Chapter 10

The mysterious art of app pricing

I often envy the designers of physical products, who can calculate the real cost to produce a single widget, tag on some industry standard markup for profit and logistical middlemen, and arrive at a marketable price for their product.

Calculating the best price for a web app is more difficult, because relative costs can dramatically decrease with each new customer, and the service has to sell itself on fundamental value rather than physical worth or visible build quality.

App pricing is a continuous process of discovery rather than a one-off calculation, and in all likelihood you will never determine your optimum price. It’s probable that you’ll lose some revenue by charging too little or too much, so don’t spend too long worrying about the perfect price point. Work out a ballpark price that seems sensible, get started with it and go from there.

If software pricing is an art, it’s more of a Pollock than a Constable, with haphazard splotches of information that you must somehow piece together and make meaningful.

In this chapter we’ll look at some basic economic and pricing theories that can help you to determine a practical initial price for your app.

Cover your recurring costs

Your app price should not be dictated by costs except as a minimum safeguard to ensure that your chosen price delivers sufficient revenue to sustain the app, covering overheads.

Disregard the cost of development. This includes any and all costs outlaid to bring your app to launch, which we’ll treat as a sunk cost. Whether your app cost $10 or $100,000 to bring to market, it has no bearing on the acceptability of the price to the end user. This development cost will eventually be recouped from profits.

What we are interested in is any longer-term costs that eat away at our cash in the bank. We call these fixed and variable operational costs, and your app sales revenue needs to equal or exceed these costs before your money runs out.

Fixed costs remain constant over a period of time.

Variable costs are incurred per customer.

Once you’ve determined the fixed and variable cost figures for your app, you can calculate the minimum break-even price using the following equation. Ensure that you use the same time period (one month, for instance) for all fixed costs.

minimum break-even price = variable costs + (fixed costs ÷ number of paying customers)

Of course, you don’t have any customers yet so you’re going to have to use your best judgement to make a conservative guess. If your fixed costs were calculated over a year, estimate the minimum number of customers you can expect at the end of year one. Be realistic and choose a number just above what you would consider failure, for example 0.5% of the market. If you don’t have enough cash to support the fixed costs over a year – if you need to break-even sooner – calculate your fixed costs over a shorter timescale and adjust your expected customer numbers accordingly.

This figure is the absolute minimum price you should charge each customer so that you don’t lose money over the timeframe used to calculate the fixed costs. To calculate the monthly break-even price from an annual fixed cost, simply divide the figure by twelve.

Ignore the competition

Your app won’t exist in a vacuum. External forces such as competitors will influence your customers’ perception of your app’s price.

Price your app too low and what appears to be better value could come across as lower quality. Even worse, you may start a price war that the incumbent leader’s economies of scale are more likely to endure, or that eventually bankrupts everyone. Price the app too high and your apparent sophistication could be interpreted as greed. Worst case: you may find it difficult to attract any paying customers. Price your app the same as your competitors and you might communicate that there’s nothing unique about it, so there’s no reason for customers to move to you.

You can’t win. This is why, even if you do have direct competitors, you shouldn’t pay too much attention to their pricing strategies. Of course, you should acquaint yourself with them: keep them in mind for marketing and for when the inevitable enquiries about price come your way. Just don’t use them as a blueprint for your own prices. Ultimately, it’s better to price your app based on the value it provides to the end user.

The value of consumer needs

As customers, we have a finite number of fundamental needs that we’re willing to fulfil by parting with our hard-earned cash.

Time: convenience, efficiency, immediacy

We’ve all heard the clichés about shortening attention spans (the MTV generation, Twitter and the like) and our tendency toward increasingly busy, on-the-go lifestyles.

Whatever the reasons, more and more of us feel that we can’t fit enough into our day, and the temporary status of owning something before our peers do is becoming very attractive. We will pay to get somewhere faster (our commute to work), do something in less time (a boring chore) or get something early (the latest smartphone).

Examples and pricing guide


Heathrow Airport to London by train
There are two options for travelling from Heathrow airport to central London by rail: the faster Heathrow Express, or the slower and cheaper London Underground train. The Heathrow Express is about four times faster, and four times more expensive.

img-10_1_b shipping rates
There are three standard book shipping rates available (per shipment) from Amazon: ranging from the 3–5-day rate to the 1-day rate, which is about four times more expensive.


Royal Mail delivery prices
Royal Mail (UK) delivery prices have a more exponential costing structure: some of the special immediate delivery rates are proportionally a lot more expensive than the associated decrease in delivery time.

These examples suggest a simple pricing structure for time: you can charge for a service based on a multiple of how much time it saves. For instance, if your app allows a user to perform a task three times faster than their current software, then you can reasonably charge three times the price of their current software.

