The myth of the 99-cent killer app

Stung by criticism from frustrated developers, Apple (AAPL) redesigned its increasingly crowded iPhone App Store last Friday to showcase the most popular paid applications in each category — Books, Business, Games, etc. (See here.)

The developers’ complaint — which reached critical mass last week — was that the old App Store, because it lumped applications together, was contributing to a “rush to the 99¢ price point” and pushing out anyone interested in creating serious (and profitable) programs for the iPhone or the iPod touch. See Trouble in the (99-cent) App Store.

But are those thousands and thousands of 99¢ apps — 4,209 to be precise — really doing harm to the iPhone ecosystem? Are they significantly more popular than apps that cost more?

Peter Cooper at Mobile Orchard, who has been following this argument for some time, took a hard look at the numbers and concluded that they are not.

Using data provided by the App Store, Cooper has created a fascinating series of bar graphs that plot the popularity (on a scale of 0 to 1) of apps in one of three price bands — free, 99¢, and $1 or more.  The first graph, reproduced below, shows every app in the store — all 11,810 — plotted logarithmically to stretch out the data.

If you look at the different popularity bands, plotted left to right, you’ll see that the 99¢ apps have a modest edge. For example, two 99¢ apps were popular enough to be catapulted into the right-most band (0.5-1.0), whereas none of the higher-priced apps made it that far. But both price points are represented in roughly equal numbers in the rest of the bands. As Cooper puts it:

“This isn’t a whitewash for the 99¢ apps by any means. Visually, you can see that even though 99¢ apps appear to have the edge at higher levels of popularity, it’s just not significant, and if you were to multiply the price by the sales obtained at each level of popularity, the higher priced apps would beat the 99 cent apps in overall revenue.” (link)

The results vary by different categories, however. At Mobile Orchard, Cooper graphs several  — Productivity, Games, Entertainment, etc.  — and finds some interesting variations.

In Business and Productivity, for example, there’s a clear preference for higher priced apps. In Social Networking, the willingness to pay more for quality is even stronger.

But Games are a toss up, and in Entertainment, 99¢ applications are considerably more popular than higher-priced apps.

And, as Cooper concludes: “As always, the free apps completely trounce the pay-for apps.” (link)

UPDATE: Reader Per Sjofors points out that the App Store is an almost perfect laboratory for understanding price elasticity. In a piece published last August, he describes how by adjusting prices up and down and noting the effect on sales, developers can quickly chart the price elasticity of their apps and zero on the price points that maximize their profits. See The AppStore, a microcosmos for understanding price elasticity.

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