

Which is better: Many customers at low price-point or few at high price? - hawke
http://blog.asmartbear.com/price-vs-quantity.html

======
lsc
eh, for me? I am type A mostly because I don't enjoy negotiation and hard
sales. If you have an expensive product, at least in my sector, you are
expected to negotiate, sometimes for months on price. Then you are expected to
give a discount to the customers that waste the most of your time.

With low-value products? Here is the price. want it? If you want to change the
price, sure, sometimes you need to do that, but you change it for everyone.
(In fact, in the VPS sector, It is traditional to change the price for
existing customers as well as new customers. Linode deserves some of the
credit for making that traditional. In the co-lo or bandwidth business, where
it's all negotiated? it's traditional to offer like 50% better deals to new
customers and to squeeze your old customers until they leave, like it is in
real-estate leases. I recently lowered the price on my low-end co-lo and gave
the lower price to all my existing customers, to much surprise. )

Right now, I'm trying to move some products that are traditionally sold with
lots of negotiation (Like co-location) into the "here is the price, you want
it?" model, which is really in everyone's interest except the salesguy. And
salesguys in this industry make a lot of money; two big local co-lo salesguys
have contacted me; I know they are good, and that they can bring me customers,
as I know a bunch of people that bought through them. The problem? they want
10% of the revenue from the customer for the life of the customer. 10% isn't
far from my own target margin for co-lo, and some plans, I don't even make
that much. And for the life of the customer? through any upgrades down the
road? it seems like a bookkeeping nightmare.

The other advantage of having lots of small customers is that if someone wants
something that you don't want to do? (in my case, for instance, people that
want password auth to my infrastructure, or people that want to run windows)
it's pretty easy for me to say "That's not what I do. Here is a refund; I hear
that provider X can help you out" - whereas if that customer was 1/10th of my
revenue? I'd be spending all night trying to get a microsoft system working,
or cleaning up after a script kiddie broke into a weak password and got into
the customer's management interface.

------
bignoggins
As a data point I have about 900,000 customers to service (iPhone apps). I've
also had times in my career where I have had one customer (department of
defense). I'm much happier with the 900,000. I think an assumption Jason makes
that i would contest is that you need to provide the same level of service to
10,000 people that you would provide to 10. When your app is at a low price
point, you aren't competing on customer service anymore. So why try? Just use
a virtual assistant to handle level one service requests, have a FAQ, etc.

~~~
shazow
Are there not perhaps thousands of people who would be using your product
under the umbrella of the Department of Defense?

~~~
true_religion
Those people aren't making purchasing decisions, ergo they're not customers
but users.

------
molsongolden
My favorite part of this article was the first half of the summary:

"If you want happiness and fulfillment from a small company, strive for B"

$10,000/mo revenue with only 10 customers to keep happy vs. 1000 customers to
service? Yes, please.

Company B could have just as much potential for growth as company A. Sure A
has the potential to have more brand evangelists bringing in new customers but
B has more time to devote to totally babying their 10 customers and making
sure they will be likely to recommend the product/service to others in their
industry. Company B only needs 1 referral to make another $1,000 per month
whereas company A would need 100 referrals.

Also think about upselling down the road, if a company can afford $1,000/mo
for your base product they will probably be willing and able to pay for
upgrades that will make their work easier or more efficient.

I'm not arguing that B is better than A, but I think that B could have just as
much growth with less stress.

~~~
mseebach
On the other hand you need just one cost-cutting round or one unforgivable
support foul-up to lose 10% of your revenue overnight. Model A likely won't
see that kind of volatility.

