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We're currently testing an app with a bunch of external testers through TestFlight. Soon we will launch the app for the public with a price tag of $3,99.

What will happen to the build that people have on their phone? I'm reading that the users will see the 1.0 (App Store version) as an update available but will they have to pay for it or will they just keep the app and future updates for free?

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I've had mixed experiences with whether users see the app show in Updates at all in the App Store. Generally it's safer to suggest that users will have to navigate through the App Store and search for your app to find 1.0. This is in line with what Apple says:

When the test period is over, you will no longer be able to open the beta build. To install the public version of the app, download or purchase the app from the App Store. In-app purchases are free only during beta testing, and any in-app purchases made during testing will not carry over to public versions.

https://developer.apple.com/testflight/testers/

App Store does not provide free copies of your app to TestFlight users — they will have to purchase the app, but users can keep the TestFlight build for free until the build expires. You can provide promotional codes through iTunes Connect to your TestFlight users if you wish to give them a free copy of the app.

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