Does 99 cents work for location-based apps?

Last week I was a judge in the Location category at Under the Radar. I was really impressed with the event as a whole, the quality of participating companies, and specifically all four of the companies in the Location category. I was most encouraged by a company called SimpleGeo. They’ve developed a cloud-based service providing location infrastructure for mobile apps. What I like about this is that it accelerates innovation, which accelerates the mobility revolution, which is great for all of us in the mobile ecosystem (except maybe those that have fixed assets at the heart of their economic engine, or those lacking a clear path to support the kinds of bandwidth the mobility revolution will drive…).

But, as much as I liked the company and the service, their pricing model really raised some issues for me. They have three tiers of service. They have a free service, a $399/month service, and a $2,499/month service. The breakpoints are driven by the volume of queries, and Matt explained that the free service could support an application with up to 5,000 or maybe even 10,000 users. I asked if that pricing would support someone with a 99 cent app, and Matt explained that the pricing was based on a tremendous cost savings compared to a company operating their own location infrastructure rather than using SimpleGeo’s cloud-based services.

So, let’s do some math. Taking the middle of the range number, let’s say that when we get to having 7500 users, we’ll need to step up to the $399/month SimpleGeo service. That works out to $4,788 per year in SimpleGeo services. If I charged 99 cents for the app (and I got to keep 70% of that price), then my total revenue from app sales is $5,197.50, leaving $409.50 to cover all of my other costs (assuming that my users stick with the app for no longer than a year).

Bottom line, I’m not sure that sophisticated location-based apps work at 99 cents, and I don’t think the problem is SimpleGeo’s pricing model – the alternatives are likely more expensive.

What do you think?

2 Responses to “Does 99 cents work for location-based apps?”

  1. Russ, we definitely appreciate your thoughts on the product, and on the Under the Radar event as a whole. It was a great event for sure.

    As far as our pricing model goes, we’re definitely still tweaking it, as well as really trying to understand how everything is going to play out. You definitely bring up some very important points…

    One thing that I think you brought up that needs discussion is the various apps that might get released that need to have some sort of web backbone. Currently, we’re already seeing solutions like Urban Airship and for push notifications, other web infrastructure plays like Ads, and of course, our location-aware platform. These services cost money most of the time, and it’s likely that the bill needs to be picked up somewhere down the line.

    It’s doubtful to me that the apps themselves can be easily monetized by just selling it for $0.99. Knowing that the app war is just a race to the bottom right now, most apps will likely be around $0.99 or less, so we’re going to have to get creative with our pricing model. I think that what we’ll find is that location can improve the quality of in-app advertising, potentially even coupons. That, to me, is a much more viable business model.

  2. Russ says:

    Thanks for the note Matt.

    My question for you after your pitch was whether you’d thought through your pricing relative to a 99 cent app. Your answer told me that you’d designed your pricing from a different perspective – which was based on the cost of a developer doing it themselves. Until you have serious competition, I think that’s a perfectly fair approach. As you learned, this is a hard and expensive problem to solve and you’re making it easy and much more affordable.

    The point I make above isn’t necessarily that your pricing has to change, rather that the 99 cent price point may not work for sophisticated location-based apps that need the kind of capabilities that you’re providing. I keep sneaking in weasel words like “I’m not sure…” and “may not…” because, as you say above, there’s more than one way to monetize (especially for location-based apps) and because I picked the worst-case threshold for my math (an app with less success can use your service for free, and an app with much more success gets to spread your price across more users).

    The real questions for you are:
    1. What level of adoption will you see with your current pricing? With lower (or different) pricing, could you see a tidal wave of new projects leveraging your infrastructure (probably not what you want right now anyway)?
    2. Does your current pricing create a ceiling under which someone else may be tempted to launch a similar service?

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