
How to price something - mh_
http://37signals.com/svn/posts/3394-how-to-price-something
======
simonsarris
(I knew this philosophy degree would come in handy)

The author may not know it, but part of this article is describing something
occasionally known as the _judgement-action gap._ It's a point in
psychology/philosophy typically brought up in moral reasoning, specifically
because there's very often a massive discrepancy between what people say they
will do and what they end up doing in any moral situation.[1] This is no doubt
true for saying they would pay X for Y.

I think the judgement-action gap is an extremely important thing to remember
at all times, especially in the realms of business deals. If a commitment
isn't on paper, it's not really a commitment. (Money counts as paper, too.)

Alas while I think the gap is a neat principle, I'd rather read an article
just on that principle than one titled "How to price something" that
culminates in the advice "make up a price, actually sell it and see." If
that's all the advice you have, then even asking for people's opinions of what
they'd pay for it is more useful than a 100% arbitrary number. It seems odd
the article would offer no _real_ solutions.

~~~~~~~~~~~~~~~~~~~~~~~

Hey! Wait a minute!

I hate to be the typical HN cynic but the last line reveals that this is not
an article at all but a thinly veiled advertisement.

While the article doesn't _actually_ say how to effectively price something, I
had no idea what Basecamp Breeze is and now I do. 37 signals blog, you've got
us again![2]

[1] My favorite example of this, though a bit dour, is "the only moral
abortion is my abortion", a long list of stories of people who are morally
opposed to abortions, yet still getting them:
[http://www.prochoiceactionnetwork-
canada.org/articles/anti-t...](http://www.prochoiceactionnetwork-
canada.org/articles/anti-tales.shtml)

[2] I'm always surprised that 37signals posts get upvoted extremely quickly,
seemingly regardless of content. It's not a bad thing per se, just a
surprising thing.

~~~
vog
Indeed, this article's quality is nowhere near e.g. what Joel Spolsky wrote on
that topic:

[http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...](http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html)

~~~
dshah
Another really good piece on pricing is:

<http://neildavidson.com/download/dont-just-roll-the-dice/>

By @neildavidson

------
biot
This one is quite the useless fluff piece. Not a single mention of even
covering your hard costs. Just guess, be wrong, and try it out. Gee, thanks.
Obviously I'm not in the subset of HN that finds "pull a number out of your
ass, rinse, repeat" to be worth submitting and upvoting. Isn't the reason to
ask about pricing to avoid this kind of crude guesswork in the first place?

If you want something of more substance, read this:
[http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...](http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html)
Ultimately, you'll still have to pick a number and try it out but at least you
can do so somewhat intelligently.

~~~
jasonfried
"Not a single mention of even covering your hard costs."

I didn't include that because that's fundamental. That's a given. If you don't
know that you need to cover your costs to stay in business, then no advice is
going to help you.

But also, remember... The market doesn't give a shit about your costs. So
sometimes it's wise to start from the price and then build your business
around that.

Because if you're price is too high because you're costs are too high, you're
in trouble regardless of how you come up with a price.

~~~
biot
Right. So your updated advice is that you must cover your costs since it's
fundamental; a given. But wait... nobody cares about costs, so skip that
fundamental given thing, pick some arbitrary number, and build your business
around said arbitrary number.

Had your blog post been "How we arrived at Breeze's price", I would have
nothing to say as you would be describing your rationale for arbitrarily
drawing a number out of a hat and charging that. However, your blog post is
titled "How to price something" and from that viewpoint the advice is lacking.

------
jerrya
Various pricing schemes:

    
    
      Price what everyone else is charging ($5, $10, $20 per month)
      Price according to value (you're saving people 200 labor hours per year, price it 
        at 200 * hourly wage)
      Price at the ideal price (good luck finding it, and if customers catch wind 
        you're playing a/b games with them, barricade your doors)
      Price discriminate (create different pricing options for basically the 
        same product with different features and attributes, maybe based on amount 
        of use, maybe based on premium features)
    

Another real world tactic: create competitors or offbranded versions of the
same service. This can help support your branded cost by allowing unbranded
seemingly less good products be sold at lower prices to price discriminating
consumers. It can let you sell to two groups of customers as well, including
those customers your competitors might steal. It can make your entire market
seem that much more of a real thing since now there seem to be competitors in
it. In can drive up barriers to entry since there are competitors, and since
you have the various pricing schemes already covered.

The article mentions that you can't ask people how much something costs, what
matters is their behavior. And that's true. But I think you can ask people to
compare products and services with known prices to your new product. Do you
pay for Evernote at $5 per month and Spotify at $10 per month? If you could
only pay for one at $7 per month, which one would you pay for? If you could
only pay for Evernote at $5 per month, or my new site that does X at $5 per
month which would you pay for? And you can do A/B testing on those prices.

------
roel_v
Warning: this post is an ad for an email list service.

Secondly: how do they get away with charging people for an email list service?
Is this for an Apple-like cult of Basecamp users?

