I have an idea for a juvenille iPhone application. I think it has a decent chance for selling well.  However, there have been two factors that have led me and Tanya to decide to not pursue the development of the application:

• The cost of development (quotes ranged from $5,000 to $50,000)
• The downward pressure on iPhone app pricing

The most challenging piece of the project was developing a pricing strategy. Putting together an RFP and posting it on guru.com was straightforward but still a learning experience for me:  I may not have taken the best approach. The trickiest part was that I just couldn’t pin down a reasonable strategy for pricing because there’s little detailed information on the dynamics of application pricing.

There is a fair amount of information on getting your app into the Top 100 but this is a component of a pricing strategy because the Top 100 is a highly dynamic group.  A strategy that depends on more than two weeks in the Top 100, much less getting into the Top 100 at all, is a misguided one. A Top 100 spot is not a sustainable strategy.

Basically, the secret to getting into the Top 100 is cut your price. But if you cut your price, you cut into your margin. And though cutting your price may give you access to the Top 100, what is certain is that bringing your price back up is difficult to do because the App store sets customer expectations for low prices. Downward changes are easy; successful price increases are tricky.

Yesterday, I found the article which I am citing in this post and its content sealed my gut feel that this project is not worth pursuing.  It’s a somewhat long analysis of the dynamics of iPhone application pricing but the short version is this: For a number of reasons, making money on an iPhone app is an increasingly difficult goal to achieve.

I think the only way I could take this idea to market is to learn to program and develop it myself. But then I would have the opportunity cost of all my time and effort to learn a skill I have only limited aptitude and interest in.

With a $5000 development cost and a $1.99 purchase price, minus Apple’s 30% commission and 35% for taxes, we would need to sell ~ 5522 copies to break even. But that’s assuming the market responds to the $1.99 price point when similar competing apps sell for $0.99. Sure, my idea has some added value over the competition but the question is: How much of a premium is that functionality worth?

What if the market only responds to a $0.99 price?  In that case, we would need to sell 11,100 copies just to break even.

And that is using the lowest development cost quoted to us. What if the app costs $10,000 to develop? At $1.99, we would need to sell 11,044 copies and at $0.99, sales volume would need to be 22,200, all just to break even.

It’s uncanny. When known software gets repackaged for iPhones and iPod Touches and passes through the hallowed gates of the App Store, something happens: Almost invariably, it gets cheaper. Waaay cheaper. Good right? Well, not always.

The App Store is a strange new place for developers. Veterans and newcomers engage in bareknuckle combat, driving prices down to levels people wouldn’t have imagined charging just a few years ago. Margins drop to razor-thin levels while customers expect apps to get cheaper and cheaper, but with ever increasing quality and depth.

For developers, for other software platforms and potentially for the increasingly fickle customers themselves, it’s uncharted, and treacherous, territory. But the most bizarre thing of all is—in an effort to keep people in the App Store, and to prevent competitors from getting a toehold in the mobile app business—Apple’s charting a course straight into it.

“The App Store is a very competitive environment,” says Caroline Hu Flexer, co-founder of Duck Duck Moose, an indie developer of children’s edutainment apps like Itsy Bitsy Spider. “As an independent developer without a large PR budget or well-known brands, it can be very challenging, and you’re pretty much at the mercy of Apple.”

[read the entire article]

via The App Store Effect: Are iPhone Apps Headed for Oblivion? – The app store effect – Gizmodo.