
Pricing Your Product - wanderer42
https://www.sequoiacap.com/article/pricing-your-product/
======
lpolovets
One of the biggest lessons I've learned as a VC in the past few years is that
pricing really has to be aligned with and proportional to the value your
product provides. If someone gets $100 of value per seat and you charge
$15/seat, that's great. If you charge $15/seat for a product that creates
value per gigabyte, people start gaming the system. E.g. they'll buy one seat
for their company and ask that person to be the proxy user for your product.
Or if you charge $10/GB and people get $20/GB of value of the first few
gigabytes and then $5/GB of value after that, you're going to run into
problems.

So figure out how users perceive and quantify your value to themselves, and
then try to come up with a simple pricing scheme that captures 10-25% of that
value. That way every time someone pays you $1, they get $4-$10 of value, and
that's a no brainer purchase.

Getting pricing right has a huge ROI across the board. Good pricing improves
margins, reduces sales friction, and creates happier customers.

The best book that I've read on pricing is Monetizing Innovation:
[https://www.amazon.com/Monetizing-Innovation-Companies-
Desig...](https://www.amazon.com/Monetizing-Innovation-Companies-Design-
Product-ebook/dp/B01F4DYY1I)

~~~
skmurphy
The First Round post “Madhavan Ramanujam–It’s Price Before Product. Period”
captures about 80% of the value for startups so I would start there. Its at
[https://firstround.com/review/its-price-before-product-
perio...](https://firstround.com/review/its-price-before-product-period/)

I reviewed the book when it came out and extracted "9 Rules for Monetizing
Innovation" at [https://www.skmurphy.com/blog/2016/11/16/nine-rules-from-
mon...](https://www.skmurphy.com/blog/2016/11/16/nine-rules-from-monetizing-
innovation/)

There are better books on pricing: for a straight up analysis of product
pricing "The Strategy and Tactics of Pricing” by Thomas Nagle is the best book
that I have read. It's on Amazon at [http://www.amazon.com/Strategy-Tactics-
Pricing-Profitable-De...](http://www.amazon.com/Strategy-Tactics-Pricing-
Profitable-Decision/dp/013026248X)

~~~
laurex
I've been working on a pricing project using a methodology largely influenced
by Nagle's work. The premise is that it's possible to learn what customers
value before pricing something and for the price to be optimized around
customer value, and perceived value. It feels much more promising than other
pricing projects I've been involved with. This podcast gives an overview of
some of the thinking here: [https://impactpricing.com/podcast/ep46-alan-
albert-why-much-...](https://impactpricing.com/podcast/ep46-alan-albert-why-
much-of-what-you-know-about-your-customers-is-wrong/)

~~~
skmurphy
Mark Stiving at Impact Pricing does a very good job at exploring and analyzing
pricing issues.

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101008
My problem with this advice of testing your pricing strategy is how to
communicate this to actual customers. Maybe this isn't a thing in Europe or
USA; but in third-world countries a change in the price it is important and
something your customers want to know.

If I set my prices higher, I can't change it for my current customers. They
will get mad. So I ahve to create a full logic on the backend for customers
created after X date, etc. It is a mess.

If I set my prices lower (i.e., display lower prices on landing page, etc), my
current customers will get mad at me if I don't change them for them too ("Why
I am paying more than the price you are saying this costs?"), etc.

So for me, this strategy of A/B testing prices, find the right price, etc, has
been always too complicated to implement. When I tried, I end up adding more
problems to me to deal with, and at the end I couldn't analyze the trends I
wanted it.

~~~
pavlov
One trick you can use is to figure out a set of product parameters that you
can tweak into new combinations to create lots of pricing plans. They may be
effectively identical to previous ones as far as your cost and engineering are
concerned, but different enough that customers don’t feel someone is getting a
different price for the same thing.

E.g. your previous “Medium Starter” plan included 10 foobags and up to 1.5
zoffobytes of data for a price of $19. Your new “Basic Plus” plan includes 15
foobags and 1.2 zoffobytes for $25.

~~~
andi999
I didnt buy a robot vacuum because of this. There was a crazy amount of
different ones from the same company with different pricings. Maybe it is
better now. But usually I want a product which fulfills my supposed needs for
a reasonable price. Too many different products (especially from the same
vendor) give me the certainty no matter which one I choose one or the other
criterium will fail.

