

You’re Pricing It Wrong: Software Pricing Demystified - willfarrell
http://www.smashingmagazine.com/2011/09/28/youre-pricing-it-wrong-software-pricing-demystified/

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acangiano
One point that I rarely see made in this type of valuable articles, is how
pricing affects your ability to do paid advertisement.

Let's say that for your particular niche, you pay on average $1 per click.
These are the expected conversion rates to break even, depending on the price
of your product.

$1 - 100%

$2 - 50%

$4 - 25%

$8 - 12.5%

$16 - 6.25%

$32 - 3.125%

$64 - 1.563%

$128 - 0.781%

In general, it's far easier to convert 1.5% of your visitors, with a product
that costs $64 than it is getting 50% of your visitors to pay $2, 25% to pay
$4, or even 12.5% to pay $8.

So in my experience, charging a premium has practical implications when
advertising, that go beyond pricing as a quality indicator.

The lifetime value of a new customer must justify the cost of paid acquisition
channels, and leave room for profit.

~~~
evolution
This is true with assumption that both products are offered in same segment of
the market where cost per click is same. Often, products with $2 pricing are
offered to much wider demographics than products with $64 pricing. For lower
priced product there can be bulk targeting strategy as well where word of
mouth and viral sign ups can also be seen. Also as pricing increases you go
into B2B sales where complete different marketing/sales strategy needs to be
adopted.

~~~
richardw
Let me try challenge that. For every iPhone app purchaser that bickers over a
$3 price, a fairly pricey iPhone has been sold. Those are the same human
beings but acting in different ways depending on the combination of perceived
value and price. They're the same demographic, the same B2C target market.

Apple sold a seriously expensive (especially initially) device to people who
would later complain about 2 bucks. They owned word-of-mouth and viral. Any
Nokia user seeing their friend using an iPhone would immediately calculate the
months to the end of their phone contract. There's been so much free marketing
that it can't possibly be calculated. But the product is not cheap.

Our challenge is to find out how to harness that for our own
software/services. First step is to avoid boxing ourselves in, e.g. by price.

------
alttag

      > Objective Value:
      > (Hourly rate × Development time in hours) − Price = Value
    

Um, no. This assumes the value of the product is based on the inputs, and is
incorrectly modeled from the seller's perspective. Any product's value is
determined by the buyer, who is the one making the purchasing decisions. The
value is not in how much time the developer put into it, but what it _does_.

Yes, the article is about subjective value (and finding it), not objective
value, but taking the developer's (biased) perception of value as a starting
point is a bad idea.

Pricing should be determined early in the development process to inform go/no-
go, and the amount of development effort to apply. Starting from scratch on
pricing after the product is ready is backward.

~~~
danielsoneg
One of my favorite anecdotes about that comes from an article found here
(can't remember the exact article): The author (a developer) went along with
their lead salesperson on a call to MIT. After demoing the product, which
normally sold for $150k, the MIT rep asked about the price. The salesperson
immediately said "$1 Million" - the MIT rep chuckled and said, "Oh come on,
that's ridiculous - you know we don't pay more than $650k for software." The
salesperson responded, "Ok, we'll let you have it for $650k - now let's talk
extras."

So yes, price is a function of demand first - don't tell the customer what
it's worth, let them tell you.

~~~
ohashi
I was expecting this to end with a couple of kids at MIT built the thing for
free and open sourced it.

------
pwaring
"This rectangle represents the calculation of sales x price, and the biggest
rectangle represents the biggest profit."

Err, no. The biggest rectangle represents the biggest _revenue_. Profit !=
revenue, unless you have zero costs.

~~~
jpdoctor
Yes. I've seen a lot of folks that confuse profit and revenue, and most of
them are living in a bubble of some form or another.

To the author's credit, my guess is that he's living in the bubble of
sales&marketing. Their assignments are usually something like "Go out and sell
as much as you can!" with little regard to product cost, production limits, or
even cost-of-sales.

I'm guessing that is why he makes such an elementary blunder.

~~~
seunosewa
Isn't the marginal cost of software effectively zero?

~~~
Someone
Not if you operate a free help desk, a support web site, etc.

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mootothemax
I'm a bit surprised that the article mentions support, but at no point makes
the connection that more customers == more support requests.

I think I'd rather have 5 customers paying $20 than 10 customers paying $10 -
is this a thoroughly bone-headed point of view? Or is supporting more
customers essentially a marketing cost?

~~~
jasonfried
This all depends on the type of customer. If your customers are high
maintenance customers that require a lot of support, then having more
customers paying less money may not be worth it. However, more customers often
means more diversity so you're more protected against a few taking their
business elsewhere. And then more customers might mean you have to hire more
people which can affect the culture of your company. Seemingly simple
decisions can run pretty deep when you think about the true cost.

So it really all depends, but it's definitely not bone-headed.

If you're interested, here's an article I wrote for Inc. that discusses some
of these ideas: [http://www.inc.com/magazine/20101101/go-ahead-raise-your-
bus...](http://www.inc.com/magazine/20101101/go-ahead-raise-your-businesss-
prices.html)

------
jedc
It's discussed in the article, but I would recommend reading "Don't Roll the
Dice" which is a free e-book on software pricing by Neil Davidson:
<http://www.neildavidson.com/dontjustrollthedice.html>

(Neil is CEO of Red Gate Software and co-founded the Business of Software
conference.)

------
keithpeter

           "Apple charges a premium because of the perceived value of its products"
    

Is this necessarily true these days? Air vs Ultrabook pricing for example?

I take the general point. In the UK college education sector there are two
main players for providing virtual learning environments. One is open source,
the other has a lease contract price in the tens of thousands per year
(depending on the number of seats). Both are widely used!

------
dustyreagan
Testing prices sounds great, but how do you test prices for SaaS
subscriptions? I can't just lower or raise prices without making at least a
moderately big-to-do about it.

~~~
damoncali
Start low and raise them gradually. Grandfather existing customers at the
price they had when they signed up. If you need to cut prices, cut them for
existing customers and new customers. It's really not that big a deal unless
you're out of the startup phase.

~~~
Lost_BiomedE
Agree 100%. I did this with a consumable online retail product. It works well.
Not only do you find the right price-point, but it gives you a solid base
revenue from loyal customers to finance overhead and test marketing.

