

Pricing Principles - craigkerstiens
http://insideintercom.io/four-pricing-principals-to-never-forget/

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tlogan
A few more tricks (I call it "red flags") I learned while running my small
SaaS:

\- if you sell service for $10/month and user says "I would buy it for
$5/month" - that means he/she will not buy. Just do an experiment: for each
customer which does that just give them discount for $5/month (even $2/month):
nobody will come back and pay.

\- if you sell service for $10/month and user needs to "to talk to somebody"
before committing purchase: he/she will not buy. On other hand, if you have
business / enterprise plan (which is like $3000/year) that is a good sign.

\- lowering prices will not get you more paying customers

\- start with "low" prices and rise it during lifetime of your company. Never
go back.

~~~
andrewflnr
Does that last point include grandfathering in existing users on cheaper
plans? If I'm an existing user, I'll be annoyed if my bill goes up, especially
if it's a really big jump. But if prices go down, everyone is happy. If you
start high, how big of a problem is it to go down? How much of my objection is
just because I'm spoiled by the internet and haven't run a business?

~~~
nedwin
Grandfathering is the best thing to do here.

A good trick I've heard is to launch at a high price - say $100 per month -
and do promos through marketing channels where you are quite liberal with
discounts. This gives the perception of high value on a limited time offer
while still making it clear what your price point is.

You then make the discounts more and more scarce over time and for smaller and
smaller amounts until you settle on optimal pricing.

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stevesaldana
One of the biggest problems I face is determining when the time is right to
shift from free to paid. I originally slapped a subscription page on my app[1]
thinking "we'll see how this goes". But after a few weeks of 0 conversions, I
had a tough time justifying turning down folks who would have at least signed
up if there wasn't a payment required - so I made it free.

The way I look at it is that any feedback with a free plan is better than zero
feedback with a subscription. I gain a lot of valuable insight observing how
users actually use the service. I'm hesitant to give that up by switching back
to a subscription plan and watching new signups die again.

I know there's no magic bullet. I suppose this could be solved quickly if I
had more time to devote to selling and marketing - admittedly I've been
slacking in that department.

Any words of wisdom would be much appreciated.

[1] <https://beanjockey.com>

~~~
alanbyrne
Stop coding, pick up the phone and call some of your free users. Ask them if
they'd pay for your product and why/why not.

If none of your free customers are willing to pay, then it might be time for a
pivot. Such as licensing your app to financial providers as a value add.

~~~
timv
If you do pivot, there might be enough return in acting as a broker (/lead
generator) for selling financial products to your users.

Once they're paid down their loans (and even before then) you should have a
pretty good picture of their financial situation. What are they going to do
with that extra cash they have now that their loans repayments are done?

* Take out a loan for a car/holiday?

* Open a share trading account?

* While they're paying down their debts can you get them a better deal on their credit card?

~~~
stevesaldana
You are spot on. There are so many alternative fee-generating sources and
maybe I've been too stubborn at ignoring them. My motivation going into this
was that I wanted to create something that provided a definitive value of x,
and have customers happily pay a function of x. The known value / known cost
approach seemed fair to me.

Pitching additional product for me is troublesome because of the intrinsic
fees associated with them. I look at my service as something that accelerates
debt repayment in the most efficient way. But to encourage customers to roll-
over into a cc balance transfer, mortgage refi, or student loan consolidation,
it just pushes their obligations further out in the future. Now, this might
not be a bad thing for some people. But ultimately you could get a lot of
people into the fee roulette game and it becomes a never-ending cycle where
every economic peak and trough of high->low interest rates creates a new
incentive for a financial services company to pitch new product.

So, I struggle with this. Do I want to maximize my revenue, or do I want to
just provide a really good service for the small group of people willing to
pay for it...

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jonnathanson
Great read. Obviously there's a lot more to pricing -- which is as much
science as it is art -- than can be covered in an article. For those
interested, I would suggest an approachable, but comprehensive text on pricing
theory and analytics. "The Strategy and Tactics of Pricing" by Nagle, Hogan
and Zale is a great resource. (And speaking of pricing: buy it used, if
possible; like most textbooks, it's fairly expensive).

One word of caution: tiered and freemium models are, once again, all the rage
in software. And that's great. It's good to see people actually trying to make
a profit, and many of them succeeding. But it's very easy to go overboard on
tiering. Too much tiering and too much customization in your pricing model
will create two big problems: 1) customer confusion and resentment, 2) hidden
operational and opportunity costs in managing the tiers and customization.
Segmented pricing is great if you can do it, but it needs to be simple,
manageable, and transparent.

