Distimo recently published an interesting report (free, registration required) on how app price changes affect revenue for iPhone & iPad apps. They give a breakdown on the scale of price changes but only give the really interesting results – the download and revenue impacts – averaged across all price changes. The key result is that download volumes and revenues are significantly positively impacted by price drops and negatively impacted to a lesser degree when the price rises again.

Although not specified by Distimo it’s likely that the vast majority of price rises are simply prices returning to normal after an offer ends. In this context it’s worth bearing in mind that e.g. an app with 1000 downloads/day increases on average to 9710 downloads/day after 5 days following a price drop. When the price goes back up again, the downloads fall by 57% of the increased total, e.g. back to 4175.

Demand at zero price

A factor that is not accounted for in the Distimo analysis is the discontinuity in demand at zero price. Ideally the effects of price changes that make an app free should be analysed separately from those which do not. In the former case, demand at zero price is typically multiples of demand at any non-zero price; a free promotion also relies on generating revenue from in-app purchases, advertising or subsequent increased demand after the promotion ends. On the other hand, price changes which do not make an app free are trading off price against volume. Developers can experiment with these changes to find the price point which generates maximum revenue. For most apps the marginal cost of serving additional users is close to zero and certainly dwarfed by the cost of creating the app. In this scenario, maximum revenue equals maximum profit. The zero price effect also suggests that any price drop intended to increase downloads for the purposes of increased visibility in the store should be a free promotion for maximum impact.

Longer term impact

The Distimo report shows revenue growth (purely from downloads and in-app purchases) continues for at least seven days from a price drop, reaching an average of 71% increase for the iPad and 159% for the iPhone. Beyond seven days we have a much smaller dataset from the App Rewards Club (and their analysis of Free App A Day) which suggests an initial revenue spike follows the end of a free promotion but the longer term increase in revenues is only minor, questioning the fees charged by some free promotion services.

Beware frequent sales

If a key component of your revenue model is paid downloads and temporary price drops create spikes in revenue, along with slightly increased revenue in the long run, it’s tempting to think that frequent sales will ratchet up your earnings bit by bit. The truth is likely the opposite since there are multiple services that allow consumers to check the price history of a premium app; if there are regular sales many users will simply wait for the next one. There was a good review of the issues with sales on the app store last year, however, ignore any claims that it’s impossible to succeed with premium pricing – even in the most competitive category, games, one of the most successful apps is MineCraft, priced consistently at $6.99. Most of the other top ranked premium apps either don’t have sales at all, or only do so around significant events (new major versions, holidays, new device launches).

All of this data was for iOS. According to Distimo, Google Play also shows similar effects on price changes but of a smaller magnitude due to the greater difficulty of reaching top rankings. However, the subject of price promotion on Android is much less relevant, since paid downloads make up such a tiny fraction of overall revenues.