The Royal Mail example indicates that for specialist (business or emergency) needs, rather than standard, everyday consumer services, this multiple can be increased as much as five or six times. If your app offers a specialist function that provides something twice as quickly as another service, in some circumstances you could charge 2 (for twice as quickly) × 5 = 10 times the price of the other service.

As a rule of thumb, however, stick with the simple single multiplier: charge a single multiple of the current price that is directly proportional to how much time you save the customer.


There are numerous industries based almost entirely on the value of scarcity: art, antiques, oil, collectable vinyl, autographs, land and more. In some cases this value is entirely intrinsic, such as art, and has little relation to an object’s practical utility. Other commodities, such as oil, are valuable because they are both scarce and useful.

But products don’t automatically acquire value by being unique or scarce: there must also be an element of demand. On the web, we can interpret scarcity in a number of ways. First, because we use unique textual identifiers (names) to access services, there is value in more memorable and, hence, scarce names. Currently, this mostly applies to domain names but the practice is also filtering down to other services, such as Twitter usernames.

The second method, similar to oil production, is to purposely limit the supply to artificially inflate the value. Online, this model usually takes the guise of a limited membership website, such as Beautiful People1 (an online dating service where membership applications are vetted by the community) or by invitation-only services such as The Deck2.

Examples and Pricing Guide


Most expensive domain names
There are currently over 95 million active .com domain names3. A standard .com name can be registered for around $10 but, as the graph on the left shows, scarce, memorable names (such as and have been sold for many millions of dollars: up to a million times more than the standard price.


Price of precious metals
The graph shows the price of precious metals relative to their rarity4, in terms of quantities on the planet: their mass abundance. Silver occupies the bottom-left of the graph, with rhodium in the top-right.

Although a relationship does exist between supply, demand and acceptable price, it is difficult to determine how scarcity affects price. Nonetheless, it is a useful model to consider when identifying possible pricing structures and generating excitement about your app. Owing to scarcity, invitations to Google’s Gmail and Plus apps were sold for up to $75 on eBay when they were initially launched5.


We pay for comfort in a variety of ways. It influences the types of hotel we will – and won’t – stay in, the optional extras we choose for our car, and the size of monitor we use for our computer. Digital comfort comes in a number of forms.

Advertising is often deliberately inserted to cause us discomfort, to get our attention, such as interstitial pop-overs that require manual dismissal, or forced interruptions that periodically disrupt our use of an app. Spotify Premium and nagware in general charge for the comfort of removing annoyances.

It could also be argued that usability constitutes a form of comfort. It’s not just the efficiency gains of usable software that increase its value (like time discussed earlier), but also the more pleasurable, comfortable experience that ensues.

Examples and pricing guide


Return train, London to Cardiff
Apart from a few minor perks, the only perceivable difference between the first class and standard class train ticket from London to Cardiff is the comfort: larger seats, personal space and less chance of screaming children. For this comfort you pay a premium almost three times the standard price.


Return flight, LHR to JFK
A return flight from London to New York offers a range of seating options. Again, apart from a few minor perks, the only difference is the comfort: you still leave and arrive at the same time. Depending on how much additional comfort you require, you can pay a premium twice or five times the price of economy class, or even fourteen times as much for the first class option.


Price of pillows
A major UK retailer stocks a variety of pillows of a similar size, with the price of the most expensive (soft goose down) being twenty-seven times the price of the cheapest (basic fibre filling).

Clearly it’s possible to charge a premium for comfort, however you intend on interpreting it. Keep in mind that the data doesn’t show what percentage of people actually choose the more expensive option, or the ratio of availability between the standard and luxury versions.

Also note that in these examples the same provider makes a range of options available, from low-comfort to high-comfort. This is called price segmentation, which we’ll look at shortly.

Esteem: desirability, self-image, ego

Consciously or subconsciously, many of us spend money to bolster our self-image, on purchases that raise our self-esteem. These include brand name clothes, makeup, tanning sessions, aftershave, haircuts, diet books, cosmetic surgery and larger status items such as cars.

Online, if we ignore the myriad websites offering us flat stomachs and white teeth, the most prominent examples fulfilling this need are retail stores, fashion and lifestyle magazines and blogs, and rating sites like Rate My Prom Dress6 and Hot or Not7.

Examples and pricing guide


Impact of self-Image products
The graph plots the typical price of a lifestyle magazine, lipstick, scent, a haircut, teeth whitening and cosmetic surgery, against a subjective impact that each has on the perceived self-image of a person, rated on a 0 (low) to 5 (high) scale.

The data implies an exponential relationship between the potential impact on a person’s image, and the acceptable price.

As a caveat, note that the data doesn’t take into account the longevity of each product: cosmetic surgery not only has a higher immediate impact on someone’s perceived image than reading a magazine but also a longer impact. This is worth considering when pricing self-image apps.