~~~
fleitz
It's $10 dollars, at this point you should be wondering how Starbucks can
charge $2 for coffee. Or how Double Bubble can fleece kids for a whole 25
cents for some gum that probably costs less than a cent.

The reason why they can charge it, is because I'd rather pay anyone $2 for
coffee than have to lug around a coffee maker.

Did you know that if you drive to a rest stop in Washington State they will
give you _FREE_ coffee?

------
hayksaakian
Interesting that they chose $10 for breeze, when Google groups is free

:-)

~~~
sleepyhead
I'm a developer and I dislike Google Groups. Do you know any normal people who
use it? I haven't looked at Breeze but assume it would be worth $10 to most
people who require that functionality.

~~~
lopatin
A lot of my non technical friends use Google Groups. Other than a few extra
drop downs during set-up, it seems to me that there's literally no functional
difference in the two services.

I don't know how they can blatantly lie and tell buyers that they're better
off with their $10/month service over the free Google Groups, but they seem to
be getting away with it. Because they're 37 Signals and everything else they
make is amazing.

~~~
dshah
I believe the price is $10, one-time (not $10/month).

------
trustfundbaby
Allow me to recommend the free ebook that I found massively useful on this
exact topic.

"Don't just roll the dice" by Neil Davidson

<http://neildavidson.com/download/dont-just-roll-the-dice/>

~~~
jedc
Completely agree. Neil's a really smart and experienced software CEO (Red Gate
Software in Cambridge, UK) and I thought he had a lot of interesting/useful
stuff to say in that book.

------
whyleyc
If you are already selling, here's a piece of actionable advice if you want to
test whether a user will pay more for your software than you are currently
selling it at - Advertise the software at the higher price point, then when
the user buys it charge them at your current price point. This is good on a
number of levels:

\- You have data points that tell you users will pay more for your software
(to the point of giving you their credit card details)

\- The users will think they are getting a bargain when they realise they've
been charged at a lower price point.

\- You can probably perform this test in <5 minutes by tweaking your
advertised price in HTML and deploying to live.

------
joefreeman
I'm curious - is it ok to charge people different amounts for the same
product? Is it morally ok? Is it even legal?

~~~
btilly
Yes, yes, and yes. So long as you do not discriminate on a "protected
category" like race, gender or sexual orientation.

The classic example that everyone brings up is airlines. If you have 3 random
people sitting in the same section of the same airplane, odds are that they
paid 2, and maybe 3 different prices for the same exact ride. And if one of
them didn't want to stay the weekend before coming back, that one certainly
paid more.

If this still bothers you, consider someone at a swap meet, bargaining with
everyone who walks up. Each person gets a different price for the same
product, depending on how well they negotiate, how you're feeling, etc. It is
no different.

A set price is a convenience, no more, no less. And if you have one, and are
successful, you'll eventually run into a large company that hires people whose
entire job is to change those prices for themselves. Oh sure, they'll wrap it
up in nice phrases like "do you support volume discounts" but at its heart it
is the same as the swap meet.

~~~
joefreeman
Thanks, those are great examples for one-off purchases. How about
subscriptions to services?

~~~
btilly
I first encountered this business fact at a small Wall St company that
provides access to analytics on a particular type of bond. The price for
broker-dealers that issued such bonds was many times higher than for companies
that might be trading them. Both types of companies got the exact same access
to the exact same data, but the value of that data and the frequency that they
were likely to use it was different so they had different prices.

If you want other examples, take a look at licensing for access to various
services. For instance I would guess that universities pay less for the exact
same Microsoft licenses than private businesses. And Microsoft is willing to
grant discounts on those licenses to small startups, in the hope that once
they are real companies they will pay top dollar.

But the master in this arena is Oracle. Monthly license fees are much, much
higher for companies that are locked in to Oracle than for companies that
aren't. This is why they do not quote a price to anyone - they want complete
freedom to negotiate.

If you want to learn more about this, including negotiation strategies, I
highly recommend _Information Rules_. It is about 15 years old, but still
relevant and worthwhile. The key principle is lock-in. If a company is locked
in, you can charge more. If a company is not locked in, you should give a
break, and maximize their opportunities to get locked in. (Oracle is the
master at this.)

------
kawera
quoting pg: "You've found market price when buyers complain but still pay."

------
seiferteric
Of course you can make up a number and try it. But what if your wrong, how do
you properly handle increasing your price on existing customers? Also, how do
you know if it would be better to increase the price and maybe get more per
customer, or decrease and maybe get more customers? How do you test that?

~~~
walke
> But what if your wrong, how do you properly handle increasing your price on
> existing customers?

