App Store Price Tiers and Pricing Strategy

Apple's July 2015 revision to its App Store price tiers is the occasion for an analysis of how the tier system constrains in-app purchase pricing and what that means for global freemium strategy. Under the system, developers pick a tier for each item and Apple sets the local price in each territory. The update adjusted prices for currency movements, notably raising Euro tiers after the Euro's decline against the dollar, and added two low-price tiers in the Indian, Indonesian, Mexican, Russian, South African, and Turkish stores, matching a tier already available in China. The previous Price Matrix change came in January 2015 and partly reflected an EU change to value-added tax calculation.

The central argument is that the low tiers add flexibility but do not allow true per-country price optimization. Apple's tiers embed only limited purchasing power parity adjustment, so developers cannot charge, for example, one thirty-third as much in India as in the US, the ratio of the two countries' per-capita GDPs. That restriction may suit Apple's interests, but it prevents developers from capturing producer surplus within each market, which is a core strength of dynamic pricing in freemium models. Because Apple updates tiers manually and at irregular intervals, absolute price discrepancies across currencies persist. Comparisons of the highest in-app price points across the US, China, Germany, Japan, the UK, South Korea, Russia, and India for Game of War, Candy Crush Soda Saga, Tinder, and Skype illustrate this.

The practical implication is that developers must optimize at the level of the whole app economy rather than the individual item. Tinder's $19.99 US price for Tinder Plus, for instance, reflects willingness to pay in its target market rather than production cost, since delivering the product costs nothing. A lower tier might lift conversion in poorer countries but would leave consumer surplus uncaptured in the US and other wealthy markets, reducing total profit. As app markets decouple from per-capita GDP rankings, with China projected to become the largest mobile gaming market by 2016, developers releasing globally will need to choose target markets and tiers deliberately, since tuning to Western price sensitivities may not maximize aggregate profit even on iOS.