apple

So I’ve spent a while explaining why I think the 30% cut Apple takes on every sale made on the App Store is not the way it should work in 2020. To summarize:

1. I looked at how taking your own payments is way cheaper than 30%
2. I talked about the benefits of a direct customer relationship
3. I asked why 30% is the hill some want to die on
4. I explained why not every Apple service must turn a profit

So how about I stop my complaining and suggest a solution, right? Well, let’s do that now.

Also, assuming this doesn’t spur a ton of other conversations on topic I haven’t even considered, I hope this can be the cherry on top of this thread on BirchTree.

Idea 1: Just Lower the Rate

A few years ago Apple decided to ease developer tensions by dropping the rate they took from recurring subscriptions from 30% to 15% after the first year. they clearly have set a precedent that App Store pricing can change, so the simplest solution here would be to have Apple say something like:

A few years ago we started giving developers more money for each subscription after the first year. We’ve seen a boom in subscription services since then and we love being able to support the developers that make Apple’s platforms what they are today. We’re pleased to announce that as of today, we’re giving that higher rate to all apps on the App Store. This will help more developers achieve their dreams of building a business, and continues Apple’s tradition of creating jobs through our platforms.

Especially in the middle of a global pandemic, Apple saying “we’re doing fine, and we’re giving every developer selling products on our App Store a 21% pay raise,” who is going to argue with that?

Idea 2: Let Merchants Choose to Take Payment Outside the App Store

Even make it so that they can’t show the payment form in the app, make them go to the web like Netflix makes you do today, but make it acceptable across the board. This will allow merchants to decide whether they want to pay the 30% and get the benefits of the App Store’s payment processing, or if they want to pay way less and manage it a little more manually.

Merchants would need to see if it was worth it to save money on payments at the risk of losing conversion numbers on people who don’t want to pay on the web. If the App Store really is as much a draw to customers as well, then merchants will choose the 30% cut since it actually makes them more money. That’s how markets are supposed to work, right?

Idea 3: Tiered Pricing

30% of a $1 sale isn’t incredibly horrible. After all, payment processing often has a fixed + percentage fee, so you may pay something like 10-15% of that sale to run it on your own, so 30% isn’t that much more. But on a $100 sale it’s a whole different story.

Maybe there could be a system where merchants get:

• $0.99-4.99: 70%
• $5-9.99: 80%
• $10-$49.99: 85%
• $50+: 90%

These numbers are all back-of-napkin suggestions, so they could be tweaked to whatever makes the most sense, but this would help the devs who are getting the rawest deal (aka those selling premium software) get a fairer shake. Also, we all know that microtransactions in games make up a ton of App Store revenue, so with those being mostly in the lower dollar amount ranges, Apple’s not giving much of that revenue with this change.

Idea 4: The First 1,000 Sales are Free (or Reduced)

This is done video games (like the Unreal Engine) and coincidentally also in payments, but Apple could have a system where you pay your $99/year to publish your app, and then you don’t pay a penny more unless you sell over X units per year. Maybe that’s 1,000, maybe it’s 10,000, but there would be some cut off where you would go from paying either nothing or a very small portion of each sale to Apple, but once you hit the big time, that percentage would go up to the standard rate.

This would benefit smaller indies who really need every penny to stay float, but it would make no difference to the bigger players, so while it would make some people in our community happy, it would do nothing for the Netflixes, Spotifys, and Amazons of the world.

Takeaway

I’m a product person, not a business person, so take this all with a grain of salt. This series of posts has been an attempt to add some context to the debate about App Store pricing (especially around independent payment processing, which I am an expert in), and today I tried to come up with solutions that accomplished a few things:

1. Got more money into merchants/developers’ hands
2. Ensured the App Store stayed a billion dollar plus business for Apple
3. Ease the tensions between merchants and Apple

If you have your own ideas for how Apple could ease the tensions between them and the merchants running businesses on their platform, then I’d love to hear them! Hit me up on Twitter or write your own blog post and shoot me the link!

My days-long exploration of App Store pricing has not resulted in actual fisticuffs, but it’s certainly helped me understand why some people feel that “this is fine” and devs should deal with it. The biggest thing people keep coming back to is “the App Store needs to break even”.

My retort: no, it doesn’t.

It’s absolutely important for Apple the company to break even. If they don’t, they go out of business and then no one wins. An let’s be clear here, they more than break even. But I would contend that it doesn’t matter one way or another if the App Store itself makes a profit.

First off, this argument doesn’t hold up when applied to basically any other service the comapny offers. Apple Podcasts does moderation and promotion just like the App Store, and it even makes it possible for the entire podcasting ecosystem to thrive by opening their directory to the world. How much do I, the podcast listener pay for that? Zero. How much do podcast producers pay to use Apple’s store? Zero. Are there people suggesting Apple should be getting a penny of the ad revenue from podcasts using their service? Nope. Or how about Maps, which requires Apple to map out basically the entire world, physically sending people in vehicles to do the work for this? The list goes on, but it’s obvious that things like these and Siri and iMessage and Weather and many more are paid for by the revenue of the hardware Apple sells you to use these services, even if they all cost Apple millions (billions?) per year to develop and operate.

