As I mentioned in my first post in this series, we dove into the App Store with a ($2.99) Productivity App called TouchBase Calender. It was a part-time effort as we were wrapping up other commitments, with the goal of learning about the App Store, getting up to speed on the iOS SDK and Objective-C, etc. This post details what we learned about the paid apps market and it contains data that I don’t believe exists anywhere else.
First off– let me say that the paid side of the App Store is not where the real money is being made. While you can churn out paid apps and make a handsome living, it’s not where you want to be if you want to impact the highest number of people and it’s (paradoxically) not where you want to be if you want to build a big business. Let me explain with a handy screenshot of the top grossing apps in the App Store today (courtesy of App Annie).
Apps with a blue-ish background are free apps. Apps with a green dollar sign have in-app purchases. So there are *3* paid apps in the Top 20 Grossing List. Things are only going to get worse for the world of paid apps. Here’s a snip from a really awesome infographic from App Annie:
So why are free apps outperforming paid apps? That deserves its own post. In brief, it comes down to ARPU (average revenue per user). Farmville-style games can pull in an ARPU $5 or more per month. In fact, there are reports of $13 ARPUs. Per month! Per user! Average!
How is this possible? Virtual goods elegantly fill up the demand curve for an offering. In other words, they accommodate customers who can happily spend hundreds or thousands of dollars (“Whales”, in Vegas parlance) without having to give up mainstream users (who can still be valuable as evangelists beyond the fact that they give the whales someone to play with).
With all of this revenue comes tremendous marketing power. If you’re pulling in $5-10 per user, you can afford to “buy” a download via CPA or CPM marketing campaigns (which can cost $2-5 for a free user and a helluva lot more for a paid user). With more users comes higher rankings in the app store, which brings more organic users. All of the pros in this world buy their way up the Top 25 Lists until the next rank gets a bit too expensive and then float back down slowly, milking the free downloads while they are there. Rinse, repeat.
It’s no wonder paid apps can’t compete. How many users do you think you can buy at a $1.99 price point after Apple’s 30% cut? (hint: the answer is zero).
Okay, okay– back to paid apps, which is what this post is supposed to be about.
Sizing a Paid Market
Apple makes ranking numbers available, and a few great services (like App Annie) make it easy to look at historical performance of competitors on the app store… But only in terms of rankings, not in terms of revenue. Even though our first app was meant to be a part-time “fire and forget / learn the ropes” effort, we didn’t want to waste our time. In short, we didn’t want to limit ourselves to pennies by picking a crappy market. So we set out to understand the relationship between Top Grossing ranks and revenue.
First off, some category analysis. Let’s take the #5 Top Grossing App in each category and see how they fare in the overall Top Grossing list (note: I’m grabbing the #5 somewhat arbitrarily because it’s a better reflection of the category– #1 might be a mega-outlier like Camera+).
So, yeah. The App Store is really mostly a game store. And a free game store at that. But you still want to build paid apps? So did we! We had a nice tractable project we could build in our spare time, but we still wanted to be sure that it was worth our while.
Connecting the Dots – Ranks to Dollars
Our app was firmly in the Productivity category (good news– it sucks less than most of the other non-game categories). But it probably makes sense to dig a bit deeper than just category (Apple is notoriously lax about policing categories, by the way– expect to compete with “OMG FREE MUSIC DOWNLOADS” apps, whatever category you end up competing in). Our app was a calendar replacement app with a bit of a twist, so here was the big question. If we had a hit and were the mack-daddy of calendar replacement apps, what’s in the pot of gold at the end of the rainbow? We can see that Week Calendar is the top ranked calendar app in our category, with an overall grossing rank of #200 or so at the time (it’s more like 500 now). We all know that hanging around the #1 spot on the Top Grossing list can get you about $7M in revenue in one Christmas month (ho ho ho!), but how could we get a sense of what a rank of #200 or so means in terms of dollars? Google didn’t help much, so we started doing good old fashioned investigation. We combed the web for blog posts where people where transparent about their numbers (like this one). We asked friends and mailing lists for revenue/rank correlations for their apps. We got about 15 good data points, which allowed us to create a rough power curve that looks a bit like this.
Big fat disclaimers on this graph. Many of these data points were received second-hand, were from old blog posts, etc. Also, consider that some apps could have alternative sources of revenue (ads, notably). And we’re correlating US App Store rankings with overall revenue– some of these folks might do well internationally and others might not translate so well. But it got us in the ballpark of understanding just how steep the power curve was and how long the tail of app success really was. Armed with our handy power curve, we drew a vertical line at Rank #200 and saw that we could, perhaps gross ~$70k/month in a best-case-scenario. Not a big enough opportunity for a protracted/full-time effort, and certainly it was unlikely that we’d “win” the market, but fine for a part-time project to learn the iOS ropes.
So, should you launch a paid app?
Every entrepreneur is different. If you want to build a big/impactful business, it’s not the right path (I explain why with a mess of data when I announced my newest venture to launch free travel apps for the iPhone). If what you want is a bootstrapped freedom-from-employment effort or are passionate about an idea that’s a lousy fit for in-app purchases, paid apps are a great path.