~~~
destraynor
Absolutely - if you find yourself having to tier lots & lots , it's a good
argument for utility pricing instead.

Re: Pricing, thanks will check it out.

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atte
Here's my situation: I have a product that I know 6% of 2000 users who have
given me their email address will take for "free," though it requires 15-20
minutes of work for them to participate (so they must see some value here).

I originally priced it at $99, but I haven't been able to get anyone to pay
that amount or $19. Do I just keep dropping prices until I can get someone to
pay? Is it a fair test to email out varying "discounts" to groups of users to
determine a price?

~~~
monkeyspaw
I'd work on your marketing. Do you have a series of case studies explaining
the benefits? Is their ROI calculated for them?

If you're providing them with that much value, maybe you just need to bring
their attention to that value.

That goes double if this is a b2b.

~~~
atte
Thanks for the tip. I don't have case studies or even testimonials yet, so
that may be hurting me. This is what my sales page looks like:
<http://cl.ly/image/1a21191A2U16>

~~~
alok-g
My gut feeling is that you should not reduce the price at all, and instead
work on proving the value you provide, just as you have identified too.

If I am working on a project that I need feedback on, _and_ I am convinced
that your solution will provide me that feedback, I'll happily pay $100. At
$40, I'll be happy to take risk too. At $20, it sounds like the price is so
low because the results would not be worth anything.

If the question is how to bootstrap, the best I can think of is to work
closely with those 6% people and refine your product to the needed extent,
proving value and getting testimonials.

~~~
timv
I agree that $19 is too low. That page is trying to convince me that I will
get ~20 comments from smart & knowledgeable people at a cost per comment of
<$1.

I simply don't believe that pitch. Anyone who is willing to do that for <$1
doesn't value their time, so why would I value their opinion?

I'd increase the price, add some case study/ROI, and provide more detail about
how it works (not necessarily on the landing page, but clearly linked)

~~~
Robin_Message
Worth pointing out what's in it for the advisors – namely, a chance to hear
about early products.

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jmadsen
"Adii Pienaar of WooThemes solved this problem by refusing to support non-
paying customers. If they’re not willing to pay you, then they’re not your
customers"

Great article all around, but I thought that was the biggest take away for
people running web apps & online games, or similar.

For a long time there was this "it's on the internet - it should be free"
mentality. There is a difference between freedom of information, and giving
away hard work with value.

~~~
aytekin
There are cases where a free plan actually makes sense.

Does the usage increases with time? Many users start using JotForm with very
low usage and then after using it for months or years they go over the 100
submission/month limit. I believe Evernote also had a similar pattern. Dropbox
probably also has it.

Can you use network effects? Only a tiny percentage of our users share their
forms with others on JotForm Form Templates gallery. Tiny percentage of 1
million users is still pretty good. So, we have all these ready to use form
templates for other users. It saves people time to be able to find a form
template for any use case. If we only had paid users the number of shared
templates would have been very low.

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Sealy
This is a great article.

When raising my prices, I'm always worried that my competition will be able to
see and roughly gauge how profitable I am. I'm worried that this will give
them an incentive offer products that overlap what I offer and undercut me.

Many price-sensitive customers will just leave at that point. Does anybody
share the same fears or have experience of this?

~~~
JacobAldridge
_I'm always worried that my competition will be able to see and roughly gauge
how profitable I am._ Not a chance (or, specifically, not a chance likely
enough to concern you). They're focused on their baby, not yours, and
'profitability' as a meaningful factor depends on variables including
overheads, business owner salaries, and vision which are next to impossible to
guess with any clarity.

 _I'm worried that this will give them an incentive [to] offer products that
overlap what I offer and undercut me._ This is more likely, but is the very
definition of competition. If you want to compete solely on price then you
(and your competitors) are signing up for a never-ending arms race. Find other
ways to compete, and know that success breeds imitators so you must always be
a step ahead in regards product or service innovation, or market penetration.

 _Many price-sensitive customers will just leave at that point._ Yes. That's
usually a good thing. Moreover, you will lose far fewer than you expect -
switching services requires an investment in research, deliberation, time to
change, time to re-learn, and risk of something new. The cost-savings need to
fund all of that as well, and often don't.

