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The Mobile App Trends Series is supported by Sourcebits, a leading product developer for mobile platforms. Sourcebits offers design and development services for iOS, Android, Mobile and Web platforms. Follow Sourcebits on Twitter for recent news and updates.

Figuring out how much to charge for an app is not easy. It’s all about finding the right balance between what it costs to produce and maintain the application, and how much users are willing to pay for it. Other factors to take into account are revenue from in-app purchases and in-app advertising.

The average selling price for applications — across all platforms — continues to decline. Some of that decrease has to do with increased competition. But another big part of the decrease in app retail prices is the availability of alternative revenue streams for developers. Rather than charge a flat, up-front fee for an application, app creators are beginning to spread revenue generation across the entire app experience, particularly in-app purchases and in-app advertising.

So what should you charge for your app? Here’s a rundown of three options.

1. Freemium or Lite

Freemium is the concept of giving away free version of a product or service while charging for a more advanced version with increased functionality (hence the portmanteau of “free” and “premium”). The idea is that users will love the free version so much, they’ll be more than willing to pony up for an even better, paid version.

But that’s not always how it works out. The popular Instapaper app famously dropped its free version earlier this year. When Marco Arment removed the free version of Instapaper from the app store, he found that sales of the paid version actually increased. The free app has other drawbacks, too. It might create an “image problem” whereby users don’t even realize that the app they’re using is limited compared to the full version.

It’s easier to build a strong case for freemium when it comes to gaming. Users start out at a very basic level and then evolve and grow their game skills from there. It makes sense that they’d start with the early free version, and then graduate on to the paid version once they’re ready to. The use case for gamers is more linear, and the paid version is just another step in the game’s path.

According to a study by app marketing consultant Distimo, the average selling price of games in major app stores declined 28% over the last year, while the revenue generated by the most successful freemium (or “lite”) games increased tenfold during this period in the Apple App Store for iPhone.

2. In-App Purchases

During this same period, Distimo found that in-app purchases within games have exploded. Last year, 8% of top-grossing games relied on in-app purchases. But this year, the number has skyrocketed to a whopping 52% of top-grossing apps using in-app purchases as a significant part of their revenue model. That helped propel top-grossing games to a 79% increase in total revenue.

3. Advertising

In-app advertising is a great way to generate ongoing revenue for your application. You’ll only get paid once for an app download, but you can continue getting paid through in-app advertising. There is a huge range of advertising opportunities — everything from small banners to intrusive pop-overs. The key is to find a balance and manage user expectations for how annoying and invasive the ads will be. Users generally realize and expect that free versions of paid apps will have more intense ads.

The Great Debate: Free vs. Paid

Charging upfront for an app is clearly not the only way to generate revenue. Many applications are free because they promote or support some other paid service (e.g. Netflix’s app). But there are still plenty of apps that are directly aimed at generating revenue but are free. The idea is that giving an app away for free but loading it up with advertising can generate more revenue than a paid app because many more users will download the free app.

One easy way for developers to get attention is to temporarily reduce the price of their app to free. It’s not unheard of for apps to drop from $9.99 to free for a “limited time only.” When an app goes from paid to free, the blogosphere usually pays attention. People love getting things for free, and apps are no exception. When users realize they need to act fast to get the app for free, it can create a small whirlwind of buzz. There are even a number of websites that specialize in tracking app price drops, such as 148Apps and AppShopper.

The upside for developers is that their apps get attention and expand their userbase. The downside is that they aren’t making much money from it. One hope is that by giving the app away for free for a short time, the “sale” will still draw users to the app even after the price returns to normal. Another reason for dropping the price and attempting to attract a rush of new users is the hope of an app making its way onto bestseller lists. However, data from one researcher shows that the correlation between making an app free and breaking into bestseller lists is dubious at best.

What To Charge?

There are a number of factors that should help you determine what to charge for your app. The first step in determining your app’s price is to do some competitive analysis. What’s the going rate for similar apps, and what are prices of apps in similar categories? Undercutting competitors on price is an easy way to gain traction and attention, but if your app is significantly more complex or advanced, you should still be able to charge more for your superior offering.

The key to app pricing is setting user expectations. Users expect simple apps to be either free or 99 cents. More complex utilities often sell for between $2.99 and $4.99. Apps in the $4.99+ range need to have an expansive feature set and lots of polish. That is, they need to look good and provide a great deal of value for the user. While users won’t know if they got their money’s worth until they install the app, users will be quick to leave negative feedback if they feel they’ve been ripped off, which will likely turn off future customers.

The highest app price allowed in the Apple app store is $999.99, and at least one app — BarMax CA, a prep course for the California bar exam — is currently listed at that price.

Experiment

App prices aren’t fixed. Leverage the ease with which prices can be changed to experiment with various price points. Try releasing the app with a slightly higher price and then lowering it over time. Keep in mind, however, that initial release is the best time to attract attention for your app, so don’t squander the good will you build with the blogosphere by charging an outrageous price.

Where Do Your Users Live?

App developers must take into account their target audience and market. For example, that same study by Distimo found that users in Asia are significantly less inclined to download paid apps than their Western counterparts. In-app purchases also tend to be less robust in the Asian market. Thus, developers often rely on in-app advertising as a primary revenue source in that region.

Commissions & Refunds

One last thing to remember is that some app stores will take a cut of app sales and in-app purchases. Apple, for example, famously takes a 30% commission on app sales and in-app purchases. (You can read John Gruber’s rant about the “Dirty Percent,” as he calls it.) When calculating your app’s price, make sure you include the app store’s cut, including any processing fees.

One last thing to remember is the app store return policy. Pricing your app too high might result in a lot of returns once users see the quality and basic functionality. The Android Marketplace allows users to return apps within 15 minutes of purchase. The Apple App Store allows Taiwanese customers seven days to return apps. While Apple’s refund policy in Taiwan is such to comply with local law, it’s possible that Apple will eventually expand a similar trial and/or refund process to their App Stores in other countries.

Conclusion

The key to pricing your app is finding a balance between functionality and what users will find reasonable. If they aren’t happy, they’ll tell make it known via comments and ratings. Experiment with different price ranges, and most importantly, don’t rely on the app’s initial sale price to drive revenue. Rather, think of the app’s price as part of a wider revenue mix of in-app purchases and advertising.

The Mobile App Trends Series is sponsored by Sourcebits, a leading developer of applications and games for all major mobile platforms. Sourcebits has engineered over 200 apps to date, with plenty more to come. Sourcebits offers design and development services for iPhone, Android and more. Please feel free to get in touch with us to find out how we can help your app stand apart in a crowded marketplace. Follow Sourcebits on Twitter and Facebook for recent news and updates.

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