Something is wrong with Apple's International app pricing

Apple’s App Store is a global platform for software developers to distribute apps to iPhones, iPads and Macs. As an institution it is phenomenal, reducing transaction costs and opening up many markets that were previously impenetrable to developers. This week Apple reported that the App Store made $15 billion for developers. But this week a problem arose.

To understand it, consider the anchor price for an app — $0.99 in US dollars. Why 99 cents and not $1? No one really knows except that it turns out that it can make a big difference. In fact, it makes so much of a difference that there is nothing you can buy in terms of software from Apple that doesn’t leave a penny change off a rounded dollar.

What is more significant is how Apple determines the prices in all of its International App Stores. For instance, if a developer were to sell an app for 99 cents in the US, up until yesterday it would be listed as 99 cents in Canadian dollars in the Canadian App Store but $1.29 in Australian dollars. Based on the current exchange rate, the US dollar equivalent price of the app in Canada was 84 cents and the Australian dollar equivalent price was $1.04. This, however, disguises a tax issue. The Australia $1.29 price includes a 10 percent sales tax (or GST) and thus we need to factor that in. Thus, the equivalent price is AU$1.17 or 95 US cents. Thus, from a developer’s perspective, the US store is more lucrative than the Australian or Canadian store prices.

It seems, therefore, a good idea for Apple to change things. Now, of course, there is nothing to stop an app developer from charging different prices by releasing different versions of apps in different stores. So a developer could charge more than 99 Canadian cents. But because Apple uses pricing tiers, the developer would be forced to charge CA$1.99 which may make their app too expensive. So rather than doing that, Apple have themselves raised the Canadian app prices on their own accord. As of yesterday, this previously 99 cent app will be listed as CA$1.19 (a 20 percent price increase). And these rises occurred not just in Canada but for Euro-based and GBP pricing as well. The minimum app price in Euros is now 0.99E (up from 79) and is 79 (rather than 69) pence. If your counting, based on the new Canadian price, the app developer will now earn US$1.01. In other words, what Apple have done is make prices in all markets look almost the same from a developer’s point of view.

Now exchange rates impact on pricing all of the time. The US dollar has appreciated and so it could be expected that the price of goods produced in the US will rise. But these are digital goods and so there is no simple supply and demand equation driving those movements. In fact, the App Stores are localized and it is difficult — although not impossible — to purchase digital goods outside of your jurisdiction. Many years ago I even used this to provide an alternative to The Economist’s Big Mac Index to examine whether currencies were under or over-valued.

Why might you want prices to differ between jurisdictions? After all, shouldn’t digital prices be the same as there are no transportation costs? First of all, to consumers they are not the same because of differences in tax rates. Above I was reporting the prices net of sales taxes but in the US sales taxes are 6-8 percent while in Canada they are 13.5%; that’s a big difference.

But, second, and this plays out at the ‘micro’ end of app payments, by raising the international minimum prices of apps, Apple is raising the minimum prices for apps and in-app purchases. The latter have been significant for developers and when they are below one dollar, they can trigger a stronger response than when they are above one dollar. After all, if 99 cents is significant compared to $1 imagine it compared to $1.19? My point here is that while Apple may seem to be equalizing margins for developers by these adjustments, it is also potentially taking a way a revenue making opportunity to exploit non-economic but significant changes in price sensitivity around $1 regardless of your currency.

There is an easy way around this. If Apple wants to keep things simple for developers, it could give them the option of real equivalent pricing (as it does now) or ‘behavioural’ pricing that would allow them to set all in-app purchase prices at the sensible 99 cent equivalent in each currency. This may help consumers but it would, more importantly, likely help developers in keeping those app store revenues high.