Belonging: relationships and affection

This is related to the previous category of desirability and self-image: the basic human need for relationships – friends, family, communities, partners – and sexual intimacy. On the web these range from generic social networking sites through to online dating services of all types.

Examples and pricing guide

Most social networks are free and dating websites average about $15–20 per month. A trend we can infer is that there is some correlation between price and the probability of intimacy: if your app has a better success rate than standard dating sites, you can charge more than dating sites.

Survival: health, safety, wellbeing

Our physiological needs – nutrition, safety, health – are our most basic needs, but ones that we often take for granted, especially in developed countries.

Web resources that fulfil these diverse needs include online grocery shops, recipe websites, online pharmacies, and maps that allow us to browse crime rates in areas where we are looking to buy a home.

Examples and pricing guide

A price guide is difficult to extract due to the diversity of services and products covered under this topic, but similar to the belonging category, we can identify a general pattern. There is some correlation between the effectiveness or impact of a product or service and its price: from the single-digit price of vitamins that may not have an observable effect, to six-digit prices for life-saving operations. The more effective you can make your app, the more you can charge for it.

Financial security: wealth, success, career, status

In western culture, financial security equates to freedom, though ironically, it is something that most of us dedicate a significant part of our lives to. Even if we don’t seek colossal wealth, many of us feel the need to achieve as much as we can in status or career.

As well as the more obvious wealth creation and management services (banking, trading stocks, job searches, business services) this category also covers any service that might potentially save or create wealth in the short- or long-term. This includes vouchers and coupons, training, gambling and any online resources we use to informally educate ourselves about our chosen career.

Examples and pricing guide


Investment vs control
Some people pay $1 for a lottery ticket, through which they have no control over the outcome (choosing numbers does not affect the result). They also spend dozens on trading stocks (some control), hundreds on personal development and training (which gives them more control) and thousands investing in a small company or new business project (with almost absolute control of the outcome).

It seems that when spending money on services that are related to personal wealth and success, we evaluate them not only on the probability that the investment will make a return, but also on the amount of control we have over the outcome. The higher the probability and control, the more we’re willing to invest.

Entertainment: emotion, experiences

This broad category covers a range of topics, from the alleviation of boredom, through to our ultimate desire for happiness. These are not physiological needs that govern our existence but, rather, the need for emotional satisfaction, perhaps one of our defining attributes as a species, exhibited as hedonism in its most extreme case.

Many popular online destinations fall under this category, including travel retailers, video and audio websites, online games and humorous magazines.

Examples and pricing guide


Entertainment price and duration
The graph plots typical prices against duration (factoring in replay/reuse) for various forms of entertainment: an individual MP3 download ($1), a CD album ($10), DVD ($20), rock concert ($25), video game ($50), book ($10) and week-long vacation ($1,000). These average out at about $5 per hour.

The $5 per hour average may explain the success of the $0.99 price tier for iPhone games. A large number of publishers create a wide selection of games which, due to the volume and iPhone App Store design, cannot be effectively tested or researched before purchase. A $0.99 price point may subconsciously register as “even if this game isn’t good, I only have to get 10–12 minutes of game play from it for it to be cost-effective”, which equates to playing it once or twice.

Intellectual stimulation: creativity, learning, expression

The final need is for creativity and the desire for knowledge. Sometimes this is tied to a deeper desire for wealth or success, but often the purchase of a musical instrument, a foreign language dictionary or painting materials will be simply for the pleasure of creating, expressing or learning.

A number of online services cater to this need, including art and photography websites, blogging, news sources and audio/visual creative tools. As noted, it is usually impossible to separate these as websites that specifically target the creative need, since they may also feed our need for belonging (community), potential wealth or career enhancement, and entertainment.

Examples and pricing guide

This category is also difficult to characterise. Many online resources are free, yet people will pay hundreds or thousands of dollars for musical instruments, photography equipment and other tools that allow them to experiment and express their creativity.

The demand curve

Let’s say that you’ve discovered the secret of successful human relationships. Other dating apps build complex intellectual profiles to match partners, but you’ve made the startling discovery that the only correlating factor that matters is taste in cheese. Brie lovers love brie lovers, and the mature cheddars can’t get enough of each other.

Your app, You Fondue, has a 50% better success rate than the average dating site so you’ve chosen a price of $30 per month, 50% higher than the average $20. At this price, your app attracts 160 customers.

If you increase the price, fewer customers will pay for the more expensive service. At $35 per month, you find that you only get 110 customers. Conversely, lower prices bring in more customers, and at $15 per month, your original customer number more than doubles to 325.

When this relationship between sales and price is plotted on a graph, it is called a demand curve.


