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Under the Radar

303: Raising Prices

 

00:00:00   Welcome to Under the Radar, a show about independent iOS app development. I'm Marco Arment.

00:00:05   And I'm David Smith. Under the Radar is usually no longer than 30 minutes, so let's get started.

00:00:10   So today, I think what we wanted to dive into was the topic of pricing, and specifically arriving at that price,

00:00:18   how do you determine what is a good price for your product, your app, your subscription, and then also dealing with some of the topics that I think are more relevant for you, Marco, recently in terms of the concept of if you decide you want to change your price,

00:00:29   how do you do that? What are some things and considerations to go around that? Because I think ultimately, it's a very important thing to give great thought to, because if you're trying to run a business, the amount of money you generate on the front of your business is what are you selling and what are you selling it for?

00:00:49   And the amount you sell it for multiplied by the amount of times you're able to sell it will be the revenue that your business receives very straightforwardly. But it is not straightforward, I think, to determine what the price of any given thing could be, because there's lots of different things that you're doing to balance out in that process.

00:01:07   Because the price you set for something will also have a direct effect on many other aspects in terms of the way that your subscription is viewed, you know, is it a premium experience? Is it not a premium experience? Are you trying to structure your business to maximize short term revenue, long term revenue?

00:01:23   Are you not even trying to maximize revenue that can be something that you could be very reasonably trying to do that you're just trying to cover the costs, like especially if this is more of a hobby project or something that the intention is not for it to get, you know, get large in terms of revenue, but potentially you would love it if it had was large in terms of customers, like that would be a perfectly reasonable and rational way to price something.

00:01:45   But the first step, I think, as with many of these things is to think about and understand for yourself, what it is you're trying to optimize for. Are you setting your price for which of those dimensions sure, you know, short term revenue, long term revenue, size of subscriber base, or you just you just trying to follow the market, maybe those last like the fourth thing you could be trying to do, and think which of those makes is a better fit for you.

00:02:08   And some of these decisions will be sort of be made for you automatically, especially if you have run a system that has a particular fixed cost associated with it, you know, so usually the classic one for this is you make a weather app weather apps have costs associated with gathering the data for them.

00:02:23   You can't price your your app below what your costs are, because you will just gradually run yourself out of money, which is something that I did years ago with I used to make a weather app called check the weather, which was at the time there was no subscription pricing. And so it was an upfront price.

00:02:39   I thought I was charging enough. And it turned out, essentially, I charged enough to cover like a couple of years of data for each user. And what ended up happening is, after the app was around for longer than that, like four or five years, and I had no new revenue, I was essentially just paying putting money into this app and losing money every every month in terms of paying for data costs, and eventually had to shut down the app.

00:03:02   So you have to be careful about this, you have to make sure that you're you're you're setting your pricing upfront to cover whatever your costs are. But then beyond that, it's a question of, you know, which of these dimensions are you trying to optimize for?

00:03:13   Yeah, I had a similar problem with Instapaper back in the day, you know, Instapaper, I never had a good subscription revenue model for it during my ownership of it. I for the most part, it was a it was a free app and a paid app. And you would you would buy the paid app as a one time purchase if you wanted to. And and that setup was good for a while. It was great for a while. But the problem with that kind of thing is like, you know, it's it spiked up in revenue, had a few great years, and then we just going down down down once once I couldn't count.

00:03:42   On the growth of the user base, because, you know, back then, you know, Instapaper was in the App Store, you know, on like day three or whatever in 2008. And then I had a great sales spike with the growth of the iPad in 2010. And if you and like a pay once model works just fine, if new possible customers are constantly coming in the door.

00:04:05   So it worked great back then, because the you know, the iPhone and the iPad were still growing substantially over time. Like that's that's one of the reasons why even though Instapaper had very little to do with Christmas, my sales would always spike on Christmas, because a lot of people were unwrapping their first iOS device on Christmas every year for a while.

00:04:28   And then every year, that effect got a little bit less, a little bit less, a little bit less, as the market kept growing and kept getting more saturated. And as more people kept getting replacement devices over time instead of their first iOS device.

