Third-party applications created with the iPhone SDK will be available for sale in June. Apple has created an incredible platform here — how much will these applications cost?

From a developer’s point of view, let’s see how much potential the market holds. This will determine what a developer needs to charge to make the effort worthwhile.

As of Q1 ‘08, Apple has sold 3.7 million iPhones. I can’t find numbers for the iPod Touch, but I’m sure the iPhone has outsold it many times over, so I’m not expecting it to contribute significantly to these figures yet. Let’s just assume that the Touch will negate the portion of those 3.7 million iPhones that aren’t being legitimately used — some have been lost or broken, some have been unlocked and won’t access the iTunes application store, and some will just never be updated with the 2.0 firmware required to run the applications.

Here comes the rampant speculation. If we assume:

• 1 in 1000 iPhone owners buy your application
• You charge $10
• You pay 28% income tax on the profit, and it’s all profit after Apple’s cut
• Your support costs will be insignificant

…then you will get to keep $18,648 after tax.

Now, those are a lot of assumptions — especially the support cost. But the most important factor, and the biggest unknown, is the sales rate: will 1 in 1000 iPhone owners buy a decent application?

Move the decimal point in either direction, and it becomes very different: if you can convince 1 in 100, you get $186,480! But if you can only convince 1 in 10,000, you only get $1864… that’s not worth most people’s time to write.

And that’s an important factor: consider how long the application took to write. At 3 man-months, the 1-in-1000 figure above gives you $6,216 per man-month. Not bad.

But if you’re making a very complex application that takes two developers and six months to write, that’s only $1,554 per man-month — you’ll need to significantly raise the price or sales rate to make that worthwhile.

Now, over time, the number of iPhone owners is likely to increase significantly. Once Apple hits 10 million iPhone owners, the default scenario above earns $50,400.

The biggest and most important variable is clearly the sales rate. How many iPhone owners will use third-party applications at all? Among them, how many will ever pay money for one? Then, among those, how many will pay money for yours?

Considering this, I’m thinking that $10-20 is probably a fair price for most good, moderately complex, single-developer applications.

But it depends what everyone else does: if the majority of the third-party developers price their apps in the $5 range, and people refuse to pay for anything significantly more, many applications simply won’t be worth making. Conversely, if enough people are willing to spend $20-30 on good applications, they become much more worthwhile to write, and we’ll see more specialization and competition. The numbers could also be skewed if the iPod Touch becomes a major application-sales platform. (I don’t think it will.)

As a developer, I’m hoping people are willing to pay good prices. And I bet they will. I haven’t decided on my application’s price yet, but it will probably be in the $10-15 range. It definitely won’t be less than $10.