~~~
modoc
I disagree. People who are paying $5/month have a much lower threshold before
they leave than an enterprise paying $20,000/month. Also larger more expensive
services tend to end up with more business integration and the cost of moving
to another service is typically substantial.

~~~
wensing
+1.

Also, consider setting a price that cuts out the vast majority of demanding
cheapskates but keeps it salient for the rest. $200 is a good starting place.
You can also achieve this by charging for the entire year up front instead of
monthly billing.

------
raverbashing
Let me tell you (a bit from experience)

It has to be low, but it shouldn't be too low!

\- Early adopters really don't mind paying more

\- If the app has some intrinsic corporate value it can be priced higher

\- Pricing "sets the tone" of the product

For example, a regular user won't mind paying $1 compared to a $0.10 product.
So charge $1

And think of how many copies you have to sell more at price X to profit like
price Y.

Suppose an exageration: price X is $1 and price Y is $100. Is selling at price
X really 100 times more difficult than at price Y?

Selling 5 units at Y price may be difficult but selling 500 units at price X
may be harder

You don't want to celebrate 1000 sales at $1, you're still starving at the end
of the month.

------
redidas
I’ve worked for 2 company Bs so far and can honestly say that I think I’d much
rather prefer a company A instead.

Both company Bs are a little over 10 years old, and still run the same
software they started out with. They both have had a history of having a few
very large customers each year, each of them demanding a lot of customization.
It could be the way the each company B handled it, but it shows. The codebase
and system architecture is a mess, full of quick fixes and patches because big
customer x was requesting feature y.

It’s made for an extremely frustrating system to work with. I’m sure a lot of
it could have been avoided, but at the same time things sometimes needed to be
done quick and dirty, and the software team probably didn’t have the resources
to do things the “right way.” It’s easy to criticize looking back. Probably
one of those things easier said than done.

If you are running or working at a company B, please please please think of
the future, the business scalability/maintainability, and the sanity of your
employees/peers.

------
Rickasaurus
I work for a company that has only tens of clients (banks) but each pays us in
the hundreds of thousands to millions range, an extreme example of B. Just one
of these customers takes up to a year to acquire.

On the plus side, things can move more slowly and in a well thought out way.
Also, there's no worry around your usual "web scale" issues. There's also a
lot of freedom around exploring new ways to do things because of the slower
pace.

On the down side, the customers sometimes put insane requirements in our
contracts. Security audits, source code in escrow, huge amounts of insurance,
long weekly meetings. The culture of bureaucracy bleeds if you're not careful.
Also, income is lumpy and one client can end up costing more than they're
paying you if you're not careful.

All in all I think it's the best kind I've experienced so far. That's probably
because my employer has done a great job of insulating me from the down sides
though :).

~~~
bmelton
Having been on both sides of the Fortune 100 sales cycle, it was always a fun
game, as a buyer, to see how close we could get to being written off during
the courtship process. Drinks at lunch are the norm, but maxing out the
champagne costs, getting box seats at games, etc.

Once (if) the sale closed though, it was down to business, and doing our
damnedest to maximize both our time and the vendors. I've never worked with or
for banks, but I can't imagine them being TOO terribly different from federal
IT, so I definitely sympathize with your plight. It seems as though all they
really want you to do is acknowledge, in every way possible, how happy you are
to have their business, and how lucky you are to be in meetings with them all
day every day.

~~~
Rickasaurus
Funny thing is, we're a 25 person company and most of our competitors are much
much bigger. However, they're so slow, inflexible and outdated tech wise that
we just blow them out of the water with our offering (we charge 2-5x the going
rate).

The biggest insight that contributed to our success came from our CFO who
realized that big corporate IT is where dreams go to die and that we should
route around them as much as is possible.

------
jordhy
Strive to get many customers paying a high price for your product. Apple
computers and IBM mainframes are two of the most profitable product lines in
IT history.

Personally, I love the high stability of a broad consumer base. However, you
can architect a successful business either way.

~~~
wensing
I'm surprised with the amount of Apple love in startup-land, more startups
don't attempt to emulate their pricing strategy. Instead, we are A/B testing
our way to local maxima with products that are supposedly changing the world.

~~~
Travis
I agree. I'm also a little surprised at the false dichotomy presented in this
thread. Using hand-wavy or made up numbers is not a meaningful way to have
this discussion.

Every business has a different decision to make. It feels like this thread is
thinking of it like maximizing an equation
(FindingMaxRevenueGivenPriceSensitivies()). Instead, some products lend
themselves to low cost support; sell those more cheaply. Some products require
insurance-like support contracts -- those are going to be enterprisey. Some
products will lend well to cheap inexpensive versions and high end enterprise
versions, without changing the product (the value prop is really high to a
business, esp if it's a service that can automate out the cost of a person's
salary).

This thread and the obsession with A/B testing result from a hyper focus, like
you said, on finding local maxima. I think it's often useful to take a step
back and find the high level factors and built a pricing model around that.

(Of course, nothing excuses you from talking to customers.)

------
paulsutter
Uniformity and automation.

With only 10 customers, the customers are less likely to be uniform than with
1000. With 10 customers automation is overengineering, but you can only get to
1000 customers if your processes are automated.

So the 1000 customer company seems more attractive to an investor (or
candidate employee) than the 10 customer company.

------
vaksel
Easy...both.

Keep the $10/mo plans for consumers. And offer the $1,000/mo enterprise plans
for enterprise.

That way your cheap customers will drive a lot of your high end sales.