~~~
pavlov
The advice is more applicable to SaaS products where users can easily switch
between plans, and creating new combinations of the product parameters is
free.

Assuming you don’t overdo it, having multiple plans for different types of
users can actually help customers feel more confident that your company has
the experience to understand their needs.

------
GCA10
The article hits its stride at paragraph 14, where they talk about the
importance of "value-based pricing" rather than "cost-based pricing."

My wake-up moment came in 2013 or so, when I was pricing the digital version
of a long-ago print book I'd written. ("Merchants of Debt"). I knew that it
kept finding a niche audience among investment bankers and people who want to
be investment bankers.

E-book prices were dropping, and I wanted to get full value from my best
customers without seeming out of step with the market. After all, most finance
types can afford to be price-insensitive, but they still want to feel like
they're getting good value. The solution was to create an unabridged edition
for $9.99, and a condensed edition (about 40% of the content) for $3.99. Truth
is, the condensed edition gets very few orders. But the fact that it exists
makes it much easier for serious buyers to pay up for the full edition.

Knowing the customer's frame of mind -- which usually is quite nuanced -- is
the key. Especially when, as the Sequoia folks point out, the marginal cost of
another digital copy is always very close to zero.

~~~
duxup
I fall for this time and again.

I want to buy a board game. I've already decided I'm buying it but hey there
is a deluxe version for a price I wasn't planning to pay... so yeah I buy it.

~~~
sah2ed
> _I fall for this time and again._

That tactic is called _price anchoring_ and the reason it tends to work on a
lot of people is because it relies on a cognitive bias called anchoring [1].

[1]
[https://en.wikipedia.org/wiki/Anchoring_(cognitive_bias)](https://en.wikipedia.org/wiki/Anchoring_\(cognitive_bias\))

------
eruci
Pricing is HARD. I launched a SaaS in 2016 with a 100eur per month recurring
plan. only 5 signups in two years. Then around 2018 someone wrote me "that's
incredibly cheap. why?" So, I doubled it to 200eur per month. Today there are
60 recurring plans at 200 per month, and only 3 @100(grandfathered plans from
the early days.)

Clients tend to think that if something seems too cheap, something is wrong
with it.

~~~
IAmGraydon
Did anything else besides the price change since 2018?

~~~
eruci
Also, at the end of 2018, based on their feedback, I added a "pricing" &
comparison page: [https://geocode.xyz/pricing](https://geocode.xyz/pricing)

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lucb1e
> Natera recently brought to market a non-invasive pre-natal test that can
> detect Down syndrome and other conditions in a mother’s blood. Previously,
> testing for these conditions required a risky procedure that extracted
> tissue from the fetus. Other non-invasive tests aren’t as comprehensive.

> Because Natera's test is better than its competitors' products, the company
> charges more.

> “Premium pricing communicates a premium product,” says Matthew Rabinowitz,
> the company’s CEO.

Is this normal in the USA? Talking of "premium offerings" in the context of
healthcare seems sickening to me. Premium hospital beds with high speed
broadband, alrighty, but premium healthcare itself? I understand that one
needs to recoup R&D costs a few times over for it to be worth the risk, but
that's simply cost price (risk * R&D cost / unit count * unit cost) and not a
"premium product". This isn't a non-essential premium Ferrari, it could help a
lot of people. Is it just me who finds this a really weird example?

~~~
ryeights
That stuck out to me as well, but it makes sense as an incentive for companies
to create better products. Why pour money into R&D to develop new products if
you're restricted to charging existing prices? Might as well just develop the
existing product and save on the R&D costs.

~~~
freepor
Bounties are a good way to solve this. Invent a new therapy? The government
buys your patent for a sum proportional to the value created (not to the
dollars invested) and releases it to the public domain.

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throwaway7281
Value-based pricing is the worst societal invention. Imagine a medicine can be
made from simple ingredients, but you discovered a recipe by accident. It's
very valuable since it might save lives, so the value is high, the cost is low
and you can reap the benefit on the mere basis that you discovered something
by accident. You also need to make sure that no one "gets it", so do not
educate people, just milk them - and in the worst case, mislead them, work
against any threat "knowledge" would pose.