The demand curve for You Fondue

This doesn’t tell us the whole picture, though. While large customer numbers are great for the ego, in business we want to maximise profits rather than customers. For the mostly fixed cost nature of web apps, profit is directly proportional to revenue.

The revenue for our web app is the monthly price multiplied by the number of customers. At $30 a month, with 160 customers, the monthly revenue is $4,800. At $15 a month and 325 customers, the revenue is $4,875. When these numbers are plotted on a graph, we can see the relationship between monthly price and monthly revenue.


Monthly revenue at each price point

We can see finally where the best price is for our app: around $25 a month produces the highest revenue and, therefore, profits.

This is great in theory, but in practice it’s difficult to test different prices, discover the shape of your demand curve and find the optimum price.

You could run A/B tests (see chapter 24) to show different prices to different customers, such as $20 to visitors from San Francisco and $30 to visitors from New York, or $15 to visitors who use Firefox and $25 to visitors who use Internet Explorer. This method is fraught with problems, however, and if discovered might lead to negative press, a loss of trust in your product and possibly even legal complications. It’s not a great idea.

You can increase your initial starting price to test a higher price point, while keeping existing customers on their previous rate, but this is a bit of a one-way street. If the higher price doesn’t produce better profits and you need to revert to the original price, you’ll be faced with messy refund requests and potentially damaging negative press. These aren’t necessarily long-term problems, but in the short-term they might end up costing you time and money that you can’t afford to lose.

A lower price point can be tested with a special offer, but this isn’t a perfectly safe method. One of the main pitfalls of using a discount to determine your demand curve is that a special offer price is psychologically different from offering a standard price at the same level due to the price anchoring effect of the higher regular price in the offer. In other words, the demand for a discount price will be of a different quality than for a regular price. See chapter 21 for more on this and other pricing psychology issues.

In fact the best way to determine your optimum app price is to give your customers a range of price options and let their purchasing behaviour identify the price(s) that produce the greatest revenue.

Price segmentation

Web apps can usually offer a range of price options by making available slightly different versions of the software, each with a unique price. Versions tend to differ by attributes such as storage capacity, number of features or maximum number of user accounts.

Offering different versions of a product at different price points is called ,em>price segmentation. A slight twist on the idea is price discrimination. This offers the same product at different prices, determined, for example, by student status or a particular club membership.

As well as helping to determine the demand curve, price segmentation has an additional benefit: it allows us to make more revenue than if we offered only a single version of the app at the optimum price. How can it do this?

Let’s go back to You Fondue, and suppose that we went ahead with the optimum price of $25 a month. We saw that there were some customers who were willing to pay $30 or more, but these customers are now only paying $25, less than they otherwise would have. Similarly, there are many potential customers who wouldn’t pay $25 but would rather pay less, and we’re not making any revenue at all from this segment of the market because the app is too expensive for it.

With price segmentation we can offer multiple versions of the app (at $15, $25 and $35) to capture more of the market at prices suitable for the various segments. Those who can afford more tend to gravitate towards the higher priced options, and those who prefer to spend less can opt for the low-end version.

Following this logic, it is tempting to create dozens of variations of an app with small increments in price, so that you can eke out the maximum revenue from every possible market segment. However, research8 shows that too much choice has two major negative effects.

Firstly, in what is known as analysis paralysis, an abundance of choice can over-complicate the decision-making process to such a degree that a decision is never made, and the potential customer doesn’t buy your app. Secondly, a large quantity of options can decrease the satisfaction that the user has with their choice and, therefore, with your app. In turn, this buyer’s remorse makes them more likely to unsubscribe and reduce future revenue.

Be restrained with your options. Choose a starting price based on user needs (if your app does something twice as quickly as the best competition, price it twice as high), and offer one or two versions either side of this price point. If you opt for five price points, consider reducing this down to three options once you have collected enough data to estimate your demand curve (with one price at the optimum price and one either side).

Basecamp9, the project management web app, has taken this approach. In 2007 the pricing page displayed five paid options, and it appears that from subsequent data the team calculated that the $99 option produced the optimum revenue. This became the predominant middle option when the page was later redesigned to display only three main prices (with two additional options that are practically hidden).


The Basecamp pricing page, July 2007


The Basecamp pricing page, July 2011


We can estimate the value – and price – of an app by identifying the common consumer needs that it fulfils. It’s worthwhile to frequently remind yourself what the base needs are that your app satisfies and how much value they are likely to have for the user.

To check that your app fulfils a basic need and offers something of value to a potential customer, you should be able to answer yes to at least one of these questions:

Web App Success book coverAlso available to buy in a beautiful limited edition paperback and eBook.

This work is licensed under a Creative Commons Attribution 4.0 International License.