The linked article is a very interesting essay about a software developer that increased revenue of their app. Go reading it and come back, I’ll wait.
The focus of that article is on how adding a button “buy all” (to buy 10 different items that had to previously be bought separately) had a very positive effect on the revenue. This might be interesting, but I think it’s intuitive: an increase in convenience is surely irresistible, especially to the lazy consumer market.
But I would like to focus on the first part of the article, where they say:
Right around Christmas we […] increased the price from $1.99 to $2.99. We saw a slight decrease in purchases per user, but we saw a big jump in our revenue.
There is also a nice graph of the jump in revenue, and it’s impressive. But I’m always amazed by the sheer number of people (especially among geeks) that find this effect surprising.
The main reason is, I believe, the wrong belief that increasing the customer/user base is the single most important thing. Now, it is surely important to have a large number of customers, and the more the better. Since raising the price undoubtedly lowers the number of customers, the intuition would say that this might be a bad thing, since there is an exponential distribution between users and price they want to pay.
But what you really need to maximize is not the number of users, but the result of the multiplication between price and users. There is absolutely no certainty that raising the price lowers the users to the point where the result of the multiplication is lower. It depends on the kind of exponential, and that’s where the trick is.
In fact, there is one specific case where you can take for granted that you can raise the price and increase the revenue: when an item is very cheap (and in-app purchases in software are always cheap nowadays, speaking in absolute terms), such a price change makes basically no difference for someone who really wants to buy the item, but it produces a big effect on the revenue.
Another important paragraph is this one:
Throughout the first year we realized 3% of our customers were purchasing the first book. Of those 3%, 70% would purchase both books.
Which meant that of our paying customers 70% percent were purchasing everything we had to offer.
We were losing sales from not having enough content.
This is a smart realization. When you segment the market among customers, you should expect them to follow an exponential distribution. If they don’t, there is something wrong with your price.
In this case, you can think of this app being a software or a service sold in 3 versions: a free plan, a basic plan ($3 = 1 in-app purchase) and a premium plan ($6 = 2 in-app purchases). The free plan will be the most popular, but you should expect the basic plan to be far more popular than the premium plan. If 70% of your paying customers are purchasing your most expensive offer, either it’s not expensive enough, or you want add more tiers on the top, to further segment the market, and extract more value from customers that are ready to pay more for your product.