Free Beer and App P.E.D.

by michaelzaletel

The price elasticity of demand for iOS Apps is extremely difficult to ascertain and differs by category.

Because Apps are “Experience Goods” (quality is difficult to determine prior to consumption), some apps even exhibit positive PED as consumers assume higher priced apps may be higher quality.

What amazes me most is the effect on demand between $0.99 and free. No other product or service in the history of the world has such a negative PED at that point on the curve except maybe beer. (Think all-you-can-drink FREE Beer today posted at the entrance to the Rose Bowl).

An ad-free, free app that is getting 1,000,000 downloads a day might easily drop to 1,000 downloads a day and visa versa.

Why would a MILLION people be willing to spend the five minutes it takes to read about, download, enter password and launch and play with an app yet only 1/10th of 1 percent of those people be willing to spend 99 cents for the same product and time investment?

I believe the correct price point for Camera+, for example, is $1.99 (PED exactly 1) but fear likely keeps them from raising it back up to that price. The danger is that at $0.99 they are much more likely to get dethroned every week by the next trendy Instagram Photo Editor. Eventually, there will be several at the same time perhaps even some smart enough to charge $1.99 and then it will be too late to change the price.

The key is not just to find the right price point at which PED is 1 but to think long term about whether that’s the most important factor for App Store longevity.