The $0.99 (App) Store

I was going to hold off writing this article, but after reading this open letter to Steve Jobs from an iPhone developer I just couldn't.

Mr. Hockenberry isn't the first to argue that iPhone apps are too cheap. So, what gives?

Marketing v. Distribution

The problem is that the App Store is a distribution channel (and a very good one, at that), but developers are using it as their primary means of marketing. Distribution and marketing aren't one and the same, and this tension is why developers are feeling pinched.

Distribution is the "how," as in, how do you get your product to your customer? Wal-Mart, Target, and your favorite mom-and-pop store are distribution channels. Malls are a way of aggregating distribution channels and amortizing the fixed costs.

Marketing is the "why," as in, why do your customers want to buy your product? Marketing channels like TV ads, direct marketing, etc. are about getting your message in front of your customers and convincing them they should buy your product.

For iTunes apps the only significant distribution channel is the app store itself. Unfortunately, the primary marketing channel is getting your app on one of the featured lists on the front page of the app store.

Why Apps Are Cheap

Here's a thought experiment. Pretend Borders is the only book store in the world and that they put their best-selling books closer to the front. 10,000 people wander in and out of Borders every day. People are five times as likely to buy the books out front versus the ones in the back.

Now imagine there is only one prime spot and two books that share the same demand curve. What happens? The one that has the lower price gets a 5x boost in sales, so each publisher tries to undercut the other until they're both priced at near-zero.

And if one of them is willing to put ads in their book, well, they're happy pricing their book at zero from the start.

This is the app store as it stands now, more or less. Marketing is about stimulating demand. App developers are confusing the app store with a marketing channel, and the only way to stimulate demand in that environment is to violently slash prices.

Beyond the App Store

There are two ways to increase demand: by lowering your price, or by marketing.

The app store is a store just like Borders or Wal-Mart. They make their money by distributing lots of goods that other people make and taking a cut, so of course they give premium spots to the apps that sell the most.

App developers, however, are acting like the people in the store are the only people in the world. The only way to stimulate demand is to lower the price and hope for that premium spot.

Instead developers should look for creative ways to stimulate demand outside the app store itself. Lower prices aren't what convince you to buy Beyonce's new album at the record store, it's the other way around. Beyonce's multi-million dollar marketing campaign is what convinces you to go into the record store in the first place.

The first iPhone developer to capitalize on this will make a big splash and reverse the $0.99 App Store trend. Just remember to link to this article when they do.