Mundus vult decipi, ergo decipiatur.

Imagine a world, where progress and invention would be something shared and
done not out of greed but out of ability and ultimately generosity that would
add to the grace of our race.

Instead we celebrate greed, as if we were a bunch of apes.

My fear is that human society needs to reach new lows before we actually have
the chance to see our own potential (and then it might be too late, anyway).

~~~
exolymph
Supply and demand dynamics =/= invention, but rather description.

~~~
throwaway7281
I understand the price signal and the process of price detection through the
myriads of needs and abilities. That's all fine and actually great, as a
relatively robust distributed system.

What I do not get is why keeping people in the dark is a cornerstone to many
endeavours - value-based pricing just being an example of that.

Edit: maybe I spend too much time in the open source world and mistake it for
some model setup for other parts of society that do not work like that at all.

------
mcsoft
It's insightful to learn that in their guide on pricing Sequoia cites Phil
Libin, then-CEO of Sequoia-backed Evernote, who was later kicked out exactly
because the company struggled to find the right pricing model.

~~~
vmception
Reminds me of seeing job posting's from Softbank for a "Valuation's Director"
immediately after finmeme accounts trashed the WeWork S-1

------
paulpauper
How ironic given that it's biggest winners in its portfolio are companies that
never sold anything (at least not initially), Linkedin and Instagram for
example.

~~~
duxup
The article seems to indicate that Linked In has made a lot of money selling
services.

~~~
twelve40
$250mil/year is 1/100th of what they eventually got acquired for. Linkedin was
probably eventually making more than that, too (need to look) but I'd be
surprised if revenue was the main reason for LI's success, probably more of a
nice to have...

~~~
laurex
LinkedIn has constantly amazed me as far as how little they have done with
their main asset, the professional social graph. That they don't offer paid
products for hosted professional associations, or verified credentials, a CRM,
or even intra-organization communication fascinates me. There are so many
other examples of how you could make money with what they have, not even
counting creepy ones.

------
reubenswartz
This is a helpful article and I would add to the general "value-based" pricing
discussion:

Price is limited by perceived differential value.

So if there's value that the buyer doesn't perceive, it doesn't count. (Often,
there's value that the buyer perceives and you don't in the SaaS world.)

If there's perceived value, but you charge $1000 and someone else offers the
same perceived value for $100, it's going to be hard going.

This feeds back into understanding your customer subsegment really well. In
the example above, perhaps the general market thinks you are at -$900, but for
your niche, there are some critical aspects that make it worth much more.

Another corollary is to offer different price points, all aligned with how the
buyer perceives value, such that you're happy with whatever choice they make.

------
x3blah
A better title might be "Pricing Your Service" since the overwhleming majority
of examples cited are services, not products.

------
koolhead17
When it comes to pricing I relate it with Jobs to be Done. Pain, desire to
progress and willingness to pay as a prime lever.

Whatever pain you are solving, if customers have no money they are not going
to buy the product.

If customer has no desire to progress, they will stick with existing software
even your product will make like 100X better.

------
zoomablemind
Good read, emphasizes an importance of figuring out a customer-perceived value
of your product.

Sidenote: reading it was very much painful on eyes, at least on my phone
screen. That thin font looks almost like a watermark. Maybe it'd be better on
a laptop screen.

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jkuria
ICYMI (Was on the front page most of the day 2 weeks ago):

Once you figure out general price, here's a good guide to Pricing Plans

[https://capitalandgrowth.org/answers/Article/3169972/The-
Def...](https://capitalandgrowth.org/answers/Article/3169972/The-Definitive-
Guide-to-Pricing-Plans)

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dang
This is a stub root comment to collect comments about website formatting,
which have been transferred hither.

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paullth
Why not just have white text on a white background? No idea what's in the
article

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tasuki
It's like #222 on #FFF ... not bad contrast?

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paullth
Not sure why, but on my phone it's barely readable.

~~~
pests
Night mode or dark theme related maybe?

Some sites don't set a body background color thinking it will always be white.

Might be related.

