What's the Magic Price?

My fourteen-year-old grandson tells me that he got the iPhone app GraphCalc for free a few months ago. When he looked recently, he noticed that Apple is now charging $0.99 for this very popular app. Clearly, Apple realized that the demand curve was further out along the supply curve than they had believed, and they priced accordingly. I wonder if this is standard policy with them, as I haven’t noticed this behavior before. My guess is that they do this fairly often, but don’t go higher than $0.99 on most simple user-supplied apps: Like me, many users are willing to pay $0.99 for an app, but are turned off by any price above that.


Abe

Apple doesn't set the price of the app, the developer does.

Raamin

Actually, Apple doesn't set prices for these apps, the developers do. And the minimum price is actually $0.99.

The minimum price means that developers are probably losing out on potential sales, making this a less than perfect example of a "magic price" (simply because it may be something like $0.60, but we'll never know), but your point stands.

trader n

The developer decides the price of iphone apps, not Apple. Usually a developer will introduce an app for free (sort of like free samples of a new product) and them charge for it sometime later.

dsmccoy

Free versus paid would be the choice of the developer, not Apple.

"GraphCalc" (found in the App store under "Graphing Calculator") is not an Apple product.
Developers often put out an App for free to get some users and some ratings, and if the ratings look good, will switch to charging if the response is good.

I am kind of amazed at the low quality of this blog.
Your speculation in this case was completely uninformed.

KocsenCMS

If its true that Apple raises the price its because they have noticed a pretty solid demand where charging .99$ would get them a lot of people who are still willing to pay that much. This goes back to issues where the cost of producing and distributing another "app" is virtually 0.00$!

On the other hand, if the developer puts the price and the minimum is .99$ and almost all apps in the app store are .99$. than that means that willingness to pay for those apps are minimal. Also, i believe that due to the fact that there are so many other ways of getting those apps for free, a underground market throws the app store economy out of balance causing these weird pricing.

Finally my prediction is that your grandson got the application from a 3rd party for free when in the app store it has always been .99$ but there was a misconception. Just as technology can make it easy to buy something and get it instantly for .99$ it can also contribute to illegally getting it for free.

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Iljitsch van Beijnum

These sales are largely driven by Apple's top 20 etc lists. So the developers give the apps away for free for a while to get on the best "selling" list and then start charging.

Joe

A lot of apps seem to be released free at first, then switch over to being for pay.

EconProf

Rather than miscalcuating initial demand, the zero initial price is likely to be to prime the pump, especially in all software download markets where user base is an critical piece of information among potential adopters. Initial users can also serve as no-cost Beta testers and focum groups for ease of use, bugs, etc. before brand name damaged.

In addition, don't overlook the networking economies involved. iPhones have enjoyed a tremendous adoption and usage increase. With it's unique OS, iPhones serve as a platform for apps whose market value depends on the size of that growing network.as much as the usefulness of the apps themselves (very few customers buy an iPhone because of the availability of a single app!). In the extreme case of startup rivals to iPhone hardware that use other Operating Systems, the phone manufacturer and/or the wireless carrier may find it necessary to heavily subsidize the development costs of apps (the way carriers currently subsidize the price to new adopters of free phones that otherwise are priced at $200 - $400).

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Erik

When you take the misunderstandings of the iPhone app store out of this article, what is left?

Brett

As already mentioned, Apple does not set app prices. It's also worth noting that many developers introduce apps for free and then start charging later, or have a free-download period at some point, using the word-of-mouth excitement of "free" to spur future sales.

Without knowing the actual long-term plans of the developers of this app, you can't make the analysis you're attempting. The developers could have easily re-adjusted their expectation of the supply curve, but more likely this was a planned move in the realm of a marketing ploy.

Also, there are plenty of apps (and extremely popular ones at that) that cost more than $0.99. Anecdotal comments along the lines of "like me, many users..." isn't really substantive.

