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The Case for the $500 App

Last year I started a company that is developing iOS software for the architectural services industry. The price of our first app, Architactile Inception for iPad, is $499.99. This makes it one of the most expensive apps in Apple’s App Store. As you might imagine we get several comments about the price of Inception. While generally, the intended audience of the app (namely architects involved in business development) recognize the value Inception delivers, many folks can’t seem to get past the price. The suggestion seems to be that by virtue of running on an iPad, software has an upward limit in value. That somehow, no matter what utility is provided by an iPad app, it is simply inconceivable that it might be worth $500. So why then have we set the price of Inception so high?  Is it some sort of get-rich-quick scheme?  Are we trying to bilk our customers?  Quite to the contrary, we’re trying to do something important. We’re trying to improve the efficiency of the business of architecture.  And we’re trying to legitimize the iPad as a real business tool for architects. But to do that, a $500 price point for Inception is both necessary and justifiable. So before you make any snap judgements, please consider the case for the $500 app.

There’s a lot of talk about people using iPads at work, but the reality is there’s very little development going on for vertically-oriented point solution apps on the device. There are a few industry giants (Autodesk, SAP, Salesforce, Intuit, etc.) that are dabbling in app development, often publishing “free” apps that provide a mobile interface to their flagship products. And there’s lots of general purpose business software - voice recording, expense reports, time keeping, todo lists, notes, business card scanners etc. but when it comes to real application specific tasks, there’s not a lot of serious development.  So why is this?  There are lots of reasons. Many of which have to do with challenges to B-to-B business models when trying to provide software through Apple’s consumer centric iOS ecosystem such as fixed pricing and the lack of detailed customer information (Apple provides no more detail than the county in which an app is purchased to the developer - no name, contact information, etc.) But perhaps the biggest barrier to the success of B-to-B software for the iPad is the perception that apps should be cheap or free.

It’s ironic really, that Apple has simultaneously created the perception of a luxury brand and is able to fetch top dollar for it’s high design tablet, while simultaneously driving the perceived value of software targeted for the coveted device to almost nothing. The common perception is that “apps” are disposable and should be purchased on impulse, without thoughtful consideration. You don’t like that app? So what? It’s only 99 cents. For the consumer market this is quite brilliant. From the developer’s perspective, high quality, low cost applications with very limited utility or functionality can be produced and sold in large quantity to an audience conditioned to perpetuate the buy-use-delete disposable app cycle in an insatiable quest for the next Angry Birds. It’s a beautifully engineered system for all involved - the user, the developer and Apple.

This system works as well as it does for one reason: Apple has done an awesome job of creating a captive audience of massive scale. A well designed and marketed app selling for 99 cents can generate hundreds of thousands, or even millions of dollars in revenue for the developer.  Although blockbuster “hits” are hard to come by (and getting harder each day, especially for the small developer) even a part-time hobbyist can cobble something together that, priced at 99 cents, can pretty easily sell hundreds of copies.

But the model changes dramatically when the developer wants to target a narrowly focused vertical market. Instead of a market defined as “anyone with an iPad” it’s something smaller, perhaps much much smaller. In Architactile’s case, our market is “architects who are involved in business development who have, or are willing to buy,  iPads.” Furthermore, vertically oriented business apps typically require more functionality, domain specific knowledge, licensed 3rd party content, and so forth, not to mention customer training and support. From the developer’s standpoint this means higher development, maintenance and marketing costs, and smaller markets. For this type of model to be viable, the price for the app must be higher than that of less sophisticated apps with target markets of millions.

So what’s an app worth? The “value” of consumer apps designed for entertainment is subjective and intangible. Much of the value of consumer apps is derived from context. By setting the lowest non-free price of an app in the app store to 99 cents, Apple (perhaps unknowingly) set the de facto standard “value” for a typical iPhone app. The common consumer perception is that in order for an app to be “worth” more than 99 cents, it must be significantly better than the average app. “Better” again being subjective. For iPad the perceived value is slightly higher - I guess because the screen is bigger and bigger should cost more.

Unlike consumer targeted entertainment apps, business apps are different or at least (I argue) they should be.  With business applications a user should perform a cost-benefit analysis to determine the value of the app. For most business software there are both tangible and intangible benefits. Typically the tangible benefits (time savings, hard cost savings, etc.) should be able to provide a demonstrable cost benefit over the alternative solution in order to be selected.  Intangible benefits (perceived status, improved aesthetics, easier to use, more fun) are typically used to choose between multiple alternative with similar tangible benefits.

