2013-08-26

Graphs: 3x4 Types Of Goods And Services

The following graph explains the three different types of goods and services very well. It helps in determining what type of pricing structure you should use when you sell something. In my realm, it is how to price a smartphone application.

After the picture is my own take on the 3 categories.


Categories, from left to right:
1. Consumables, seasonal apps, fad/meme apps: These apps will be used only a few times at the most, then eventually probably uninstalled. Examples include apps that play off from something happening in the news, or an app for an Internet meme like that one dancing craze I forgot about already (Harlem shake).

2. News, reference sheets, utilities, tools: These apps will always be of use to the user, and functionality in them typically don't change drastically. Examples include flashlight apps, unit converters, information apps about a particular topic, and hourly/daily/weekly news feeds.

3. Productivity, social, leveling-up games: These apps get more useful the more you use them. Example: When you store more files in Dropbox, then the app becomes more useful to access, backup, and share files, thus you use it more. When using these apps, there is either a real or perceived difficulty in changing service providers. Users may worry about the future of these apps much more than the other two categories.

In each of the app marketplaces, apps that fit the first category (with consumables) are the most prevalent. And, apps in the third category are the most scarce. And, or course, there are always exceptions in the examples I gave, I will not list them all here.

Here's the pricing structure that should be used, in general, for each of these categories (if you want to make money from the app). An easy way to remember is: charge for the app when it is the most valuable to the user.
1. Charge once, early.
2. In order of preference: (1) Subscription model to keep all the information updated, or just to have access to the data/information. (2) Charge once, early. Then have additional (major) updates cost extra. (3) Ads.
3. Freemium: App should start off free and have enough basic features in order for most users to be satisfied with that. Then you should charge for more features only to users that get the most value out of your product. If you never have to update the app again, then a one-time fee is okay. But, if you are going to be providing updates to the app, then don't work for free! A subscription model or in-app purchases will allow you to stay in the business of creating more great apps and keeping that one updated and fresh.

But, wait! There's more!
You don't have all the information yet required for building a proper business model. In addition to those 3 categories above, your app can be further classified into one of the following 4 categories.

This following graph should give you a more thorough understanding of what type of app you have:


(I have labelled the quadrants according to mathematically standards with 1 in the top-right, going counter-clockwise to 4 in the bottom-right. A few hand-selected apps are positioned roughly in their corresponding quadrants.)

The biggest take-away from this graph is that most apps in the market are in quadrant 3 (least profitable), and it is very rare to have an app in quadrant 1, the most profitable quadrant.

Wide appeal apps have the luxury of choosing to only charge once and still be in a profitable business because many new smartphone users will always need/want these apps. Thus, a "never ending" source of income. Narrow appeal (niche) apps will not be able to draw as many downloads. So, a charge once business model is not sustainable in the long run. Though, many developers of quadrant 3 choose to create a framework and keep switching out the data to create new apps very quickly and easily. Example: A Chuck Norris joke app and Shakespeare Insult app could share 95+% of the code by just changing the database where the information is pulled. So, by creating many cheap niche apps, these developers are effectively reaching quadrant 2.

In order to effectively/successfully create a profitable premium app, users must "need" the app. There is also probably little to no [close] competition. Your app has to truly shine. These apps correspond to the category 3 (freemium) apps of the first graph. Category 2 apps from the first graph are most likely to be classified in quadrant 2 or 4. And just about all Category 1 apps from the first graph are located in the third quadrant, but not apps in the third quadrant are category 1.

If you have any further thoughts to share, then I'm all ears.

~ Simply Advanced ~

Additional great resources:
[1] http://www.xda-developers.com/android/the-smart-way-to-price-your-mobile-app-xda-developer-tv/
[2] http://mobile.smashingmagazine.com/2012/11/07/succeed-with-your-app/
[3] http://blog.ideashower.com/post/21276590202/why-pocket-went-free
[4] http://www.bradfordcoffey.com/bid/81600/pricing-model-lessons-matching-the-timing-on-value-price



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