~~~
Sealy
Thanks Jacob, if anything that was an encouragement to keep me focused on my
overall goal of service improvement rather than to get intimidated by the
'business side' of running my website.

Can I tap your knowledge further. How important is it to have a clear division
of roles in a startup? What I am asking is, for greater success, can the techy
guy really be the business guy at the same time? (I'm thinking about the
partnership between Woz and Jobs)

~~~
JacobAldridge
Clear divison of roles is important BUT (here's the trick) one person can fill
more than one role.

There are loads of case studies where an innovative, entrepreneurial spirit
has teamed up with a more detailed focus operationally-minded colleague. As
long as their values and risk profiles are aligned, it can be (really, really)
great.

There are also many advantages to one person looking after both tech and sales
[1] - for one, it avoids building a product that customers aren't asking for.

So the clearly defined roles are still there - say product build and sales.
You might do both, so just make sure you keep yourself accountable to doing
them both justice - for example, scheduling blocks of time for each, and not
giving in to distractions. You will almost certainly prefer one to the other -
success is keeping the balance, and not one day finding you've been coding for
3 months without talking to a single customer or investor.

In the startup stage there will always be a lot of roles that aren't full time
and will be filled by a founder - think accounts, marketing, customer service.
As you grow, these can be handed over - and if you've always treated them as
separate roles, not just part of your job, then that role succession will be
much easier for you and your new recruit.

I'm always happy to answer business questions - email address in my profile if
you prefer.

[1] At startup, "the business guy" means "the sales guy". They're either
selling to customers or selling to investors; if they're writing 5 year plans
and applying their MBA's management reporting course, then they don't
understand startups.

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thezach
As a person who just launched their first two Android Applications this was an
excellent read.

My biggest question is do you think its best for applications to charge a one
time large fee or a monthly smaller fee?

~~~
destraynor
It depends on how often you deliver value and what costs you have.

If you have recurring costs that increase in size with your user base, then
charge a proportionate recurring fee.

If it's a game that someone buys, plays for a week and moves on to the next, a
subscription won't work, because there's no continuous value. So you charge up
front, deliver all your value up front, and get busy working on your second
game.

If you're thinking big applications (e.g. Photoshop) then your question
becomes about things like distribution, retention, sales channels, competitors
etc.

Bluntly You can take $2k every 2-3 years assuming people upgrade to your
latest release, or you can take $50 per month every month assuming people
stay. Both work out similar.

The advantage of the $2k model is that you get big money up front which you
can re-invest in more customer acquisition (or your next release). The
drawback is that $2k isn't a "no-brainer" sale, it needs approval, you need a
good brand, and you're limiting your addressable market a good bit.

The advantage of the $49 per month is that it's a zero risk try-out, people
will convert far far easier. The disadvantage is retention.

Product to product I'd give different advice, but in general, recurring is
easier to plan a business on.

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pbreit
Good article. I still think a free tier can be beneficial for most SaaS
products. At Eventbrite we shared space with Yammer and Zendesk, the three of
us with free tiers (Zendesk $20/year "donation") and really making it work.
The point is NOT to implement limits but instead to implement features that
make sense for those able to pay. For many SaaS services, that's admin tools
to manage users. The reality is that there are millions of companies out there
with fixed costs well less than $20k per month (don't forget there are non-
tech startup companies, too).

It cannot be overstated that it really is very easy to raise prices. It's
pretty much impossible to make a pricing mistake in the beginning because for
growing companies, the initial users will only amount to a fraction of total
users over time.

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dvt
Awesome read. Everyone planning to run a SASSy start-up should read this. I
would add that when I ran one of my first start-ups, we were sort of scared
about whether or not we're charging too much. After our first influx of
clients, that fear quickly diluted. (As it turns out, we could have charged a
lot more and people were still willing to pay.)

Generally speaking, you ought to charge _more_ than what you think you should.
For example, you may think that $25 dollars a month may be too much, but, in
reality, you should probably be charging $40 or $50 a month. This isn't a
silver-bullet, but, as developers and given the insane ROI (barring
development which you most likely did yourself) you get out of running a tech
start-up, we _heavily_ tend to undervalue our products.

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DenisM
Good stuff.

I would add that one exercise which should really help is sitting down and
actually quantifying the value customer receives - dollars saved, dollars
earned, time saved, all broken down by type of customer (however you chose to
define that), and by the aspect of their workflow you aim to improve.