00:04:39   And so what I should have done and failed to do then was change to recurring finance model of some form, some kind of subscription or something like that, or ads in some kind of recurring income, I should have converted to it back then, once it was clear that the growth of the market and the growth of the potential user base was slowing down.

00:04:57   I didn't, and therefore my income just went down over time. And that's part of why I ended up having to sell it, because it just, you know, financially just was not performing well towards the end.

00:05:08   And so with Overcast, I've gone through a number of these different types of phases, but it was really only the very first year that I tried the pay once model.

00:05:19   Then in year two, I tried some kind of like patronage kind of model, like kind of let's volunteer to, you know, maybe give me some money if you like me, and that didn't work very well.

00:05:31   So starting in year three of Overcast, I just had ads plus subscription. That was it. That became the model.

00:05:38   That was 2016. That was eight years ago. And so I, back then, obviously things were a little bit different in the App Store and in the landscape. I set a price back then of $9.99 a year U.S., so 10 bucks a year, and similar equivalents of most other currencies, and that was it.

00:05:58   And I have been sitting at 10 bucks a year since then. I've never changed the price. 2016, eight years ago. As a result now, things are, you know, I make good money from it, but when I look around the market, I'm starting to see like I am dramatically underpricing myself here.

00:06:17   Because I looked around, a lot has changed in both the podcast app market and in just the overall app market in the last eight years.

00:06:28   Subscription pricing back then was a risk. Now it's the norm. Back then, 10 bucks a year was considered like a decently mid-range price.

00:06:39   Now I have a hard time finding any like decently popular app in the App Store or decently featured app in the App Store that has a subscription that is in that range.

00:06:53   Like usually they're either free totally and they make their money some other way, or if they're subscription priced, they're way more than 10 bucks a year.

00:07:00   So I'm finding myself now, like, you know, I have to, I think, revisit this pricing. I even looked like all of my competitors, like I did kind of an audit of whatever podcast apps I could find that had subscription pricing.

00:07:13   And podcasts, again, podcasts are also weird now, but for the most part, and there's not that many left that are like this, but for the most part, they're either free as part of some big service like Spotify or YouTube or Apple podcasts.

00:07:26   Or they are subscription priced and those prices, you know, I'm at 10 bucks a year, all of my competitors are like between 25 and 40 a year.

00:07:36   So they're way higher than what I'm charging. So I've reached the point now where, you know, I've realized like I am leaving a lot of money on the table.

00:07:45   And, you know, not only does that kind of feel crappy from that point of view, and I'm trying not to do the math in my head of like how much I'm losing per month potentially by not raising the price, because that's just a recipe for sadness.

00:07:57   But I am now thinking like, okay, I'm going to raise the price, it's just a matter of to what and how, because it's clear to me that like, you know, pricing, not only am I leaving money on the table by being like a third to a quarter of the price of most of my competitors,

00:08:15   but that also sends a signal, marketing wise and value wise, that's in the signal that I think I'm only worth a quarter of their price, or for some reason I'm doing this where I'm getting like four times the paying users as they are or more and so it's worth it.

00:08:30   And I don't think either of those are true. I really don't think I'm getting that many more paying users at $10 a year than I would get at 20.

00:08:38   Because when I look at who my users are and like, you know, how they've stuck around over time for so long and I actually have a pretty decently high percentage of the user base as paying subscribers, so that tells me these people love my app, like they're really dedicated.

00:08:52   And so I look at that and I also see like, am I actually, you know, am I delivering a quarter of the value of other competitors?

00:09:01   No, we have very similar features, we have very similar apps, like, you know, for the most part, I'm actually, maybe I'm giving away too much even in my free tier.

00:09:10   So it's very clear to me that I need to raise this price and so I'm going to do it.

00:09:15   So now just again, the question becomes how and when and how much?

00:09:21   Yeah, and I think starting maybe with the how much question is the interesting one for like, in your case, you have the benefit of a market that you can compare yourself to.

