
How to price software/Saas? - nreece
http://network.businessofsoftware.org/forum/topics/how-to-price-softwaresaas
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patio11
The best advice I have ever received: charge more. Whatever your first
impression is, it is not enough.

You do not have enough confidence in your application. You see how much of a
hack it is. You worry that someone could duplicate it all in a Jolt-fueled
frenzy. And you're wrong.

2.5 years ago I was terrified of the prospect of taking money and asked for
some folks opinions on whether my software was worth $15, $20, or $25. In my
heart of hearts, I was sure it would not sell even at $15. Someone convinced
me to charge $25, at the least. I wish I remember who -- the decision has made
me over ten thousand bucks.

And I'll be raising prices one of these days. People will pay them -- that is
all I need to know to justify a price increase.

~~~
russell
I remember a great story from Sandra Kurtzig's book "CEO: Building a $400
Million Company from the Ground Up". She demoed her package to her first
customer. He was wowed and asked , "How much?" She was worried about
overpricing, but she said "$50,000" anyway. And when he didn't blink, she
added, "per module." And when he still didn't object, "per year."

It really depends on who your customer is. Many managers have discretion up to
$1000, so a few hundred dollars is not a hard sell. Above that gets into the
corporate approval cycle. If you are selling enterprise software, you can get
away with $2500 per seat, but then your selling cycle becomes months long.

If you are selling to consumers, maybe only a few dollars or a few $10's of
dollars. Think TurboTax. Developers are the really cheap bastards, maybe $.05,
But they can probably talk their managers into spending a couple of hundred
dollars.

~~~
ible
The perceptions of the customer makes a huge difference. A friend works at
software company which sells software to corporate and government clients.
Their pricing varies from $50,000 to $300,000 with the size and type of the
organization they are selling to. They originally tried to sell to larger
customers for the same price as smaller, but they didn't get any sales until
they jacked up the price.

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jd
> Do you look to the market to price (external input) or do you primarily look
> internally (we think it's worth xyz and adds $x value therefore..)?

Whatever you do, don't look internally. Your estimate of what it's worth is
always awful. Why? Because prices aren't measured on a linear scale. Just to
take an example from every day life: books. A lot of people make impulse
purchases of books in the $10-$20 dollar range. Let's call one of those people
Bob. It doesn't matter much if Bob is short on cash, a $10 book is easily
bought. Often, Bob won't read the book, or won't finish it because it may not
turn out to be very good. And curiously, Bob will not save to buy a $30 book,
that he's sure he's going to like, because it's simply priced outside of the
arbitrary range. In our minds, good books are not allowed to cost more than
bad books. If we see two John Grisham titles laying next to each other in the
bookstore, and if they're priced differently, what do we assume?

a) one book is much better/enjoyable/exciting than the other book

b) one book is newer/more popular/hardcover/etc

Think about this. It makes no sense that (b) is the right answer. And yet it
is.

Mostly, I think, you have to find the right price point by experimentation.
Don't be afraid to raise the price when you release a new version, and don't
be afraid to lower the price with holiday certificates. Then measure and
refine. A lot of people are afraid of raising prices because they might lose
customers that way, but compare that to all the money lost by giving away your
product too cheaply.