The great challenge with business oriented software for the iPad is that the users’ perception of the software’s value is largely based on the intangible context pricing of large market consumer apps instead of the actual cost-benefit provided to the business by the use of the app in practice.   This reasoning has resulted in criticism of high value yet moderately priced productivity software from great companies like The Omni Group who produce the $49.99 OmniGaffle for iPad which is often cited as one of the most expensive iPad apps.

It’s paradoxical that folks frequently argue that a $500-$830 piece of hardware is an essential, or even revolutionary business tool while simultaneously dismissing the validity of any software for the device priced at more than a few dollars. The reality is that, as a device, the iPad’s value to business is a function of what it can do for that business in terms of cost-benefit which is to say that iPad’s value to business is completely dependent on it’s software. The idea that the cost of iPad for use in business is justified before consideration of the nature and cost of the applications which will run on the device is sophomoric, unless of course browsing the web and playing Angry Birds at Starbucks alone is somehow sufficient justification.

Pricing is something we at Architactile take very seriously and we spent a lot of time considering it during the development of Inception (which sells for $499.99 in the iTunes App Store). We knew that the price would draw criticism, but at the same time we knew that in order to be viable as a business we needed to charge a significantly higher price than the typical iPad app because of our small target market. At the same time, we knew that we needed to provide a product that delivered benefit that far exceeds the purchase price if anyone was to buy it.

We spent a lot of time talking with architects and showing them early versions of the app to try to gauge value.  The general consensus is that for architects who are routinely involved in business development or other activities that involve developing high level scope and conceptual budgets for projects, that Inception will save several hours (at least 8 to 20 or more) on every project. At a cost of $500, most architects involved in business development that we talked with feel that Inception will pay for itself within the first 1 or 2 projects with measurable (tangible) time savings while providing the intangible benefits of producing higher quality deliverables for clients in less time than what they (and their competitors) are doing now.

We also spent a lot of time sizing the market. In the US, there are about 40,000 architectural services firms. About 80% of these are 10 employees or less. Half of all US firms report less than a millions dollars in annual revenue. In September and October we provided a free preview of Architactile in the App Store (called Architactile Lite) which was downloaded just shy of 3,000 times - about 1,200 of which were in the US market. Based on this information, our sales goals are in the low hundreds of copies per year.

Often when I tell people that we’re selling our iPad app for $500 they reply with some version of “I think you’d do better to lower the price to $50 or less and make up the difference in scale.” The problem with this approach is that, for us, the scale is simply not that big. Our total market is not millions, not even tens of thousands but more like a few thousand.

So let’s run the numbers. Let’s say that everyone in the US who downloaded the free app was willing to pay $50 for the non-free app. That’s 1,200 folks - a number that we consider ridiculously high when projecting our sales (at almost any price).

1,200 people x $50 / copy = $60,000 gross revenue.

Apple keeps 30% of this, or $20,000 leaving $40,000 net revenue.

Architactile Inception took 800-1,200 hours to develop. We’ll call it 800 to be generous.

$40,000 net revenue / 800 hours = $50/hour

First off, the going rate for an iOS developer is $75-125/hour. Secondly, this doesn’t include the marketing costs, equipment costs, 3rd party content licensing (parts of IBC 2009 for example), ongoing maintenance and updates, customer training and support, other operating expenses, etc. And keep in mind, this result is only if we could sell as many copies as we were able to give away for free in the US market - something that seems pretty unlikely.

The bottom line is “make it up in volume” strategies simply don’t work for point-solution, vertically oriented business applications on the iPad or any other platform when the target market is small.

The alternative is to set a fair cost based on the actual benefit of the app to the business, and aim to penetrate enough of the market to make the business viable. In the case of Inception we hope to sell 200 copies in the first year. The math looks something like this:

200 people x $500 /copy = $100,000.

Apple keeps 30% of this, or $30,000 leaving $70,000 net revenue.

Keep in mind that we’ve already invested about 1,000 hours in development. So even if we hit our targets, no one is getting rich quick - but it would allow us to expand and develop more applications for the iPad designed specifically for architects. We’re okay with this - we’re in it for the long haul.

So, how will architects perceive the value of iPad apps for their business? The jury is still out. But if architects (and other professionals) want to use their shiny slates for more than email, slide shows and PDFs, then they’ll need to measure the cost against benefit instead of Angry Birds. Otherwise, the market for industry specific B-to-B software for the iPad simply won’t be able to attract developers.