Tuesday, 10 November 2015

The Changing Economics of App Development

hbr.org
nov15-04-fst067012
In many ways, app developers, like popular consumer brands in a supermarket, are locked in a fight for two scarce resources: consumer attention and shelf space.
In the supermarket, consumer purchases are influenced by familiarity and availability, and few shoppers will endeavor to buy what they can’t find or simply don’t know exists in the first place. It’s why brands invest heavily in marketing, pricing strategies, and store positioning to raise awareness, encourage engagement, and drive sales.

In the digital app store, the situation is similar.

The virtual shelves that line the Apple iTunes and Google Play app stores are brimming with 3.1 million apps as of July 2015. The iTunes app store alone sees 1,600 new submissions daily. So users rely on tools, primarily search, to navigate the “aisles” and find the apps they want.

So while the App Economy booms, there are signs that its rapid expansion is a challenge for the current search, marketing, and monetization models — models that have been largely fashioned by blockbuster app titles and the big spenders behind them. A newer generation of app developers – the so-called “middle class” of independent app creators and companies – is finding success by better catering to customers’ demand for choice and variety, even as they bump up against challenges like app discovery and advertising.

For evidence of this trend, consider new research released this week by Priori Data, a mobile app store intelligence company headquartered in Berlin, and PollenVC, a FinTech company helping app developers and companies realize app store revenues, which helps demystify this burgeoning middle class of app developers and examines how many million-dollar apps there really are.
A snapshot of the data produced in the first phase of the research program known as the Millionaire Index reveals that a total of 1,887 app developers and companies have already generated $1 million in revenues from a mix of app purchases and in-app purchases in the last 12 months.
Overall, over 20,000 app developers and companies will have made over $100,000 in revenues — or $8,333 per month — from their apps in 2015.

The Priori-Pollen research program findings run counter to popular app developer surveys that suggest over half of developers make less than $500 per app per month. (This discrepancy is likely tied to a difference in methodology as the snapshot is based on concrete app store data while popular surveys draw from the self-reported input of app developers willing to reveal their monthly revenues.)
What’s more, the research program results point out that nearly half (45%) of app store revenues — or $2.3 billion — will have been generated by publishers outside the Top 100 ranked apps in 2015.

But these findings don’t just highlight the increase in the number of independent app developers and companies making money with their apps. The research confirms the rapid advance of a “long tail” of app developers and companies, a new segment of developers proving that many of these apps benefit over time from tapping specific audiences and consumer tastes that run outside the mainstream (like the types of niche audiences that might like indie music or genre-specific games).

Which all sounds great – until you try to actually find one of these niche apps in one of the popular app stores. For smaller app developers, understanding the nuances of discovery and user acquisition is still critical.

First, there is something I call the “Discovery Dilemma.” App store research, which I collected in my book, Apponomics, reveals only 5% of apps accounted for 92% of downloads in 2013.

Popular apps rise to the top ranking, while the others are lost in the heap.

Recent Google research reveals that one in four app users discover appsthrough search. And The State of App Discovery 2015 — a new study released by attribution analytics company TUNE, drawing from an online poll of 2,100 smartphone users in the U.S. — reports app store search accounts for more than 67% of actual app discovery.

So understanding app store optimization is high on the agenda as developers and companies invest in the tools and talent to optimize mobile apps. They believe that higher rank leads to increased visibility, which tends to translate into more traffic and more downloads.
Being featured or chosen as the “app of the week” among the top titles can be a huge boost to visibility and discoverability. But it’s certainly not a silver-bullet (or sustainable) solution to the Discovery Dilemma.

And, even if app developers and companies invest in paid promotion campaigns to achieve the massive volume of downloads needed to rocket an app to the top of the charts, fame can be fleeting. (The numbers are murky, but mobile app marketing company TradeMob did a little investigating. It found that the magic number for getting into the top 15 in the U.S. App Store was 60,000 downloads over a 24-hour period.)

Recent internal research also conducted by Priori Data and PollenVC shows that both daily downloads and revenues for app developers “fizzle out within a matter of weeks” of being featured in an app store.
The joint research produced by Priori Data and Pollen VC examined 50 free-to-play and 50 paid iOS games featured at launch in the iTunes App Store during the second half of 2014. It found that on average, daily revenues after the app was featured fell by more than 75% within 30 days and then by more than 85% after 60 days.

Significantly, the data shows that app revenues can reduce to a trickle within 90 days. This is roughly the same period in the app lifecycle when developers and companies should be doubling down on user acquisition. This is also a critical time, especially for smaller scale developers, when resources can wear thin waiting for revenue to surface from app sales or in-app purchases. The lag time between making a sale and getting paid by the app store can be up to 60 days, or more, and that’s an eternity in the mobile world.

Interestingly, the TUNE survey shows, it is word-of-mouth and advertising that motivate users to search for apps in the first place. A significant number of users look for apps by name, suggesting that they are becoming accustomed to seeing apps as brands. So even though advertising can stretch a smaller budget, it still matters for reaching new users.

As more and more app developers compete for users (there are nearly 5 million developers worldwide, and tech research firm Vision Mobile expects that number to grow by about 800,000 this year) the overall costs of user acquisition – including CPI or cost-per-install — have jumped. App marketing technology provider Fiksu reported recently that the costs associated with retaining one “loyal user” – that is, someone who opens an app three times or more – hit a whopping $4.04 in August, representing a 36% increase month over month and 117% percent rise year over year.

Mobile ad networks also add to the friction. They are designed to accommodate large brands and big budgets. While many ad networks offer automated “self-service” platforms, thus allowing app developers and companies to spend on paid promotion to acquire users at scale, the approach is completely out of step with the requirements of smaller app companies. This is because self-service, which requires ad network customers to pre-pay, forces app developers to use credit cards to finance their app advertising campaigns.

The approach may have worked in the early days, but Oliver Kern — a veteran in the mobile industry who has helped a wide range of app companies, ranging from independent app developers to market giants like Rovio and Wargaming — argues the self-serve platform offer is a “gross mismatch” with the needs of today’s developers and companies to launch and scale their mobile apps quickly and on smaller budgets.

There was a time when developers could run short-term campaigns that cost a few thousand dollars to advertise their apps in order to catapult them into the top rankings, where organic growth would take over from there, Kern recalls.

But the ability of big-name app publishers like King and Supercell — through a extensive portfolio of titles supported by even bigger advertising budgets — to chalk up millions of app installs every month, means that a campaign to gain and maintain top-notch spot in the app store charts costs hundreds of thousands of dollars. That is an expense well beyond the scope of most app developers.

App developers and companies will need to continue to think strategically about new ways to bridge the “funding gap” — the time between making a sale and getting paid by the app store. They will need to be more flexible than ever and know exactly who their audience is and how to best reach them.
And we will have to watch closely to see if the app developer middle class can help move the needle in terms of better ways to facilitate user discovery.

The App Economy offers a wealth of opportunity. But cashing in requires independent app developers and companies to understand the barriers that stand between them and success.

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