Greg

Many devs offer an app for free at launch, usually for a short "introductory" time. That it was eventually priced at $.99 tells me there isn't that great a demand for it. If there were, it might've been set at $1.99 or higher.

Josh

Often, the developer will do a brief free period as a promotion, then raise the price again. Being free gets you users, and word of mouth/demos of hand is one of the most effective marketing tools for the iPhone at the moment. As noted, $0.99 is the minimum paid price. What is interesting is how quickly the prices of apps tend to converge toward there: any competition in an environment where the marginal cost is 0 seems to drive prices down very fast.

John

Also, a common marketing tactic for apps is to offer it for free initially. Lots of downloads of your app will help to get it ranked as "what's hot." It also helps seed reviews. Un-reviewed apps are reminiscent of checks with very low numbers; some folks are wary of them.

JonA

The minimum price is not $0.99, it's $0.

An app can be free or cost money. If the developer decides to charge for the app, then the minimum is $0.99

BTW, since no link was provided for the app, can I assume it's this one?

Joe Shlabotnick

What's a 14-year old doing with an iPhone in the first place? Spoiled brat kid.

Neil (SM)

As other commenters have stated, the individual app developers set their own price, not Apple.

It looks like .99 has become a "standard" price whereas a smaller percentage of apps that want to market themselves as premium will sell for anything more.

I think most developers who are smaller shops or do not have big-company name recognition (like EA Games or Garmin, for example, who sell products for 5, 10, and even up to $100 in the case of a turn-by-turn GPS app) do not expect to make money if they charge more than $.99.

As for free apps that become paid-for apps, perhaps the developer wanted to get his name out there first, perhaps the app wasn't really ready for primetime yet, and they waited until the first update to begin charging. Or maybe it was free for a limited time.

RickyCMS

Although it is evident that the demand for the "graph app" is further on along the supply curve I predict that this is not only done for economical purposes in the short run but for long run economic profit.

Mac right now is gaining a lot of profit from selling this application for .99$ since the total cost of producing this application is virtually 0$. However, I believe (may be wrong) that after some time all of the applications will have a price of .99$. People who buy these certain application enjoy Mac products and obtain a lot of utility from them. Thus, in the future Mac will charge .99$ to all of their "apps" being that the consumers who buy these application are loyal customers of Mac and obtain a lot consumer surplus.

With all of the applications costing .99$ in the future, Mac's long run economic profit will be one of great magnitude. The charging of one applications is just the beginning. Soon all of Mac's "apps" will cost .99$.

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AngelPeñaCMS

t is clear that the demand curve was further out than they have predicted. If the product is free quantity demanded is higher than ever, and as Apple noticed that the application is has a great demand it is strategically to raise price to reach equilibrium price. I bet quantity demanded decrease after increasing the price. Most consumers will not be willing to pay for the app at a price 0f $1.00. But like in any other perfect competitive market price equals marginal cost, and the cost a producing another app is $0. This indicates that Apple has a monopoly for these apps, which make them, price makers, and are able to have monopoly prices. But they are careful, because if they raise their prize to high consumers might not just but apps. They could get it for free, by cracking the iPhone, but that's just immoral.

Myke Hawk

I think all of this is childish nonsense.

0.99 cents for an app is NOTHING.

Your behavior is what has the country in a recesion

compare it to my monthly porn subscription is around 24.99 A MONTH!!!

Myke Hawk

Joe

Magic price indeed. 99 cents in one respect and one dollar even in another are very much magical to the American consumer. We talk of inflation yet Wendy's has found a way to provide me two patties of beef and cheese STILL for $1 and how long has that been going on now?

The appeal of the dollar store, dollar menu, 99 cent etc. etc. is so ingrained in the American consumer mind that I think the best way for businesses to increase their profits on small ticket items would be to convice federal government to adjust the value of the stand american note with George's face on it. If the standard unit (still called the "dollar" of course) became equal to $1.25 in today's dollar, it would make growing fast food restaurant revenue very easy.