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Oct 25, 2009 -

iPhone apps have exploded in popularity since the iPhone App Store debuted in July 2008.  Millions of iPhone owners use them to play games, check the weather, or access their files. iPhone app sales have generated riches for a fair number of developers and entrepreneurs.  In fact, over 2 billion iPhone apps have been sold so far, and that number is growing fast.

But while the iPhone may be one of the hottest platforms around, it’s also one of the most confusing.  There are thousands of failed apps, $0.99 knock-offs, and others that never make the light of day.  How do you prevent your application from failing spectacularly?

This guide helps deal with that problem by detailing some of the economics behind the iPhone App store and the choice you’ll have to make if you decide to release one.  We don’t claim that it will answer all of your questions, but instead will help demystify many aspects of the app store process.

How Pricing and Revenue in the App Store Work

Apple allows developers to set their own price for iPhone apps, in dollar increments starting at $0.99.  A developer can make his or her app free or charge $59.99 if he or she so desired, although the latter pricing is very rare. 

For each iPhone app sale, Apple takes a 30% cut, and the developer keeps the rest.  So, if a $1.99 app sold one million times, the developer would take home $1,400,000.  Not a bad chunk of change…if the developer can sell a million apps.

Pricing an iPhone App

One of the biggest challenges you face if you develop an app is the pricing.  Pricing it too high will turn off consumers and the app will be ignored.  Price it too low and you risk not making your money back.

The big thing to remember with pricing on the iPhone is this: value is deflated on the iPhone platform.  The price of Tetris on the Playstation Portable gaming system is $10 for example, but on the iPhone it is only $5.  WeatherBug Elite on the BlackBerry costs $5 while it’s just $1 on the iPhone.  You can read a deeper analysis of the iPhone app value problem here.

Luckily, you can change your price even after your app goes live in the app store.  Any price change will take up to 24 hours to implement, but that’s about it.  Try to pick the right price the first time, but don’t be afraid to adjust.

One more alternative: You can make a free app and earn revenue via advertising.

Factors that Affect App Sales

• Its place on the iPhone app store charts (you need to get momentum right out of the gate or you’ll immediately drop off of the charts)
  
• The categorization of your app (targeting smaller and niche categories can help, but topping a big one is huge as well)
  
• Whether Apple features it in the app store or in an iPhone TV ad
  
• Positive press, good reviews, and buzz

Image courtesy of iStockphoto, petrovich9