Second, let’s talk about scale. 3 years ago, Apple announced they had paid out $70 billion to developers since the App Store debuted in 2008. If we assume they made all 30% on all of this revenue (and sweetheart deals surely mean they got less), then that’s $30 billion for Apple. Now surely that has increased quarter over quarter for those nine years, but in Q1 2017 soon before this was announced, Apple reported $78 billion in revenue in that quarter alone. Let’s not pretend this service is moving the needle so much that to trim it down is going to devastate them.

Third, let's not act like this 30% is something everyone pays. Subscriptions after year one are 15%, some huge companies have worked out sweetheart rates, and there are some big companies who simply refuse to use Apple’s payments and Apple can't afford to lose them. Who pays 30% and has no good way to work around it? The smaller devs and companies who can't stand up to Apple.

I understand this feeling, I really do, and if I was looking at this situation from a purely capitalistic view, then I might also say, “they need to be on iOS, so they'll pay whatever it takes to be there. Maybe they'll throw a fit now and again, but where else are they going to go?” But even then, I’d say it’s in Apple’s interest to keep their developer community happy. The iPhone has lit the world on fire, and Apple didn’t get there on their own.

I keep thinking about this 30% cut Apple gets on App Store purchases. The conversation usually has three general sides:

1. 30% is the right number
2. 30% is too high and it should be lowered to something like 10%
3. 30% is okay, but merchants should be able to do payments themselves if they want

I’m a mix of positions 2 and 3. I think 30% is probably too high for what you get in 2020 compared to what you got in 2008 when the App Store launched, but I’m also much less opposed to it if there was a fair and consistent option for merchants to take payments outside the App Store’s system.

There is a ton to unpack with this conversation, but my question today is this:

Why is 30% the right amount for Apple to charge merchant selling on their platform?

What if I argued 25% was a more fair cut? Would you argue 30% is fair and 25% is unfair? What’s the measure we’re using to say 30% is the correct number?

Is it because this is how it’s always been? That’s not particularly compelling as to why it must be that way for something to stay the same forever.

Is it because the Play Store charges the same amount for the equivalent in-app purchases? Since when is Android the barometer for how we do things on iOS? Do we also think Apple should ease up on their privacy policies because Google isn’t as strict?

Is it because Apple distributes, promotes, and handles payment processing for your app? That’s why they could warrant some, but again I ask why do you think 30% is the right number?

Is it because it’s what the market has shown it will bear? Considering all the big players, and more of the smaller ones too, have different deals or allow sign up outside the App Store, I’d argue it’s not what the market has agreed is right, it’s what they can do to the little guy. Also, since Apple actively tries to block other options, I’d argue the market hasn’t shown anything, it’s only had this option.

Is it because Apple deserves to make a profit too? Apple is the biggest company in the world and their profits are wild. In the past quarter they made $87,000 in profits per minute (or about $174,000 in the time it took you to read this article). I know Apple is a business and they are compelled to make money, and reducing someone else’s income is always easy, but to suggest Apple deserves all of that 30% more than giving a little of that back to the smaller companies trying to put food on the table is not a position I feel like I can take.

So I come back to the question: why is 30% the right amount for Apple to charge merchant selling on their platform? You can argue all you want about the benefits of the App Store for both merchants and customers, but that does not explain why 30% is the line in the sand we shall not cross.

I don’t talk about this too much on the site (separation of work and hobby), but I happen to work in the payments industry and the has proven to be both helpful and a cause of madness this past week.

It’s been helpful because I not only know a lot about payments, subscription management, and merchant behavior and desires, but I freaking design the tools merchants use to do these things. I work on tools that allow everyone from big box retailers to airlines to one-person shops collect payment data safely and easily. These tools are used billions of times per year to enable merchants to run their business.

Today I wanted to take that knowledge and consider one element of the current conversation about In-App Purchases in the App Store: fees. What is the cost, both in terms of cash and business requirements, to selling though Apple’s IAP or through your own payments.

Payment Fees

I can’t get into specific fees since those are going to vary a bit from merchant to merchant, and even transaction to transaction , but we can talk about generalities here. Let’s use Hey (Basecamp) as an example.

Basecamp is charging $99 per year for their service, Hey. Currently they have you sign up on their site and pay them directly. I’m not sure what payments provider they’re using, so I’ll talk generalities for this bit.

In general, merchants will pay a flat fee per transaction, as well as a percentage of each transaction to the payment platform. Again, not knowing Basecamp’s provider, it would not be unreasonable to estimate they pay 10¢ per transaction, plus 3%. That might be a little high or low, but it’s likely in the ballpark for them.

