recession and we slowly hit the bottom and slowly leave the bottom before we recover. W, as you can tell, is two V recessions back-to-back.

THERE IS STILL TOO MUCH DEBT. THERE ARE STILL TOO MANY WHO HAVE NOT LEARNED THEIR LESSON.

And so the second half of this recession is about to hit and our government can’t do a thing about it.

To tell you the truth, it’s about time, too, that our government learned their lesson. Everyone is in recession except our state and federal governments. As much as we may want it to, as much as we don’t want to feel the pain, we must. No amount of regulation will help us. There will be recessions again.

No amount of government spending will help us. Congress has no idea how to spend money efficiently. They just know how to spend it.

I’m going to make one more prediction here, while I am making predictions. There will be a growing backlash against both the Republican and Democratic parties that will either absorb one of them or be a third-force to be reckoned with.

It’s a group of people who believe that the biggest threat to the USA is not Iran or our educational system or our trade deficit specifically. It’s ourselves. It’s our leadership’s inability to say no, to live within it’s means, and make the hard decisions. Our government’s responsibility is to help us help ourselves and then get out of the way. And it feels like our government is moving very rapidly to nanny state instead.

Greed and recessions and over-reaching are all apart of the endeavor of capitalism. They will happen again. And that’s okay because it means the system is working. When we don’t have greed and recessions and over-reaching, that’s when we should all be worried.