iPhone App Prices: How Much is Too Much?

The booming Apple App Store, which just surpassed a whopping two billion downloads, has witnessed a wild ride in app pricing. Today, more than 85,000 apps are available on the store’s virtual shelves, with prices ranging from free to TomTom’s new $99.99 iPhone app ($139.99 for the Western Europe version).

When the App Store launched on July 11, 2008, most of the popular apps were games and simple tools that were either free or cost $.99 or $1.99. Thanks to rising prices, market research Yankee Group foresees a bona fide $4.2 billion mobile app “gold rush” within five years.

One in four downloads will be a paid app that costs on average $2.37 by 2013, Yankee Group predicts.

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The rise in prices owes much to the iPhone’s maturation as a more serious gaming and application platform, says Gartner’s Van Baker. “Now we see free trial versions paired with a $4.99 price in the gaming space as a pretty common tier,” he says.

App prices, however, are hitting a critical juncture as developers test the limits at the high end. “I personally think that the TomTom price is probably too high and they will likely have a challenge moving beyond the early adopter segment at that price,” Baker says. He believes that a $19.99 price point will become commonplace at the high end, while $1.99 will continue to be the low end. Three middle tiers will emerge, he says: $4.99, $9.99 and $14.99.

So what do iPhone owners think about these pricing tiers? Create with Context, a researcher and designer, sought out these answers by bringing iPhone users to its lab in Silicon Valley. Here’s what the users had to say during focus group conversations:

Free trial versions are still popular, yet iPhones users differ on how free should be implemented. Some users felt that $4.99 apps should have a free “lite” trial version, while others want the full app for free but with a timeout. “Light versus full creates confusion,” an iPhone user told Create with Context researchers.

The $.99 pricepoint that helped launch the App Store out of the gate, as well as make software purchasing a non-risky impulse, now signals cheap, sophomoric, and even dangerous apps, some users say. The $.99 price, says an iPhone user, “means it’s been around a long time, or there’s a promotion going on, or it’s not a complex app.” Another user says: “Anything sub-$5 may not be a money-making enterprise or has malware.”

Indeed, the $4.99 pricepoint seems to be a tipping point for app buyers, according to Create with Context’s users, many of whom called it a “reasonable” price. Of course, expectations of the app are higher. “I’d be more willing to pay that for something like Quicken than for a memo pad,” an iPhone user says.

The $14.99 pricepoint stirred a lot of mixed reactions. For users who still see the App Store as a smorgasbord of free apps, “$14.99 seems like an awful lot to pay,” said one iPhone user. Another user countered that it’s not expensive, “considering I’m doing [the $14.99 app] from an iPhone that costs hundreds of dollars.”

Some users are now comparing iPhone game costs to console game pricetags. “If you can get a PS3 [or] Xbox game for $30 to $40, then $15 to $20 seems expensive for this platform,” one user said.

Tom Kaneshige is a senior writer for CIO.com. Send him an email at tkaneshige@cio.com. Or follow him on Twitter @kaneshige. Follow everything from CIO.com on Twitter @CIOonline.