What this will do is anchor your pricing gu feel to the right range. Besides,
you can show it to the users and get valuable push back where you're off. My
mentors spent countless hours convincing me of the value of this exercise and
it's finally sinking in now, so I am in a hurry to share the wisdom. :)

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kunle
Solid read. This is one of my favorite blogs about Saas businesses/services.

~~~
_neil
Agreed, one of my favorite product blogs as well. It's also prime example of
using your blog to educate, demonstrate domain knowledge, and eventually win
customers (worked on me, anyways).

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nubela
Mirror:
[http://webcache.googleusercontent.com/search?q=cache:http://...](http://webcache.googleusercontent.com/search?q=cache:http://insideintercom.io/four-
pricing-principals-to-never-forget/)

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logicallee
there's great danger in leaving value on the table. I suggest you survey no
fewer than 150 decision makers and start quoting them different pricing
amounts.

So that you're thorough, do your survey all hte way from $150M (anually) down
to whatever's silly (like a few bucks, you don't have to do those.).

For example:

    
    
      Quote decision maker #1, decision maker #2, and decision maker #3: $78213333.33
      Quote decision maker #4, decision maker #5, and decision maker #6: $38471111.11
      Quote decision maker #7, decision maker #8, and decision maker #9: $26702222.22
      Quote decision maker #10, decision maker #11, and decision maker #12: $20298271.60
      Quote decision maker #13, decision maker #14, and decision maker #15: $15549629.63
      Quote decision maker #16, decision maker #17, and decision maker #18: $7051412.89
      Quote decision maker #19, decision maker #20, and decision maker #21: $6571486.05
      Quote decision maker #22, decision maker #23, and decision maker #24: $3755915.26
      Quote decision maker #25, decision maker #26, and decision maker #27: $2857190.47
      Quote decision maker #28, decision maker #29, and decision maker #30: $2011964.30
      Quote decision maker #31, decision maker #32, and decision maker #33: $955402.69
      Quote decision maker #34, decision maker #35, and decision maker #36: $812816.78
      Quote decision maker #37, decision maker #38, and decision maker #39: $516906.05
      Quote decision maker #40, decision maker #41, and decision maker #42: $322132.83
      Quote decision maker #43, decision maker #44, and decision maker #45: $231654.29
      Quote decision maker #46, decision maker #47, and decision maker #48: $157176.59
      Quote decision maker #49, decision maker #50, and decision maker #51: $104682.89
      Quote decision maker #52, decision maker #53, and decision maker #54: $67406.83
      Quote decision maker #55, decision maker #56, and decision maker #57: $40156.30
      Quote decision maker #58, decision maker #59, and decision maker #60: $34938.66
      Quote decision maker #61, decision maker #62, and decision maker #63: $17201.68
      Quote decision maker #64, decision maker #65, and decision maker #66: $10708.61
      Quote decision maker #67, decision maker #68, and decision maker #69: $7962.40
      Quote decision maker #70, decision maker #71, and decision maker #72: $5854.78
      Quote decision maker #73, decision maker #74, and decision maker #75: $3738.44
      Quote decision maker #76, decision maker #77, and decision maker #78: $2609.52
      Quote decision maker #79, decision maker #80, and decision maker #81: $1678.07
      Quote decision maker #82, decision maker #83, and decision maker #84: $1169.41
      Quote decision maker #85, decision maker #86, and decision maker #87: $852.98
      Quote decision maker #88, decision maker #89, and decision maker #90: $504.30
      Quote decision maker #91, decision maker #92, and decision maker #93: $403.51
      Quote decision maker #94, decision maker #95, and decision maker #96: $217.04
      Quote decision maker #97, decision maker #98, and decision maker #99: $180.79
      Quote decision maker #100, decision maker #101, and decision maker #102: $100.46
    

In this case 102 decision makers is plenty.

If you chart it you should see a precipitious drop in interest somewhere.
Where is that?

If you DON'T do the above you'll NEVER know!! :)

By the way if anyone's interested, this is made by a script that decays from
100M by 2/3 each go, then fudges +/- 20% to make it a bit more organic.

~~~
DenisM
I'm not brave enough to start with this price level, but then I fear that
starting lower will leave money on the table...

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snambi
does increasing prices increases the number of customers also?

