This article is a guest contribution from Markus Nigrin of Windmill Apps.

Let me make one thing clear: I love paid upgrades.

One of the greatest achievements of the software industry has been to educate users that they have to pay for new features.

Free is unsustainble

It's also one of the best mechanisms a software company can use to create a sustainable business, growing both their product and customer base, monetising the latter to finance that growth.

Indeed, I've always thought being able to demonstrate a good solution to this part of the software business provides a great 10 second acid test to judge any venture.

Equally, my general experience has been that a customer who values your product and wants new features is willing to pay a fair upgrade price - although they'll never say so out loud.

In this context, I think not offering a paid update path within the App Store is one of Apple's few mistakes.

There is evidence it had plans to enable this but that after realising how valuable updates were in terms of providing developers with a mechanism for highlighting their apps in the App Store charts, it hasn't been in a rush to implement the feature.

Turning of the tide

The subject is now a hot discussion point however thanks to the decision of the developer of the Tweetie app to charge for its next, feature-rich release. Although tempting, I don't want to join that discussion.

Instead, I want to share some out-of-the-box thoughts about how I plan to implement both paid upgrades and high value (or Gold) editions of my apps within the existing ecosystem. Because, while I want Apple to create a clean paid upgrade path, I think the App Store currently provides mechanisms to do so.

The paid upgrade path

The problem is straightforward: how can you introduce a new version of your app at a certain price, while the existing users of the old version pay a lower price?

My solution is simple: Introduce the new version and, for a certain time period, reduce its price while informing the app's user base, giving them a chance to buy the new version for a reduced price.

Of course, new users will be able to buy the new version for the reduced price too.

Tell them what you're doing

There's the issue of how to inform your existing user base.

You can do this using an in-app newsline, as already used in games such as Doodle Jump, Scoops, Super Memory Match etc, and/or with a newsletter.

The beauty of this concept is it hooks into the feature the App Store encourages in terms of instant price changes and a paid chart that is based on sales numbers, not revenue i.e. Peggling(tm).

This is the practise of dropping the price of your app for a limited time period to encourage users to buy it, which pushes it up the charts and in turn encourages more sales.

The key to classic Peggling™ is to make sure lots of people know about the price cut; something that's also an important part of my paid upgrade solution path. See how everything comes together?

How it works

As a practical example, Tweetie v1 could receive a small update which implements a newsline feature. This would initially say, "Thank you for buying Tweetie".

Prior to the release of Tweetie v2, it would change to, "Tweetie 2 coming soon! Tweetie users get a special upgrade price. Click here to sign up".

This would lead to a simple online newsletter subscription form with more text explaining that Tweetie 2 will be introduced at a special price as a courtesy to existing customers and that the timeframe for this promotion will be announced via email newsletter.
Tweetie 2 is then introduced for the introductory price, existing customers are informed and everybody is happy. (Actually a lot of customers will find a lot of reasons to be unhappy, but the premise of this post is a lot less will be unhappy than if you try other solutions.)

Advanced lessons

There are also some fine tunings you can apply thanks to the flexible mechanisms of the App Store:

1. You can lower the price of your first version to reflect the difference in price at the moment you announce the update in the newsline. In the example, Tweetie 1 could go down to $0.99 if the introductory price will be $1.99 or vice versa.

2. Some customers are left out. No problem, you have a great answer: Get them to sign up so they'll never miss a future promotion, and repeat the update path - and the promotion - several times in the future. It will, of course, be a pure coincidence if you time this whenever version 2 drops in the charts.

3. This situation doesn't solve the problem of having two versions of your app in the App Store. However you can permanently reduce the price for version 1 once version 2 is out and re-offer the update promotion from time to time.

4. Yes. New customers can buy the new version for a reduced price as well as existing customers. There's no way around this. However it is the very concept of peggling to give that advantage to some users to gain visibility for thousands of others later when the app is up in the charts.

5. There are additional variations. You can vary time the length of the reduced price time period. You can repeat it. If you have a potentially very successful next version coming up and you don't think you need upfront promotions - such could be the case with Tweetie 2 - you can inform your user base that you will provide the upgrade path "soon" and try to maximise $2.99 sales before this happens.

Personally, I prefer to do this the other way around and get the damage out of the way with a pre-announced introductory sale limited to 24 hours as early after release as possible. In this way, you harvest the benefits of those expectedly high sales numbers and your chart position before you bring in the full price version. Then I would repeat the promotion much later at least one more time to satisfy the left out customer base.

Building a business

Now, this might strike you as a lot of work but it's really not that dramatic. And it builds something that in my opinion might be over time worth more than some of your apps: an active newsletter base.

So while this approach isn't traditional in terms of what currently happens on the App Store, it plays well with the tools we've been provided with.

If done effectively, I see no reason why you won't end up with a consistent App Store offering as well as the least possible disgruntled user base, as users of your version 1 app will be still be paying you some money, while you'll also be generating revenue from and a high chart position for version 2.

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Markus started Windmill Apps in February 2009 having previous founded and sold in-store and online photo service solutions Silverwire to HP. Based in San Diego, Windmill Apps creates mobile applications for iPhone, Android and Blackberry.

You can follow Marcus on his blog and via twitter.