How to Evaluate a (paid) iPhone App Idea

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.


(Y Axis is gross revenue from App store only, X axis is rank on the Top Overall Grossing List)

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?

Maybe.

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.

  • Ryan Luce

    Tony – this is excellent, really great, clear analysis.  Its great to see how you guys thought through these options as you were selecting how to build your next venture.  Thanks much for posting.

  • Morgan Schweers

    This is awesome research; now you’ve got me thinking about releasing my app for free and including various quantities of ‘sniping points’ that you can buy, and then doing the snipes on my own server… :)

    Those numbers are crazy big, though.  For a one or two developer team, $25K/mo. is a great foundation at the 600th highest grossing.  How far out does that curve go?  What’s an app that averages (in a month) being the 1000th highest grossing paid app make per month?  2000th?  Is there any way to know?

    Or, to be more specific, it seems you have a mathematical model based on the data points you’ve collected.  Can you estimate at what ‘nth highest grossing’ level it crosses some arbitrary value, like the $10K/mo. number?

    • http://www.rescuetime.com Anonymous

       Yeah, we didn’t go too far down.  Apple only publishes the top 1000, so you’d need to math your way down from there.  There’s a really long tail, I think, of apps that can happily support 1 or 2 devs.  We do have data down to rank 900 or so, which would net you about $9k/month after Apple’s cut.

      • http://www.jason-preston.com Jason Preston

        Even numbers like this are misleading though, right? because a 1 or 2 dev shop is unrealistic given other hidden costs? I asked one of the founder of Flipboard what the biggest surprise was about their success, and he told me it was the massive amount of customer support. 

        • http://www.rescuetime.com Anonymous

          That’s a great point! If your ARPU is $1.70, you can’t afford gold plated customer service by any means… At our peak with TouchBase (when our run rate was enough to cover 2 solid paychecks) we were getting 10-15 emails per day (though many of those didn’t require troubleshooting– oftentimes they were compliments and suggestions). So I think a 1-2 person shop could handle that, assuming no other monstrous incremental costs. Of course, apps can vary in terms of support needs. And, at scale with a free hit like Flipboard, it’s got to be pretty crazy! Yet another reason that a good ARPU is critical– otherwise you can be paralyzed by support volume.

  • Jeff Dixon

    Hey Tony, nice post. I did a similar analysis scrapping data from public and semi-private sources to come up with a power curve. In my case I came up with slightly more favorable results. I’m curious if your own personal results corroborated with the predicted results? Also, did you do anything to normalize the secondary data sources based on the date they were published? The overall number of iOS apps downloaded has increased significantly over the last 24 months and looking at data even 18 months old is probably misleading. Thoughts?

    • http://www.rescuetime.com Anonymous

       Yeah, I think we’re probably a bit off (on the low side)– though our own data points are indeed in there, so it’s not too off.  Didn’t do anything with the older data to compensate for age, which probably makes sense to do if I was going to do a great job at it.  I suppose I could multiply it by the app store growth rate.

      I am/was REALLY tempted to make a good study of it, try to collect tons of (timestamped) data…  But I just wanted to be in the neighborhood of understanding “is this market worth it”.  It was, for our little effort, but certainly wasn’t fundworthy or even full-timeworthy.  Few single-app strategies are fundworthy, IMO.

  • Mike D.

    Is it me or is the photo of you on the right a little distorted/skewed?

  • Pattondog

    Some weeks ago i did my numbers, and i end up with really disapointing results.  To make just $90K/year (support for just 2 developers), you need to sell 90.000 real purchases for $1.30. Every year and consistenly. Am i the only one that is seeing it a little bit not doable achieve that amount of real purchases per year? I really don’t know how a team from TOP80 can make $120K/month. It would requiere more than 100K real purchases per moth, almost 1M per year. Something is not going on well with this studies from my point of view.

    • http://www.rescuetime.com Anonymous

      That’s definitely a conclusion I came to. To build a big business you either need a hit OR you need a portfolio of (hopefully cross-promote-able) apps. That said, remember that the whole market is growing like gangbusters.

      This is less true in games. If you build a (FREE!) game that is well designed for revenue, you don’t need to be a natural hit… You can just buy users via marketing. By way of example: Zynga Poker is the #3 grossing game in the whole dang app store. However, it’s only #88 on the “Top Free” list (and better believe that it wouldn’t be there without a big marketing budget– they are “buying” users). If you can build a game with a decent ARPU (average revenue per user), you can “buy” users at the going rate. This will make you more money than it costs AND will help you float up the rankings. Floating up the rankings gets you organic/free downloads, which reduces your effective cost/user.

      There are certainly games outside of the top 50 (or even top 100) that are supporting entire teams/companies. That said, I’d still aim for a portfolio strategy here – you’d want to keep churning out games.

  • http://www.facebook.com/CompuInfoSystems Michael Brown

    The majority of small developer income doesn’t necessarily come from the  app’s  themselves, but from the market share, affiliation, and adverts incorporated into the apps. It is my observation that larger, more credible developing companies, have their toes in the market, leaving small businesses unlikely to compete (marketability wise). Smaller developers should focus (outside the box of app sales), and focus on the app itself as the marketeer.

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