00:09:33   And in a weird way, sometimes I appreciate that when I have a competitor who seems very, like, well funded and big compared to me, where I have this vague expectation, whether it's true or not, that they've done lots of the A/B testing and experimentation and market research and all of the things that I probably should do, but have not done.

00:09:56   And then you look at them and say, Okay, well, what are they doing as a result, because I don't think they're doing it out of foolishness, they're doing it out of some other, you know, sort of value and thing that they're trying to accomplish and having some success with it, otherwise, they would have changed the price.

00:10:11   And so it is useful in your case to have that sense of it's like, okay, this is a reasonably sort of like fair market value for what value you're providing to someone. And so you have that as like an anchoring point.

00:10:26   I think you have the other kind of anchoring points of just there's a sense of, like, I don't even know, I feel like there's a certain intuition that I have for these things. And I know I should be, I should probably pay less attention to this than I do. But it certainly is something that I think about of the, how would I feel if I was being asked to buy for this, you know, buy this service, this product, whatever it is, what I think that's a lot of money, what I think that's not a lot of money.

00:10:49   And that one's a dangerous one, because I'm not necessarily my average user, I'm not my typical user, I'm me, and I'm just one data point in a wide range of things. And the way pricing works is, in some ways, you can get into price segmentation, where you're trying to price for different types of users and charging them different amounts.

00:11:09   Like, in theory, that would be the maximum way to kind of optimize, because naturally, as you for most goods, if you increase the price of a good, fewer people will be willing to pay that amount. And so you're trying to find this sweet spot where the, you know, the the number times the price is the highest, unless you can segment further, but it's like where I am on that.

00:11:27   If I optimize for that, which is unfortunately, probably what I often do, is I'm choosing one data point, and that just happens to be where I am, rather than where the number the largest number of paying users for my app would be. And so I think that's certainly something also to keep in mind that it's, you know, and it's nice, I think it's like, I love it when apps have low prices in some ways, because that's better for me.

00:11:48   That isn't necessarily better in the long term, you know, longevity of something like in the example you just gave of Instapaper, right? It's the, if overcast subscription was say, two or three times more than it is now, it was 20 or 30, or even $40 a year, would that make it more likely that the app sees faster, stronger, longer lived development? Like, maybe.

00:12:11   And like, that's, in some ways, what a lot of users are paying for, once you're sort of past the costs version of this, that once your server costs, even if you say, like, if you paid yourself a basic development, you know, in terms of is this if I was just a regular Swift developer, what salary would I make, you're kind of reaching that point.

00:12:30   The excess you're getting beyond that is almost just like generating excitement, interest, motivation, to keep going, because money is a useful motivator, it is a useful tool by which we often measure our success and the usefulness and the value of the time that we're putting into something.

00:12:46   And so in some ways, what they're buying, you know, is your attention there. And I think in this case, I completely agree $10 a year seems very low, and seems something that could be increased. And I think, straightforwardly, it's like, because you're starting from such an initial low point, you have a lot of space to play with in terms of even doubling your price.

00:13:08   Still, it would not be particularly expensive. You know, all of the subscriptions that I have right now, in my apps are $2 a month or $20 a year, which increasingly I'm starting to feel a bit of like, you know, those prices, especially given what inflation has been in the last four or five years.

00:13:27   It's like, I think overall inflation since 2020 is something like 20% or 21% in the US. It's like, that's a pretty substantial amount. And so I should potentially be looking at making my, you know, my pricing more like maybe $3 a month, $25 a year, something like that, like if I was just trying to keep up with inflation and not be sort of losing money in real terms.

00:13:50   I think that's an interesting place to be, but I think there's a lot of us, it's hard to want to change something because whenever you change something, you have the fear that you're going to like just ruin everything, it's all going to burn to the ground and terrible things are going to happen.

00:14:03   And so I find it very scary to actually go in to App Store Connect and, you know, sort of make a change like that.

00:14:09   That's why I never have. I mean, and I also did the inflation calculation myself and like, you know, if I really because I have not really like any price that you've had for a few years that you have not raised, you're basically discounting yourself from the past because of the inflation has been so strong.

