The Rationale Behind Soaring App DevelopmentPrices

Editors note: Ashwin Ramasamy is the founder of ContractIQ, a marketplacethat 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 inBoston to identify an app development company to build an app for theirEuropean launch. The skill sets were quite niche, and the yearly spend would cross$100K, so we had to approach platform evangelists to identify some developmentstudios that theyd recommend based on first-hand experience.

We picked the Australia and Indonesia markets because we knew we had toprovide some choice at both ends of the spectrum, and the startup had an

Australian connection.

The platform companys Australian and Singaporean offices recommended theirpreferred teams in the above markets, based on first-hand experience of launchingsome very popular apps. While we did expect price differences for comparablequality, we did not expect a 15x difference between geographically close marketswith identical skills.

Another anecdote that drives the point home a Southern California-basedagency with a Vietnamese founder is setting up a five-story office in Ho Chi Mincity to hire and train fresh graduates on Node.js. How could they have possiblybought a five-story building in a metro city within half a decade of existence? Itsnot the West Coasts VC money being pumped in. Its plain-old price disparity andconsequent profits that we always associate with outsourcing. Just this time, thedisparity is sinfully high.

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

The best app developers in the U.S. charge $250 per hour while the best inIndonesia charge about $20 per hour. Thats 12.5x difference in how appdevelopers price their services. Of course, there is purchase-power parity and ahost of other reasons, such as time zone, language, product culture and exposurethat account for some of the difference.

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

Lets consider two supply-side markets: India and Indonesia.

Indonesias local mobile market is robust and growing. While U.S. smartphoneusage is peaking (reaching 75 percent in the next two years), Indonesians are notstopping till the next 50 percent of its population gets hooked. It has about a 100million users to try, fail, learn and provide a better mobile experience. They haveto think mobile-first and they already are. Their adjacent geographic markets areleaders in mobile in Japan, Korea, China and Singapore. You just have to travel intheir 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: 82percent of over $1.3 billion worth of investments in the last four quarters are fromearly-stage VCs; 71 unique VC firms have invested in India in 2014 alone; and theshare of VC investments in India from the U.S. is shrinking, whereas the share ofIndian VCs is increasing.

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

India has a robust demand-side market for developers and most of it hassomething to do with mobile (driven largely by e-commerce and transportationverticals). The country has a rich legacy of being the worlds backyard for webdevelopment. The agencies that built their cred on web development are quicklyretooling themselves for a mobile-first world.

An exploding product scene is fast filling the design deficit that we alwaysassociate India with. In just the last quarter, we helped at least a dozen U.S.startups design completely out of India and you wont be able to tell the differencebetween them and the studios in the U.S.

If youre a mobile development studio in the U.S., the best days of demandoutstripping supply will soon be over. The supply on the other side of the world iscatching up fast in terms of engineering, design and user-experience sensibility.For the first time, thanks to mobile, they have fast-growing local demand topractice 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 andfaster. More than 200 app development studios we interacted with expect a 25percent to 50 percent increase in the use of SDKs in the apps they build in 2015.

There is a squeeze coming in the near future, on the pricing front and there is along-term squeeze on the level of custom development that an app might need. Sohow 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 andbecome 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 theupside of growing local markets and at the same time, hedge against the costarbitrage of their competition from Asia.

Download ContractIQs detailed app development economy report(2015) from here.

Featured Image: Kumer Oksana/Shutterstock (IMAGE HAS BEEN MODIFIED)