Free or Paid? Pricing your app – Are you doing it wrong? (Subscription Options Included)
This is a highly interesting topic these days.
Because like a lot of other industries, shit changes.
And when shit changes, some are complacent, some are reactive and some are proactive.
Since 2012, I’ve seen a lot of things play out that I saw coming, but did nothing about. The last few years I stopped standing around watching and started acting regardless if people thought I was a little delusional.
As you may of guessed, that means more risk. You lose more, but when you win you can win big.
On subscription, the pricing strategy ties into your marketing strategy which ties into your resources.
Your resources probably tie into your capabilities.
Your capabilities tie into your interest of the actual app
Maybe not a direct interest, but an understanding of what your target users interests are.
What the hell does all this mean?
Real Life Example
In my last blog post I went over some numbers of a free to download subscription app we have. Like any actual reasonable person, I drink the kool-aid I pass out lol. I took a closer look at last weeks subscription blog post and re-read it as if it wasn’t written by me (really paying attention to the numbers). I then started to compare it to other apps.
(To read this previous post, click the title below)
- Current apps that aren’t free to download with free trail + subscription
- Apps in the pipeline for the holiday season
- Current apps that are free, but have traditional IAP’s
- Industry leading apps in a variety of categories that we’ve researched while building our own
After a few minutes I saw something that made me dig deeper.
There were (are) paid apps that could probably do better if they launch today with free + subscription. Now the tricky part is they probably won’t capitalize on this BECAUSE they already have a popular app that’s ranking great and bringing in big rev!
So they won’t cash in on the opportunity in their niche.
Think that is silly? It’s not. If you had a paid app bringing in 150k-4mm+ annually without much maintenance, would you change the price to free and confuse people with a subscription?
However, if you are about to launch a new app or have already launched an app, but haven’t really pushed traffic to it yet, there is time to tweak things and that’s what we are going to do.
In the coming weeks / months, we will be doing
- A price change of an existing paid app to > FREE to download + Free Trial + Auto renewing subscription
- Last minute price change for an app about to launch with the same model
Below, I will dig into the math a little more if you want to geek out on why I’m changing this.
The Math – Part 1
The math should answer the why of this exciting model. The math below is hypothetical, BUT close to the math for an app we intend to release.
Let’s say I am publishing an app with these details:
- Broad Niche size on Facebook of 25mm active users w/ iOS devices
- A conversion rate (it’s more of a reachability rate, but you get the point) of 2% on 25mm for a free app = 500k potential users (annually). This could be much higher as the comp app is paid and we are doing free.
- Confirmation that comp app has accumulated 600k-1mm downloads in the last year so the niche IS reachable
So from here, our sample number is 500k users that paid $3.99 = $1,995,000 Annually. I suspect it’s closer to 1mm users, so double, but I’ll leave it at 500k for now.
If we get 500k users for free how is this better?
In that previous blog post I showed that our ARPU was $5.51 on a free to download > Free Trial > Auto Renewing Subscription.
I used a 60 day period to measure this. So it was simply:
- how many new users we accumulated
- how much revenue they generated
- divided to get the average revenue per user (ARPU)
Did you catch the thing I realized this morning in the shower after looking at the numbers again? Wow, that was wordy…
I know you weren’t there (hope not lol), but I mean I’m referencing the interesting part about a subscription vs paid app.
Let me break it down.
I pulled this from a set period of 60 days so you could see a nice average. I could have pulled it from 30 days too, but didn’t want it to seem like a good month is the reason I wrote the post. That 30 day period actually yielded a better ARPU = $6.31!
When you are doing annual and monthly subscriptions, some people will pay up front for the annual to save money and some will pay monthly because they want to try it out, on a budget, etc.
The “annuals” pull up your ARPU assuming you can still bring in new annual users every month to keep that going and of course still sign up monthly users + have a decent split of “annuals” vs monthly users.
The Math – Part 2
So now we are back to the 500k target users for a 12 month period (even though we are really shooting for 1mm and have validation that comps are pulling those numbers in)
Comp app pulling in:
- 500k annual users @
New app pulling in:
- 500k annual users @
- w/ ARPU = $5.51 (used as sample)
- = $2,755,000
Not bad right? Simple idea of using free to attract more users for less + free trial + subscription w/ the annual option gets the ARPU up. Here’s the mind twister though and something I want to study more over time. We are computing the examples over 12 months to keep it simple, but because it’s a subscription app, that MEANS that the monthly users paid each month (obviously), but the annual ones pay up front. So just like I mentioned above, a monthly period could go up or down for ARPU depending on the ratio of monthly sub users vs annual users (pay up front)
Data to show that units sold in a month
- 86% of units purchased came from monthly charges (1st charge or renewing)
- 14% of units purchased came from annual changes (1st charge or renewing)
Data to show revenue generated in a month based off the above units
- The 86% of units (monthly) accounted for 44% of the revenue in that period
- The 14% of units (monthly) accounted for 56% of the revenue in that period
This tells me that even if we don’t get a lot of annual charges that bring up our average and up front cash, We could expect approx. 44% of revenue to come from monthly charges even though it’s 86% of the units.
