Why even the best iOS app developers struggle to set the right price

App creator Phill Ryu is a proven hitmaker. Currently working on his fifth iOS app, he is respected among his peers for his eye for design, his understanding of what users want, and his skills as a great software marketer. And right now he’s wrestling with one big uncertainty going into the launch of his company’s latest app, Hatch: what, exactly, to charge for it.

Phill Ryu

Phill Ryu, co-founder of Impending

Ever since the iOS App Store(s AAPL) launched in 2008 and became a new distribution method for independent mobile developers worldwide, the notion of what an app is worth — and what developers should charge for an app — has changed. At first, if you wanted to be paid for your work in the iOS App Store, you simply put a price on the software — around 99 cents — and if your app was any good, saw the money (well, 70 percent of the money) start to come in.

But the golden age of the paid app is very much in the past. If you want to make money — especially if you’re making a game, like Ryu — the trend for the last several years (which still holds true today) is the free-to-play/freemium model. In-app purchases allow developers to put their apps on the Store for “free” and charge for upgrades within the app. Just about a quarter of revenue from iPhone apps in the U.S. come from paid apps — but nearly three quarters of iPhone app revenue comes from apps that are free with in-app purchases, according to Distimo.

There’s also plenty of anecdotal evidence that the companies that do the best with this model tend to be larger companies and not smaller, independent developers. The failure of Gasketball and Bombcats are some of the best-known examples of independent game disappointments — from a revenue perspective. The problem hasn’t been getting critical praise or promotion from Apple, as those and Outwitters’ flameout showed last year. The problem is in betting enough people will pay for things inside games to make up for all the freeloaders — also known as the Zynga(s ZNGA) model.

Getting paid and staying independent

Setting up in-app purchases is a lot more involved and more resource-intensive, especially for the “indies” that don’t have a ton of resources, Ryu explained to me over coffee in San Francisco last week:

“A lot more money is being made in the top-grossing apps, but customer behavior has fundamentally changed and they are going to free-to-play. That’s sad to me — the paid app market was super friendly to these indies. Not only was it super inexpensive to implement that monetization model … to implement free-to-play you have to analytics, and it really encroaches on the design of your app. It doesn’t even work on many kinds of apps.”

Hatch Impending Phill Ryu

A preview of Hatch on an iPhone

Ryu is no whiner. He thinks a lot about app sales dynamics — he’s been making software since he was 14 — and at 25, admits that he probably loves the App Store “more than 95 percent of the people that work at Apple.” But his dilemma is not unique: every smaller developer — including plenty who don’t have near the successful track record that Ryu and his Impending co-founder David Lanham do — are facing the pricing question. For now, he said, they’re leaning toward paid. But he keeps going back and forth.

The app Ryu is working on right now is a long-held vision of his that draws on the old NeoPets and Sim City concepts combined with our constantly present mobile devices. Hatch is due out later this summer — if you want a peek at what’s coming, check out the incredibly detailed teaser site set up for it.

If you see that page and even look back at the apps Ryu’s helped to bring to fruition — from early iOS gaming hit The Heist to Clear and more — it’s clear that these are high-quality apps. So how — and how much — should he and his partners be charging for years’ worth of work? Should they give it away for free and cross their fingers that some people will pay up?

How often should you ask users for money?

It obviously does work for a lot of developers, even smaller ones. FiftyThree, which gives its Paper iPad app away for free, charges for additional features like pens and tools — and is consistently one of the top-grossing iPad apps. CEO Georg Petschnigg finds paid apps are limiting, because once the price of an app is set, it’s harder to take features away in future versions because people have paid for them. That, he said, can lead to bloated software.

“In-app purchase is a tremendous opportunity to offer something (like how a) chef only puts what people want to eat on a menu, we see in-app purchase as a mechanism for paring down the feature set and offering up what people want to buy,” he told me. “It keeps the software footprint small and efficient. And from a design persepctive it’s incredibly liberating.”

On the business side, he points out it means they’re not limiting their value per customer either.

The decision on pricing comes down to the type of app a developer is looking for and the relationship they want with the customer.

“I think that if we’re going to be doing buinesss here we should probably be making money off of the long-term relationship with the pets, instead of charging up front,” Ryu said. “So free-to-play matches a pet and that kind of experience. But on the other hand, we’re also interested in creating that kind of long-term relationship, and Hatch is supposed to be a happy place you go to … is it better to ask for money once or ask twice?”

No obvious solution

This question comes up as there’s a bit of a movement afoot that smaller developers should just charge more — and forget nickel-and-dimeing their users via in-app payments. Right now $4.99 may stick out as an expensive mobile app. But in proper perspective of the software industry as a whole, $5 is nothing. It’s a coffee and a bagel in the morning. Minecraft on the iPhone is $6.99, but as a console game, on the Xbox(s MSFT) it’s more than twice that.

Productivity suite Readdle works in a similar field as Paper, but it went the other way: charging more. Readdle, which now has 40 employees worldwide, charges as much as $7 for its apps, and they too are often listed among the highest-grossing iOS apps. And like others in the App Store, they’re seeing those numbers — download and revenue — slipping, even with promotion from Apple. Just moving to in-app purchase isn’t necessarily the obvious solution. CEO Igor Zhadanov said he wasn’t sure his users would like being prompted to unlock a certain calendaring feature while trying to get work done.

So Readdle is looking to move some of its business beyond the iOS App Store: by building up its software into an enterprise product because “we don’t want to have to rely on the App Store.”

For Hatch, as of last week at least, Ryu is thinking of charging up front. “But, then again, balanced against this past week of wondering where the paid market will be going, maybe we’ll start paid and move downward in price.”

“It’s a new world that we have to figure out or else we’re going to be stuck in the old dying world. I saw that happen with Mac developers: when the App Store opened up on the iPhone, they had a big head start, but out of matters of principles and politics, didn’t (take it). I saw so many Mac developers not make that transition,” said Ryu. “We have to make that next jump. I hope we’re not those people.”

Thumbnail image credit: Kelly Bumford via Compfight cc