Great article over at Inside iPhone. Very worth the read.
http://blogs.oreilly.com/iphone/2008/12/the-app-store-effect.html
Snapper-brand lawn mowers are expensive. Many Snapper products cost thousands of dollars, and even their simplest push mower is hundreds of dollars more than some competing products. Snapper lawn mowers are not cheap. What they are, however, is reliable. They’re manufactured well and designed to last for years. Snapper believes that a premium-quality product can command a premium price. They’ve built their business around that idea, and that business has been around for nearly 120 years.
In 2002, as CEO of Snapper, Jim Weir went to meet with Walmart executives. Walmart has thousands of stores in the US, and millions of customers walk through their doors each day to purchase nearly a billion dollars in goods. Yet Weir went to Walmart’s Arkansas headquarters to tell them he was pulling his products from their stores.
The problem for Weir, and Snapper, was the very essence of Walmart itself. Walmart sells customers disposable goods at the cheapest possible price. At the time, Walmart had six different push mowers for less than $200, while the cheapest Snapper listed for $350. These low prices change expectations across the board, and leave customers wondering what they could possibly be getting with a Snapper to justify the much higher price. With no expert salespeople to educate them on the tradeoffs between price and quality, most consumers opt for the lower-priced product. Over time, higher-quality goods are forced to lower both their prices and their standards in order to compete. The quality level of an entire market is eroded, ratcheted downward more and more.
Weir chose to break this cycle by pulling his products from Walmart entirely. Snapper instead focused on the knowledgeable independent dealers who could educate consumers on Snapper’s legendary quality and explain just why the higher price was worth it. Even without Walmart, Snapper has grown since 2002, and they’ve managed to maintain their identity as a premium-quality manufacturer.
Weir’s story brings to mind a comparison between Walmart and the App Store. The reasons behind it aren’t identical, but just like Walmart, the App Store is driving down prices of applications across the board. The price floor isn’t $5 as I predicted back in June, but $0.99, the very lowest price it’s possible to charge for an application in the App Store. If developers could charge a price lower than 99 cents, there’s no doubt that some would, and the price curve would shift even lower.
On the face of it, these low prices may seem like a good thing. The more affordable iPhone apps are, the more customers will purchase, leading them to try out many different products. When price is no longer tied to a developer’s costs, however, the market is unstable. The first application to cut its price and successfully rocket to the top of the App Store sales charts will see an enormous jump in sales. As we’ve seen, this cycle repeats over and over, and those developers who reach the sales charts do very well. As the average price is driven down, however, a negative-feedback loop is created. A low price is required to get a top sales spot, and only the sales volume that such a slot brings makes development sustainable. Fewer and fewer customers will pay a premium price, so all developers are forced to slash prices to chase a top sales spot.
While there are dozens of new applications each day, the number of slots in the Top 100 is, obviously, unchanging. As consumers come to expect ultra-low prices, more and more developers will wind up earning less for their software than it costs to develop. That will lead to developers ending development of existing products or simply opting out of the platform entirely. The low prices the App Store has led to will directly affect the quality of what’s available in the App Store.
Certainly, some developers are attempting to counteract this App Store effect, by providing higher quality products at a higher price. SimCity, currently the #2 selling app, has a $9.99 price tag. However, that’s a game with an established brand; top sellers have by and large been $0.99 applications. It’s difficult to look at iFart Mobile, which has sitting at #1 in the App Store for nearly a week, and view this as a quality, stable marketplace for developers or consumers. The App Store, like Walmart, has been reduced to selling disposable goods at the lowest possible prices.
Unfortunately, unlike Weir and other vendors of premium products, iPhone developers have no other way to get our products to customers. We can’t sell direct to customers, or via any other stores. At this time, our options are to be in the App Store, or to not sell our software on the iPhone. This makes it very difficult to command any sort of price over $0.99.
The math is simple. It costs more to make an application with depth and quality. In short order, the App Store effect will prevent the development of these deeper, higher-quality applications for the iPhone. When developers can’t charge a higher price to cover a higher investment, these applications simply won’t be made at all.
By Paul Kafasis
