If you’re building a mobile app that you plan to sell, you’re probably thinking about what price to charge. That means you’re trying to decide what one-time payment you’ll ask people for in exchange for using your app, which is what just about everybody who sells an app does. However, new research suggests that you should, instead, be thinking about a different payment scheme altogether, like pay-per-use, and, no matter how you structure the pricing, you should offer a free trial first.
In a newly published paper titled “How to sell an app: pay-per-play or buy-it-now?” researchers from Microsoft, the University of Washington and the University of Wisconsin-Madison argue that traditional app pricing, which charges a one-time fee to users in exchange for unlimited use of an app (which they call a Buy-It-Now, or BIN, price) is based on a traditional economic assumption that users know the value of a given product to themselves before they buy it. If the price is less than or equal to that value, the consumer will buy it.
The authors argue, though, that, in reality, consumers often don’t know the value of an app until they use it. Plus, that value can change with each use. For example, you may not know if or how much you like a song until you hear it, and the more you hear it, the more you may like it. Or, you may like a game for a while and then get sick of it. This introduces uncertainty, which can also affect what people are willing to pay for a product.
The BIN model doesn’t properly account for this type of behavior and the authors theorize that alternative pricing models, such as ones which charge consumers on a per-use basis (Pay-Per-Play, or PPP, as they call it) and/or one which allows for a free trial before buying might make everyone, both consumers and producers, happier.
To test their theory, the authors constructed mathematical models to compare traditional BIN pricing versus alternative PPP app pricing schemes. Without attempting to explain the math and statistical theories behind it all, I’ll share what I read as the two key take-aways from their findings:
Pay-Per-Play pricing can make everyone happier
The researchers demonstrate that, in theory, there’s a fixed Pay-Per-Play price that can generate more revenue for the producers and greater utility for the consumers than they would get under the usual BIN scheme. This is because the PPP approach allows for price discrimination, meaning producers can effectively charge different prices to different consumers, depending on how much they value the product. In short, PPP will get some people to buy who wouldn’t under BIN and others to pay more than they would have, because they value the app so much. The net effect is everyone does better.
“In other words, the PPP scheme grows the total pie and hence gets a bigger share of the pie.”
Free trials are always worth it
Offering a free trial for an app, that is, a fixed number of times consumers can try it for free, can lead to more revenue for the producer, the authors show. They demonstrate that, even for a BIN model, offering a free trial first allows for even better (“near-perfect”) price discrimination. If people don’t really know how much value they’ll get from something, letting them try it first may encourage more people, ultimately, to buy. That means producers will (nearly) capture the maximum amount of profit. A free trial combined with PPP, they find, is the best approach of all.
Of course, this is all just theoretical, based on numerous assumptions; it’s not an empirical study. There’s also a lot left undetermined, like, how would you figure out the optimal PPP price? Still, their arguments are persuasive and, as they point out, the technologies already exist to support such alternative PPP pricing schemes for apps, so they seem be worth considering if you’re an app maker. At the very least, you might want to think about offering a free trial first.