Alternative Math on AppStore Pricing

When I was in high school we used to tell a math puzzle that would stump most (careless) people. It worked especially well when the person telling the puzzle was really good with the delivery. I bet it still would stump some.

Here is the puzzle:

Three friends rent an apartment for $30 a month, evenly splitting their rent. On first of the month they pitch in $10 each and send the money through the super to the owner.

The owner, for some reason, decides to reduce the rent to $25. So she gives $5 back to the super, asking him to return it to the roommates.

The super, not being very good at math, decides it is not easy to share $5 among 3, so he eats lunch for $2 and returns $3, that is $1 each to the roommates.

SO each roommate paid $9, for a total of $27 and the super ate for $2, that is a total of $29.

[Drum roll] Where did $1 go?

While you work on this, let us look at AppStore pricing.

All Apps and subscriptions on AppStore have a 70% royalty model.  One way to look at this as the App Developer takes a dollar from us and gives 30 cents on the dollar to the AppStore. When they complain such steep fee we might be tempted to say, “that is your problem, not mine your customer”.

That would be the math I showed in puzzled above.

The problem with the puzzle above is it treats the $2 as if it has different origin, came from a different source. The truth is, it is the roommates who paid for the lunch, from their $9,  not the apartment owner.

In case of the AppStore royalty model, it is the customer who pays both the parties. To get an App, the customer must pay both the channel and the App Developer. In the puzzle, without the super’s take of $2, the roommates would have paid  $0.66 less, without the AppStore’s take you would have paid only $0.70 cents.

The single list price could be misleading, what we see  is a case of partitioned pricing that isn’t explicitly partitioned.

As an aside, if you see through this lens, then you can also see that pricing for iOS devices practices near perfect price discrimination. More Apps you buy, more value you get and hence more you pay for the device.

Shouldn’t you care about the 30% fee?

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