PRICE ELASTICITY OF IPHONE APPLICATIONS
Time for some economics (don’t all cheer at once, yes I’m talking to you lot at the back wearing tweed sport coats).
Using price elasticity of demand (PED) we can calculate the likelihood of change in demand for iPhone application downloads as a result of a change in price for that download. Why should we do this? It is a common problem for creators of applications as to know what price to charge for them (if at all) – the internet audience loves freebies, but how do you get a return on your investment in development if you give things away for free? Surely you should be able to charge something?
I would assume that demand for iPhone applications, like many web-based applications, is highly elastic to price – that is, the change in cost of the application has a great influence over the number of downloads it receives. This seems obvious – but is it, and how elastic is this demand? How much could you change the price of an application download with the minimum reduction in the number of downloads?
Pinch Media, an application analytics company, recently released an aggregated download report from over 30 million application downloads. I used two sets of data from their publicly available case studies to establish what % change would occur in two different price change scenarios: a price cut, and a price increase. The first case study (A, above) yielded a massive uplift of downloads when the price was cut by 50% measuring a price elasticity of -20 meaning that, all other things considered equal, this application was very sensitive to price.
The second case study we used (case study C, above) yielded a decease of 50% in downloads when the cost was increased by 100%, measuring a price elasticity of -0.5 meaning that this application was conversely relatively inelastic to changes in price.
So what does this mean? On the one hand we have an application that is extremely responsive to changes in price, and another that doesn’t change a great deal relative to the change in cost. Are our two case studies inconclusive?
Not quite. What it does tell us is that consumers are choosing to pay and download applications based on several criteria, not just price. In reality all things are rarely equal – so you may have applications with differing levels of involvement, quality and competition that consumers are willing to download on based on their overall merits and not just price (or whether it is free or not).
In considering applications for clients or campaigns we should not be limiting our thinking to an application as an added-value only. Given the right idea, planning and development an iPhone application could turn into a revenue stream in its own right.