The Math – Part 3
Now let’s factor in churn rate / retention. We will focus on monthly charges.
7th Month Mark
I wanted to use this so we can compare the first month as the initial charge of $3.99 (like the paid app) and 6 months following as recurring revenue is the boost.
- After 7 months, we keep 24% of our subscribers that accounted for of that 44% of revenue generated (on a monthly basis)
- So now that 44% is down to about 1/4th (24%) of our revenue for a user
12 Month Mark
- We keep 14% of our subscribers that accounted for of that 44% of revenue generated (on a monthly basis)
- So now that 44% is down to about 1/7th (14%) of our revenue for a user
I want to focus on the 7 month mark as it’s more reasonable to think people could stick around for that long. If I tie in the math from PART 1 above here is what this means.
- If 500k annual users @
- w/ ARPU = $5.51 (used as sample)
- = $2,755,000
- =$229,583 per month (of 2.7mm)
- 44% of these could be monthly = $101,016
- =$21,213 coming in after the initial month of $3.99 based on the yearly forecast
- The yearly forecast doesn’t include the recurring charges
- 24% could stick around for 6 months *Really 7 months* (after the first month) @3.99
This means instead of getting $3.99 once (month 1), we can get $3.99 for up to 6 more months (for example) at 24% of the users.
That’s an additional $127,280 in revenue after 7 months from the same users.
After 1 year we are at 14%, so that would be something like $14,142 x 12 = $169,706
Something to remember
This is assuming a fixed number of 500k installs using month 1 @$3.99 for those that choose it as the fixed model like a paid app. However, if our ARPU is higher, like $5.51 then we can beat the paid app.
That ARPU is achieved by the annual options boosting us above those that choose $3.99 a month.
The crazy part is this entire forecast looks at a set period vs rolling all the recurring revenue in.
The conclusion for me is this:
- The ARPU of $5.51 is for month 1
- At 500k users it’s at $2,755,000
- If we take 86% of users (monthly subs vs. annual) out of 500k users we get 430k users
- 430k users at 14% retention after 12 months = 60,200 users
- 60,200 users paying $3.99 = $240,198
- $240k x 12 months = $2,882,376
- That 2.8mm is on top of your annual up front revenue from month 1 of monthly subs @3.99 and the annual subscribers making up 14% of users.
So without growth, you are 2.8mm on top of the already boosted rev with the larger $5.51 ARPU.
The numbers would also be slightly higher as the retention goes down over time, but I’m using month 12 at 14% for the average for the year. So if at month 6 we have 25%, that’s 11% more revenue than I’ve used for the overall subscription rev (to keep it simple.
- Price = at $3.99
- ARPU = $3.99 x
- 500k users =
- $1,995,000 anual revenue
- They get this revenue once
Free app + Free Trial + Auto renewing subscription =
- Price = FREE
- ARPU = $5.51 x
- 500k users
- = $2,755,000 annual revenue (for the up front revenue of month one monthly subs and annual charges.
- 240k a month reoccurring revenue of x 12 =
- TOTAL REVENUE = $5,637,376
So $1,995,000 vs $5,637,376
Free + Trial + Subscription wins.
It wins by $3,642,376.
That’s about 2.8x more revenue.
Maybe this isn’t obvious so I’ll state it here. These are examples, but the multipliers and forecasts are based from our own subscription app conversions, ARPU and retention.
They are paired with research we’ve done to release a new app and how in a last minute decision, we’ve chose to go with FREE + Free trail + Auto Renewing subsription.
It should be clear by now. It’s the potential and opportunity. Not neccearlily just the revenue. No people, there’s more to it than that. It’s the opportunity to create a way better app and business around that app. With recurring revenue you can afford to build new features, run sweet promotions, give aways, donate to charities, etc.
I’m not sure about you, but I’ve had apps that need updates, but I don’t want to pay to do it as the revenue of new users is minimal and we can’t pay more for 1 update than the app is bringing in for a period. A lot of times I see this when you have a paid app and all the revenue is up front vs down the line after you have a decent user-base and want to build it out.
Another thing to mention is the opportunity to actually build a brand and cross promote / source your own non online products. If you set your app up to collect user contact information , you can keep in touch with them.
Past Blog Posts Here >
If you are using email automation tools you can use this to cross promote other interests or simply convert users to purchase things within the app (the users that haven’t subscribed).
Past Blog Post Here >
The last thing to mention is, you’ll need an app that actually provides enough value to keep people around month after month. With that recurring revenue you could do weekly, or monthly updates. Throw in some contests, etc.
At the top of this blog post I said we drink our own Kool-aid meaning if I talk about something, then we are invested in it ourselves. The whole reason I wrote this post is because while re-reading my last post and looking at subscription retention for an app, I thought, DAMN, maybe we should rethink this upcoming app and it’s strategy.
I then hopped in the shower after a run and the ideas kept pouring in. I came back to the computer and the deeper I dug into this, the better it sounded. I’m not saying the subscription opportunity as a whole.
I mean for an app we are working on + an existing app that’s paid. We will be reworking these to fit with subscription options.
By doing this, I believe we can do some pretty great things in the next few months.
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