00:14:27   So like, you know, right now, like, you know, if I do like the calculation, like if I, you know, what is 10 bucks a year now worth eight years ago, it's actually $7.60. So or like, you know, if I had been raising my price with inflation and started at 10 bucks eight years ago, then this year, it should be $13 a year.

00:14:45   So that's a substantial difference. You know, that's, so I'm basically offering a price drop every year I don't raise the price. And also in during that time, you know, you look at the App Store as a whole and a few things have happened.

00:14:58   Number one, the move toward subscription has gotten even more aggressive. You know, back then, not every app was subscription priced. Now, almost every app that has a way to pay for it at all is a subscription payment. You know, again, many apps are just free with ads or through other business models through their, you know, backing services or whatever.

00:15:18   But if the app processes your money at all, usually it's subscription based now. And like, this was also enlightening, you know, I went on a little exploration over the last couple of weeks trying to find apps offering me certain features for sleep tracking.

00:15:30   I was looking at all these different sleep tracking apps, and they all are like 40 bucks a year. And so when you start looking around the App Store, again, like look around at full featured apps that are established, that have, you know, good features, good reviews, good user bases.

00:15:45   They're all in that range now. It's very hard to find one that's not. And also, Apple seems to have relaxed the rule that it used to be that if you had an in-app purchase, then if you didn't purchase the in-app purchase, the app had to offer some kind of minimum functionality for you.

00:16:02   That seems to no longer be the case, policy-wise. So now, it seems to be totally okay with the policy, because I found a few that did this, that you can, as part of your onboarding flow into your app, just put up the subscription thing, and you can require the user to start a free trial for the subscription, to actually go through the purchase with a free trial for any functionality in the app.

00:16:24   So what we effectively have now is trials plus subscription, like as a required business model that you can use in your app. So what this has done, and you look around, this has pushed prices up so much for apps that have a reputation on user base.

00:16:39   So that has happened. And then what has also happened in the intervening eight years is Apple has added the ability to change the price of a subscription without losing all of your subscribers.

00:16:49   There are certain bounds on this, and you see this, I believe they did it for Disney Plus a couple years ago when they did that Christmas price raise, but now every streaming service is doing this, where I'm getting an email, I can tell you exactly, it happens about once a year.

00:17:03   And there's a reason for that. I get an email about once a year saying, "Oh, Hulu is raising the price of your subscription by a dollar," or whatever.

00:17:11   So the current policy on the App Store is you can raise the price of a subscription to whatever you want, but if you raise it by more than $5 or 50%, more than once a year, everyone gets opted out.

00:17:30   But if you raise it under that cap, if you raise it by $5 or less, and it's only once a year or less, people get opted in by default. So they'll get an email, the ones I get from my streaming services, they'll get the email saying, "Hey, next time you renew, this is gonna be this new price, and you can cancel if you want, but if you don't do anything, you don't cancel."

00:17:51   So I do have a very strong incentive now to raise my price by $5 a year until I reach whatever I want it to be.

00:18:00   So I have some time to dabble in other things, but that's probably what I'm going to do starting pretty shortly.

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00:19:39   I think absolutely we're going to change our prices, I think as we're talking ourselves into this. And I think the next question is sort of like the actual mechanics of doing that and finding the best price and you know, taking advantage of the mechanisms that Apple has there, I think makes a lot of sense. And I think when I've been trying to think through this through for myself, I think something that I've sort of hit on is one of the advantages of a subscription model is that you have both a kind of, you have this archive of users or this catalog, like you have this large

00:20:08   base of users who are subscribed to your app. And that is like the magic of the subscription system is that you have a group of people who have agreed to pay you money in the future. Awesome. Also, every day, you present users with the opportunity to become new subscribers. And I think what is really interesting to me, and this is something that I'm just starting to explore myself is the sense of, you can use the new users as a way to discover price sensitivity, price value, how

