Want to get rich off Apple’s (AAPL) iPhone app store? Don’t bet on ad revenue to get you there alone. Unless your iPhone app exists to support a broader business, it’s a good idea to charge for it to maximise revenue.
That’s the gist of this report from NYC-based iPhone analystics firm Pinch Media. (See below.) This presentation has been making its way around the Web for about a week, but this is the first we’ve seen of it. (We thought it was interesting enough to share. Apologies if this is a repeat to you.)
So why charge for your app? Here’s the maths from Pinch Media CEO Greg Yardley, as shown on slides 20-25.
- A $1 app returns $0.70 per user after Apple’s cut.
- Free apps get about 6.6 times more uses than paid apps. And let’s assume people use them about 12 times, on average, before abandoning them. (Not unreasonable. See Greg’s other charts showing how quickly users abandon most iPhone apps. Yikes.)
- That means a free, ad-supported app has about 80 sessions to make $0.70 off advertising.
- Assuming one ad per session, that’s a $8.75 CPM, or cost per 1,000 ad impressions.
- But the iPhone ad market is offering CPMs closer to $0.50-$2.00, Greg says.
- That means you’d need to “bombard” users with ads to beat the money you’d make charging $1 per app.
Makes sense to us. Of course, this doesn’t apply to everyone: Apps that are huge viral hits or have higher ad rates would do much better.
And we’re not suggesting that companies shouldn’t make free apps for fun, to promote other products, to use with subscriptions, or as “lite” demos for their paid apps. But assuming Greg’s numbers are accurate, companies should not assume that ad-supported apps are the best bet.
Meanwhile, on slide 8, Greg also helps answer our question as to why companies are dramatically cutting iPhone app prices: The average price cut increases demand by 130%.
We don’t know what “average” means, but that suggests to us that it’s definitely possible to double your demand by cutting a $2 app to $1. Which means — in the short term, at least — you’d be making up for the lost revenue on volume.
We don’t know how that affects more expensive apps. And we imagine the long-term effects aren’t as favourable. But it’s at least some explanation for the spooky trend we reported yesterday: That top-50 iPhone apps have, on average, seen prices drop 34% since late December.