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bdfh42
Eric Sink wrote an excellent primer on software pricing and you can read it at
<http://www.ericsink.com/bos/Product_Pricing.html>

~~~
lbrandy
That was a good read. He says: "We want to charge the maximum amount that our
customers are willing to pay." At the risk of being pedantic, the more
precisely correct answer is to charge each customer how much that customer is
willing to pay. All other things being equal, that would be optimal pricing.
All other things, of course, aren't equal.

That is why versioning exists. It lets you better approximate getting each
person to pay how much they'd be willing to pay without all the hassle. He has
that much right.

The part he neglects to mention is why three versions is a magic number. He
hints at the reason but it should be stated more often. People do not like
complexity so having -too- many choices becomes overwhelming. Three lies in a
sweet spot where people tend not to be overwhelmed (small, medium, large).

There is a more important reason, though, and that is the aversion to
extremes. People are averse to choosing any extreme without good cause. Three
is the minimum number to take advantage of this. If you had just two versions,
the best way to force people to upgrade to the better and more expensive
version is by simply introducing a new super-expensive third option. This
causes angst in people who might otherwise buy the cheapest.

Hence why everything comes in small/medium/large, etc. This is also why the
"default" position is always the middle, and you have to ask for the others
specifically. Use words for the lowest like "basic" or "starter" etc. In
general, versioning in threes is done to force "most" people into the middle
option and let you profit more on your "power users" in the high-end (for
example, I am a known "power-user" at Wendy's).

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joseakle
Here are several articles i've collected over time about pricing:

[http://dl.getdropbox.com/u/113637/softwarepricing/pricing%20...](http://dl.getdropbox.com/u/113637/softwarepricing/pricing%20new%20products%20mckinsey.pdf)

[http://dl.getdropbox.com/u/113637/softwarepricing/How_Do_You...](http://dl.getdropbox.com/u/113637/softwarepricing/How_Do_You_Know_When_the_Price_Is_Right_.pdf)

[http://dl.getdropbox.com/u/113637/softwarepricing/Econometri...](http://dl.getdropbox.com/u/113637/softwarepricing/Econometric%20Analysis%20of%20Switching%20Costs%20in%20the%20Software%20Indsutry%20.pdf)

<http://dl.getdropbox.com/u/113637/softwarepricing/VBSP.pdf>

[http://dl.getdropbox.com/u/113637/softwarepricing/PricingMet...](http://dl.getdropbox.com/u/113637/softwarepricing/PricingMetrics.pdf)

[http://dl.getdropbox.com/u/113637/softwarepricing/SW_Pricing...](http://dl.getdropbox.com/u/113637/softwarepricing/SW_Pricing_Licensing_Report.pdf)

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mdasen
First, look at your variable costs. These are the things that go up as more
people use your product. In SaaS, that means bandwidth and storage. Price
accordingly. I think $0.25 per GB for both storage and bandwidth is a
reasonable assumption (yes AWS can give you lower, but you have to deal with
request pricing and S3 vs. EC2 persistent storage, etc.). Don't price yourself
lower than that. If you want to give people 5GB of storage space and 50GB of
transfer, you need to charge them at least $15. Those are real costs.

Any free version will be crippled because storage and bandwidth cost money.
That's ok. Give a few MB away for free with unlimited time (unless you have a
SaaS that isn't going to be crippled by low storage allowances). That way,
people can sign up without a credit card and really use the system without any
hassle. If they really want it, they'll need more storage and pay. Most of the
accounts will probably end up being browsers who don't really want/need your
service, but that's ok.

Take into consideration your market. Is this a market with lots of users? If
so, go for lower margins, you'll make it back in scale. If this is a niche,
that niche will pay up and you'll have fewer users so you'll have to charge
more.

Most importantly, make it obvious. Don't make it so that someone looking at
your rates wonders why the pricing scheme is the way it is. Make it obvious
how to sign up and terminate. Make it hassle-free. It makes you look
professional. Don't do paypal or some other form of payment simply because
it's easy/cheap. It's a hassle. It looks unprofessional. Make it easy for
users to get to what they want - hopefully it's your product, but if not
they're still people that deserve the respect of ease of use.

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prakash
Thanks! Didn't know the BoS site had a forum as well.

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windsurfer
I'm personally against the idea of selling software. It doesn't have any real
value because it costs nothing to reproduce. Sure, the development costs
money, and you need to live, but there are other more morally correct ways of
obtaining cash than selling something that should be free.

For more, see fsf.org

~~~
dhimes
Is it moral to charge for food? Water? Heat? For tutoring or teaching? If I've
learned something in my years and I want to make the world better by passing
it on, through software or any other means, I'm morally _obligated_ to find a
way to sustain it. I personally also feel morally obligated to educate my
children so that they can do the same.

The best model man has yet developed for allowing people's talents to be used
to their fullest is _business_.

I disagree with your implication that I am somehow immoral for selling
software. In fact, I am a little annoyed.

(Edit: but I did upmod because it's an interesting POV that deserves to be
heard.)

