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The Race to the Bottom for Native Apps

Now that Apple’s iOS platform has had a few years to mature, it has become a major source of revenue for the company, having recently announced that they’ve paid out $2 Billion to developers. But is that enough? There’s certainly amazing potential in terms of revenue for certain apps — those that have a wide appeal, can reach a global audience and are novel concepts. But unless you’ve got a blockbuster app like the wildly popular game ‘Angry Birds’, the reality is that the practical costs of app design and development will probably outweigh the revenue potential for most developers.

There’s been a certain amount of novelty to being able to say your company ‘has an app’, but many have started to question how much it actually costs to create a native app. The most realistic estimate I’ve seen sits at around $30,000 for an entry-level app — iOS apps are quite sophisticated and, when executed well, require great care in design and development. For a $0.99 app, after Apple and the government takes their cut of each sale, you’ll end up with about $0.50 per app, so you’ll need to sell at least 60,000 copies just to break even. Want to also offer an Android or BlackBerry app as well? Some design use cases could possibly be reused, but expect around the same costs of development since the platforms don’t share any technological commonalities.

App Pricing

The major impediment to having more app developers realizing a profit on their apps is the glass ceiling that exists in terms of app pricing. You can spend six months and write tens of thousands of lines of code paired with the most beautiful design assets, but ultimately you won’t be able to price your app for much more than the hundreds of fart apps that took week and zero imagination to put together.

Why? Users are unwilling to spend more than a few dollars on apps because their perceived value is much lower than the actual value of the app. While people may not take much issue with paying $5 for a coffee, they’re unwilling to pay the same for an app that might bring them much more value.

The value of a mobile app is intangible unless it’s coming from a developer that the user trusts or has been recommended by their friends. Apple may boast that they have hundreds of thousands of apps available, but the fact of the matter is that the large majority of these apps are terrible. The end result of intangible goods in a saturated market is that developers are undercutting each other on price, trying to make up the difference in volume.

Trials and Returns

Users have to take a pretty big gamble on buying an app today. Apple’s App Store offers nothing more than a text description and up to five screenshots of the app in action as a sample of its functionality. With rich interactions and experiences left completely up to the user’s imagination, Apple recommends developers create separate microsites that show off video of the app in action, like the demo site for the app Camera+ that provides video of the app in action and an overview of its features. The issue is that these are all hands-off demonstrations of the app in action — videos can’t convey the actual interactions a user will make and the resultant performance and experience of the app. These sites also burden developers with additional creation and maintenance costs.

One of the brilliant features of Google’s Android Market is that they allow users to get a full refund within 30 days of purchase. All they have to do is give the developer a reason, and Google automatically refunds the transaction. This allows users to buy an app, and keep it if they decide it provides value, or return it if it doesn’t. The developer in turn receives valuable feedback from unsatisfied customers. The end result (theoretically) is that valuable apps will rise to the top of the charts while those that don’t deliver on their promised functionality will have to go back to the drawing boards. Empowering the users in this way could allow developers could try to charge more for their apps since users won’t have to gamble on its value. Amazon’s “Look Inside” feature works in a very similar way, allowing users to immediately get a sense of value from intangible goods, mimicking a customer’s action of leafing through a book in a brick & mortar store before purchase.

As Apple begins to think about removing software for sale from its retail stores, they need to consider how they can improve the quality and value of their platform’s apps. They have a sophisticated DRM-equipped rental system already available for TV shows and movies that automatically deletes media from a user’s devices after a certain number of days, and there’s no reason why this couldn’t be applied to app trials as well.

The Value of a Platform

One would hope that Google and Apple could boast about the quality of experience that their apps deliver rather than merely the hundreds of thousands of apps sold. As the native app market becomes more saturated, it’s becoming increasingly difficult for users to separate the good from the bad. For developers and companies assessing the mobile market, the cost of entry to native apps, as well as the fragmentation of devices available is forcing them to start to rethink their approach to mobile, with many taking the Web app road. Mobile web browsers continue to become more sophisticated to support much of the same functionality that native apps support today, making it difficult to justify investment in a single platform.

To ensure native mobile apps are a viable and attractive market to talented developers, Apple needs to take responsibility for the amount of value those developers are deriving from the platform.

Update: Geoff points out that you can, in fact, return a purchased iOS app through iTunes, but they sure don’t make it easy to find.

Adam Schwabe More posts by Adam Schwabe