That means on every $99 sale they make, $3.07 would go to fees for that transaction. If they added the App Store’s IAP, then they would be paying $29.70 in fees per transaction. You can see why Basecamp would be unhappy to make that trade.

Other Costs

Of course, this savings has a cost of its own in that Basecamp needs to maintain these subscriptions and make sure billing runs correctly and they need to invest in a good customer onboarding. But even with that, they are still coming out way ahead.

It’s possible Hey is making a decent margin on each customer and they could eat those costs and still turn a profit, but that’s certainly not going to be the case for all companies. Those companies will either need to eat the costs and offer IAP as well, which is bad for the mechant, or they raise their cost to customer by 30% to make sure they still turn a profit, which is bad for the customer.

Benefits

There are benefits to handling payments for yourself too. Refunds, something that are notoriously difficult on the App Store (aka the developer can’t give you one, Apple needs to do it) are simple if you control the payments flow. Let your support team issue them, give them to customers technically ineligible because you think it’s the right thing to do, offer your refunded customers get a coupon in case they ever decide to come back after you’ve refunded them. These are good for both the merchant and the customer.

Handling payments also gives you a closer relationship with your customers. You can manage them in your existing CRM and reporting. You can more easily track churn and understand your business better.

It’s also worth saying that most iPhone users are not all in on Apple. The average iPhone user uses a Windows PC. While this conversation on Twitter is happening mostly between people with Apple everything, the fact is that we’re a smaller slice of the pie. What if I signed up for Hey on Windows and then got the iPhone app? Or what if I use Android today, signed up for some services, and then switched to the iPhone? As a customer, I’d be incensed if I needed to close my accounts and recreate them in Apple’s system. I would reasonably expect to be able to just sign into that account on my new shiny iPhone. I can do this today, but the suggestion by some that IAP should be used for everything would make this impossible.

Alternatively, what if a customer wants to trade in their iPhone for a Galaxy phone? Now they need to cancel all their subscriptions in the App Store and recreate them on their new device. Why should I need to cancel my email account for a third party company in the App Store if I want to use that on a new platform? Correct me if I'm wrong here, but as far as I can tell, there is no way to manage my IAP subscriptions to third parties without an iOS device. That's a bad user experience, and while it makes you more likely to stick with Apple because no one wants to deal with that, it's not the right way to retain customers.

Finally, there is the possibility for a merchant to be even better than Apple at working with their customers. They may give more helpful subscription renewal notices. They may give incentives to lower customer fees in some cases. They may have a better onboarding on more platforms than Apple has created (although Apple’s is pretty solid). They can innovate in ways that Apple hasn’t even thought of yet!

Takeaway

This isn't an argument for or against Apple changing its policy on in-app purchases, nor does this address anything with monopolies or anti-trust regulations. This is just an attempt to give some more context to the conversation and help people understand why some merchants would prefer to use their own system for payments. I hope to have another article out soon that explains the modern methods of accepting credit card information and how it's both more secure and easier to implement than you might expect if you haven't been paying close attention in recent years.

I've seen some defenses of Apple's now-modified-enforcement of App Store guidelines that go a little something like this:

If you think apps should be able to freeload on Apple's App Store distribution, but then not give Apple a cut of their revenue, then you must also think that it would be perfectly fair for a merchant to set up a bodega in their local Walmart and sell their wares to Walmart customers without giving Walmart a cut of the revenue.

This argument may work as a quick mental exercise, and it may win you a few retweets on Twitter for this single argument, but I don't think this is a good comparison.

First, big box retailers and an app stores are different things. There are many differences between Walmart and the App Store, so I don't think it's wise to suggest app developers need to follow the same rules as merchants selling at Walmart.

Second, if we follow that merchants taking payments for products downloaded from the App Store is like setting up a bodega in Walmart and not giving Walmart a cut, then is the suggestion that services that let you subscribe/pay in the App Store or outside of it (Netflix, Spotify, Disney+, Hulu, HBO, and basically every single SASS out there) should be forced to not let people use the App Store apps unless they are also paying through the App Store? After all, the monthly fee I pay to Netflix through Netflix directly means Apple isn't getting a penny.

Third, if I'm a merchant selling socks and I don't want to deal with Walmart's rules, I can choose to sell at Target, shoe stores, or just go straight to the consumer. Sure, being at Walmart has benefits, but if I choose not to go that route, I still have options. If you can't be on the App Store, you may as well not exist on iOS, which is not the same thing.

As I'll reitterate every time I talk about this, I don't think that Apple is legally required to allow everything on their store. I think they have the right to set rules and enforce them, and even though they're huge, I don't think they should be considered a monopoly. I have this position because I think it's better for consumers, better for developers, and frankly, consistent with how many other apps on the App Store already work.