I think "properly" is to go about it in a way that is fair to everyone. If you
have a customer base who sees value in the service you are providing and the
raise is within reason they should stick around. If it is a very disruptive
price increase you can always grandfather customers in or give them a X-month
run way.

>Also, how do you know if it would be better to increase the price and maybe
get more per customer, or decrease and maybe get more customers? How do you
test that?

Why not just A/B test your pricing structure? Unless your customers
communicate in the same channels you have little risk in charging Customer A
one price and Customer B a different price.

~~~
FooBarWidget
They go to your website, see price A, then they switch IP address and computer
(e.g. they visit your website again with their phone) and see price B.

~~~
wikwocket
I want to say patio11 addressed this, but I may be misattributing. In any case
the advice I recall is to, if anyone notices or complains, offer them a direct
link to the lower price, possibly accompanies by a 10$ off coupon. An apology
about the mix-up is optional, as is bringing up the fact that you are the
founder, and you're happy to chat with customers any time on how to improve
the service.

~~~
SyneRyder
You should probably also charge all customers the lower of the two test price
points at the final checkout step (as mentioned by whyleyc in this thread).
That should avoid most complaints.

------
jacques_chester
This was useless navel-fluff. Pricing is a sufficiently difficult task that
entire books -- not short ebooks: fully dressed textbooks -- have been written
about the topic. You can honest to god hire consultants with _pricing
laboratories_ to work out what to charge.

------
rthomas6
So I know next to nothing about this, and I've never shipped a product of my
own, but why can't you just do something like:

1\. Price it at price $X, record number of buys/month over a few months.

2\. Price it at price $Y, record number of buys/month over a few months.

3\. Now with the assumption that you have a linear demand curve, you can
extrapolate the buys at any price, which would roughly follow the equation B =
(X-Y)/(P1-P2) x P, where B is the number of buys and P is the price in
dollars. Obviously this equation will only work (if at all) for values in a
certain range.

4\. You want to maximize B x P, which is the total money made per month. That
is, assuming costs are always the same regardless of the number of sales.

~~~
wikwocket
Demand curves sadly are notoriously nonlinear:

    
    
      -If priced low, more will buy... unless it's TOO low, then the product is junk
      -If price high, fewer will buy... unless it is VERY high, then the product
        must be a luxury item, hand-crafted out of artisan materials!
    

And demand will vary with seasons, holidays, work schedules, school schedules,
the stock market, the phase of the moon, the price of tea in China, etc.

Fortunately you can get around time-based fluctuations with A/B testing. There
are theories about how to learn the demand curve (see Van Westendorp's price
sensitivity meter), but they are theories only.

------
trebor
This reminds me of the "Tracer Bullets" tip from The Pragmatic Programmer. The
idea being that tests help you see where the code _should_ go and how far off
you are, so that you can aim a little better and try again.

This is just tracer-bullet pricing.

------
jfoster
How to price something: \- Based on your competitors' offering & pricing.
Higher price can indicate higher quality. You also don't want to spark a race
to the bottom. \- Based on what you want your revenue & costs to be. Not
relevant to your customer, but very relevant to your company. \- Through
testing different price points. It's generally easier to start high and go
lower than the other way around.

------
stretchwithme
I've heard starting with a high price can be useful. Its easier to lower
prices than raise them. Your early customers are more committed. You can
perfect things more easily with a small number of users.

And its easier to figure out the impact of price changes with multiple price
changes, which are easier to do when you are going down.

------
0verc00ked
Haha damnit I wish Jason had posted this a day sooner, as yesterday I created
a few threads asking people how much they'd pay for a tool I haven't built
yet.

How do you balance this with the principle of not building something people
don't want/won't pay for?

~~~
msellout
Get them to buy in advance.

------
davmar
not a lot of actionable information in this post. very fluffy. reminds me this
comment that a poster made yesterday.

<http://news.ycombinator.com/item?id=5033493>

~~~
0verc00ked
I disagree. Though maybe there isn't all that much here (certainly nothing
new/groundbreaking), I still think it's useful advice coming from somebody who
knows what they're talking about. Maybe it doesn't deserve the all the
upvotes/attention it receives, but that just goes to show you how important
credibility is.

------
davemel37
lots of theories on price, but none seem to start with the more important
question. WHO WILL PAY THE MOST FOR YOUR PRODUCT. If you sell a vitamin that
improves eyesight, are you better off selling it to the mass public, or to
hunters to improve their hobby, or perhaps to pilots to extend the life of
their career. The value proposition here is vastly different...

Pricing a product should not start with what can I get away with charging, it
should start with, WHO DOES THIS PRODUCT CREATE THE MOST VALUE FOR?!

~~~
Fundlab
This sounds a lot more rational to me than the entire blog post

------
Narkov
Charge what the market will bear. Yes, I haven't answered the question.

