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The Rationale Behind Soaring App Development Prices

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Editor’s note: Ashwin Ramasamy is the founder of ContractIQ, a marketplace that matches enterprises and startups with agencies for app development, product engineering and analytics services.

During the last quarter of 2014, we were approached by a funded startup based in Boston to identify an app development company to build an app for their European launch. The skill sets were quite niche, and the yearly spend would cross $100K, so we had to approach platform evangelists to identify some development studios that they’d recommend based on first-hand experience.

We picked the Australia and Indonesia markets because we knew we had to provide some choice at both ends of the spectrum, and the startup had an Australian connection.

ContractIQ Mobile App Development Pricing Report

The platform company’s Australian and Singaporean offices recommended their preferred teams in the above markets, based on first-hand experience of launching some very popular apps. While we did expect price differences for comparable quality, we did not expect a 15x difference between geographically close markets with identical skills.

Another anecdote that drives the point home — a Southern California-based agency with a Vietnamese founder is setting up a five-story office in Ho Chi Min city to hire and train fresh graduates on Node.js. How could they have possibly bought a five-story building in a metro city within half a decade of existence? It’s not the West Coast’s VC money being pumped in. It’s plain-old price disparity and consequent profits that we always associate with outsourcing. Just this time, the disparity is sinfully high.

We probed further and did a study on app development prices in every important market in the world. The price disparity for app development is even more stark than the anecdotes I shared above. 

The best app developers in the U.S. charge $250 per hour while the best in Indonesia charge about $20 per hour. That’s 12.5x difference in how app developers price their services. Of course, there is purchase-power parity and a host of other reasons, such as time zone, language, product culture and exposure that account for some of the difference. 

But, in spite of all the rational explanations, such difference in pricing of comparable underlying service is not sustainable. Substitute the U.S. with any similar high-priced app development market and Indonesia with markets like India, the conclusions are the same: App development agencies in high-priced markets have to become full-service agencies and also grow geographically.

Let’s consider two supply-side markets: India and Indonesia.

Indonesia’s local mobile market is robust and growing. While U.S. smartphone usage is peaking (reaching 75 percent in the next two years), Indonesians are not stopping till the next 50 percent of its population gets hooked. It has about a 100 million users to try, fail, learn and provide a better mobile experience. They have to think mobile-first and they already are. Their adjacent geographic markets are leaders in mobile in Japan, Korea, China and Singapore. You just have to travel in their trains to realize what ‘mobile’ means to them.


Source: Statistica

Take another big market which is India.

The local tech scene that builds products for India and the world, is exploding: 82 percent of over $1.3 billion worth of investments in the last four quarters are from early-stage VCs; 71 unique VC firms have invested in India in 2014 alone; and the share of VC investments in India from the U.S. is shrinking, whereas the share of Indian VCs is increasing.

 India Tech Scene

What does a thriving local tech scene dominated by mobile mean for the app developer in an unrelated market? 

India has a robust demand-side market for developers and most of it has something to do with mobile (driven largely by e-commerce and transportation verticals). The country has a rich legacy of being the world’s backyard for web development. The agencies that built their cred on web development are quickly retooling themselves for a mobile-first world.

An exploding product scene is fast filling the design deficit that we always associate India with. In just the last quarter, we helped at least a dozen U.S. startups design completely out of India and you won’t be able to tell the difference between them and the studios in the U.S. 

If you’re a mobile development studio in the U.S., the best days of demand outstripping supply will soon be over. The supply on the other side of the world is catching up fast in terms of engineering, design and user-experience sensibility. For the first time, thanks to mobile, they have fast-growing local demand to practice and perfect their skills with.

Our own research points to another trend in mobile app development.

SDKs are making it easier than ever to build bespoke mobile apps cheaper and faster. More than 200 app development studios we interacted with expect a 25 percent to 50 percent increase in the use of SDKs in the apps they build in 2015. 

SDK Economy Trends - ContractIQ

There is a squeeze coming in the near future, on the pricing front and there is a long-term squeeze on the level of custom development that an app might need. So how do developers insulate themselves from the effects of these trends?

Most app publishers need help with app marketing, analytics and engagement. Mobile development studios should look to expand higher up the value chain and become full service mobile consulting firms.

In mobile, the action is in Asia. Established mobile development studios in the US should look at South Asian markets to expand. This will allow them to catch the upside of growing local markets and at the same time, hedge against the cost arbitrage of their competition from Asia.

Download ContractIQ’s detailed app development economy report (2015) from here.
Featured Image: Kumer Oksana/Shutterstock (IMAGE HAS BEEN MODIFIED)