00:20:38   valuable your app is to people, because you aren't don't have the baggage of trying to change something from their expectations. You know, this is if this is a brand new user who's never seen your app before, the first time they open your paywall, and they see that the price is $20 a year. If you're you can look at that, and you can look at the conversion rate of that. And you can very easily, to some degree, like mathematically work out, okay, at $20 a year, how many users to what would I get at $15 a year, how many users would I get at $45

00:21:08   a year, how many users would I get. And I think what's interesting to me is starting to explore and experiment. And I know there's a bunch of tools that people, I think, I know revenue can, I think, has a whole tool set up for this. But there's a lot of ways you could approach that, you know, in terms of whatever made sense for your, your approach, but I think it is useful to then use the opportunity, you know, the opportunity of having new customers as a way to gauge what is a good number. And then when you go to the place where potentially you're up, you know, increasing the price on existing users, which will naturally be

00:21:38   something that increases your churn rate, I would expect, you know, if you anytime you're going to raise the price, some number of people are going to go away. But at least you're not doing that blindly. Where if you've done a bit of research with your new subscribers, and it seems like saying you're, you know, it's like going from 10 to $15. You know, $15 has almost the same subscription rate as the $10 did in your in overcast, for example, you could have some confidence that if you go from 10 to 15, your churn rate is not going to be 90%.

00:22:08   That you're not going to suddenly lose all of these people, you're going to lose some you're in, you know, that's just the nature of what's happening there. And hopefully, you know, you lose fewer than the number of the increase. And so you overall come out ahead, which would obviously be the the long term hope that if you raise your netcase, if you raise your price 50%, and you only lost 20% of users, you probably have come out ahead. But it's I think it's an interesting way to view this in the way that at least I'm expecting to start approaching and starting to think about pricing is, you know, doing my experimentation,

00:22:38   on my new customers, to understand where the best price would be like to sort of you have a bit more of a range there that you could, you're not the in terms of Apple's rules, you can set whatever price you want to some degree. And there's some complicated mechanics in terms of the actual like App Store connectedness of that, like are you creating a new product that you're showing people inside of your existing subscription group, and it's like, it's complicated. But broadly, you're able to, I think, experiment a bit with understanding what you price you want, and then you can move towards that with

00:23:07   within the bounds of what Apple lets, you know, so you can only increase by certain amounts. And if you do, if you, you know, if you're in overcast case, if you find that really the best price for overcast is $25, you can feel pretty good about increasing your price by within the rules that Apple has, and not feel nearly as worried, I would think.

00:23:25   Yeah, and I think that's that's what I'm probably going to do, you know, over the next coming months, like, you know, I do want to work on some features to add to premium, so that I'm not just raising the price with no new features being added, that that's probably not a great recipe for good sentiment among users. So so I am working on new features for it. But ultimately, it's not going to be anything like, you know, massively mind blowing, it's going to be basically the same thing, just, you know, you're doing it mostly to support the app, and maybe to get rid of the ad on the now playing screen, like a couple other features, it's gonna be that that kind of thing.

00:23:55   But, you know, I do intend to do a lot of experimentation over the over the coming months, and things like, you know, trying out different price points on new subscribers to see, like, you know, can I can I, you know, create a new subscription within the same subscription group, or however that's going to work, you know, only show it to new users, let let existing users keep buying the current one, like, you know, that kind of thing, like, there's all sorts of room for that kind of experimentation. And that's kind of what I had to do, you know, model out, you know, this seems to be the churn rate when I raise the price by this, and then therefore, what is worth it. And that's,

00:24:25   you know, it's, it's kind of unfortunate whenever the answer to, to a question of in development is like, well, just try it and see. Because, you know, that's, that's obviously quite a process, it can have some downsides, got some costs. And sometimes the answer is not clear cut until you try it. But that's, I think the pricing is one of the things like it's it's so it's so psychological, it's so much based on perceptions and feelings, you know, because the reality is, like, it doesn't really matter if

00:24:54   like, for somebody who's using my app, if they're paying 10 bucks a year, and I raise it to 25 bucks a year, that's probably not going to make a difference, whether that person can afford it or not. So it's not really about affordability in when you're in these kind of price ranges. You know, because usually somebody who can't afford a $10 a year purchase in your app, probably also can't afford 25. And vice versa. So it's more about perception. It's more about like, people don't like to feel ripped off. They don't like to feel fooled.

00:25:24   They don't like to feel railroaded. They like to support things that usually have some kind of exclusive content. You know, they and people value content differently than they value software. So there's all sorts of different perceptions and pricing psychology going on here that you have to consider. And because of all that, a lot of times, really, the only the only good answer to what should I charge is, try it and see see how people react react in real life, basically, which again, is not a satisfying answer.

00:25:54   And it takes some time to really figure it out. But then once you do that, you know, the payoff can be can be quite substantial.

00:26:01   Yeah, and I think the other form of experimentation that I think this kind of pricing discussion think that makes me think about is the concept of discounting and having multiple price points for the same thing, which is something that I don't think either of us have particularly done. And it's it just makes me think of if the you know, it's like if the fair price of something is $20 a year, and I show the price as being $25 a year with a $5 discount, it feels weirdly, and this is just like pure

00:26:31   psychology doesn't make any sort of sense rationally feels like you're getting a better deal. And I think increasing pricing in a weird way also allows more space for that kind of thing, that you can create these different price points or have different opportunities where you can have a sale on Black Friday or whenever. And it would make sense for your users in a way that you just if you are pricing initially at a much lower amount or closer to your costs

00:27:01   are closer to the kind of like the minimum that you would feel good about, you just don't have a lot of space for those kinds of things. You don't have a lot of space to raise your, you know, to lower your price, because your price is already as low as it can go. And so that's the other aspect of this that when I think about my pricing, that I'm starting to sort of lean towards is like, it also creates that opportunity, and it creates the ability to be more flexible in your price in some ways. And I think there are some interesting options that and things that you could do as a result of that where you

00:27:30   can, if you have a higher price, you that doesn't mean that that is the price for everyone forever. You also are creating more space to other for other forms of experimentation. And I mean, experimentation is one of these things that I both love and hate, because it isn't, it isn't development. That's the thing that I enjoy the most I enjoy building features, not experimenting and spreadsheets. Like I enjoy the spreadsheet part like that. That's very enjoyable to me. But the actual like, building this building the infrastructure or incorporating the infrastructure to

00:28:00   actually do the experiment and running the experiment feels like a certain kind of busy work to me that I don't enjoy. But, I mean, the reality is, if I want a viable business that has a sustainable future that is motivating for me to continue to work and grow, like these are I think, just like these are the table part of the table stakes of getting that done. And I just need to sort of lean into that a little bit and not get too stuck on just the shiny next new feature.

00:28:25   And also, I think by one of the biggest lessons I've learned here is don't stay still in your business model thinking or your pricing thinking. These are evolving things. And the market has changed so much in just the last five to 10 years. You know, any assumption you've made about pricing in the past or your perceptions about pricing in the past probably need to be revisited. And I've learned, like, I think what I'd like to get to is a point where maybe I'm increasing the price every year, just like the way Hulu does.

00:28:54   Maybe I increase it, you know, once I get to a stable point, maybe I increase it by a dollar a year. That way everyone kind of just gets used to the fact, yeah, this goes up over time like so many other things. You know, there's so many, you know, assumptions that you should challenge every year, every couple of years about your app and about your business thinking because, you know, we're not sitting in a vacuum here. This is, everything around us is changing all the time.

00:29:15   Yeah. And I think maybe lastly is understanding that what people are paying for is the value you provide to them. And if the value continues, then their desire to continue paying continues. And I think valuing yourself in that way is just an important aspect of this and saying that if you raise the price for it, like my fear is always that everything's going to go away. But the value I'm delivering has not gone away. And so it is not, I shouldn't be quite as scared as I as I naturally am as a result.

00:29:40   Thanks for listening, everybody. And we'll talk to you in two weeks.

00:29:43   Bye.

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