~~~
wensing
Maintaining two product lines for two segments is a recipe for lack of focus
and serving two masters. In the end you will choose to focus on one at a time
and may never do both.

~~~
vaksel
it's up to you to define your product line.

nothing is stopping you from just limiting the products.

Normal Accounts? Max 5-20 users.

Enterprise? Unlimited Users

no real difference between the products except for a single value

~~~
wensing
It's fine to have two products for different segments within the consumer or
business markets, but having one product for consumers and another for
businesses is not as simple as changing a single value. Very different
customers with different needs, demands, and expectations of your product.

~~~
r00fus
So why differentiate, other than with a value that clearly segments them?

This is not unlike Apple's laptop plan - before it was retired, the plastic
unibody 13" macbook and 13" aluminum macbook pro had almost no distinctions to
a consumer aside from exterior.

------
Androsynth
I am currently close to releasing an app on the iPad and I have done lots of
internal debating as to which price to choose. Here is my situation:

-I am entering a smaller addressable market, so I know I won't be able to grow forever and therefore I am focusing on building brand loyalty and getting repeat customers.

-I am planning on releasing new apps at a steady cadence, probably 1/month (it doesnt make sense in my situation to release new content within the app itself).

So with these two things combined, it seems logical to go at a low price-
point. A low price point should gather initial customers and then be small
enough to keep them coming back month after month. So I am currently leaning
towards $1 per app.

But I have heard enough about the app market pricing and from people on this
board to give me second thoughts, specifically:

-early users are insensitive to price-point

-ipad app purchasing is very elastic (ie you get the same revs depending on whether you sell it at $1 vs $4 etc)

I've thought a lot about releasing it at a higher price point, $2, maybe even
$3. The biggest reason I am leaning towards $1 is the fact that I intend to
release many apps and I see each as a microapp and therefore a micropayment.
So even though I think one app may be worth more than $1, I think the value of
each app over time is logarithmic. Therefore its better to sell 5 at $1 than 2
at $2, etc.

The apps themselves are interactive ebooks focused on military history. (a
vague description, but unfortunately I am a few days away from having my
website up)

------
hsmyers
This is simply a restatement of what Philippe Kahn showed the world and more
particularly Microsoft. The Borland compiler came pretty much from no where
and became a serious competitor for the powers that be. While the IDE was
quite impressive, the major difference lay in the price. As I remember it,
Borland was very near $100 while Microsoft was much closer to $500. Details
(some) here: <http://en.wikipedia.org/wiki/Philippe_Kahn> More elsewhere by
way of Google or your favorite search engine.

~~~
rmason
What is even more impressive was that while Borland began its rise without
venture capital to 500 million dollars in sales Kahn himself was an illegal
alien.

[http://www.fundinguniverse.com/company-histories/Borland-
Int...](http://www.fundinguniverse.com/company-histories/Borland-
International-Inc-Company-History.html)

------
tedmiston
I view the acquisition as a tradeoff in whether you'd like to exert a lot of
effort upfront or down the road.

If you exert a lot of effort upfront, you can collect a few high-paying
customers and provide more tailored support to their needs. Of course the
fewer customers you have means each has a greater proportional influence in
affecting the direction of your product. That is, assuming customer feedback
is something you're interested in, which I acknowledge is not necessarily
always the case.

If you would rather exert effort more "constantly" and gradually down the
road, than the many customers approach is good. Many apps which end up in this
situation do so because of a massive user spike at the point when their app
"goes big". In that case, the short-term growth is clearly not gradual, but
the long-term growth leading up to that point may be.

My personal preference would be a small to medium customer base to provide
more tailored support.

------
hoka
I think having to please fewer customers could be great, but you run a greater
risk of someone undercutting you and taking them away. Though, if you have 10
customers vs 1000, it's a lot easier to personally try convince those 10 to
stay.

~~~
patio11
Welcome to HN.

In general, people (especially businesses) do not make decisions based on
price. This is one of the most common misconceptions of new software/startup
founders. Indeed, for higher paying customers, they are often _shockingly_
price insensitive, assuming you are genuinely delivering value to them.

More on this topic in my Microconf speech in, oh, 7 hours or so, but I'll try
to hit the highlights in a blog post or something in the coming week.

~~~
jiggy2011
This depends if you are dealing with public sector organizations or not.

In many cases these organizations _have_ to review their contracts every X
years and _have_ to take the cheapest deal (unless they can provide evidence
that the supplying cannot produce what they have promised etc).

I have spoken to a few people now who were supplying various government
departments and had excellent supplier/client relationships (they were going
out of their way on weekends to fix problems etc) where under any ordinary
circumstances this would continue. However they got to the end of some review
period and another supplier (who is known for providing very mediocre service)
undercut them by some small amount that they were unable to match so they were
unable to continue the relationship despite every stakeholder being happy.

------
brackishlake
I would always, always

— always —

prefer a higher margin and fewer customers.

------
cantankerous
Just tossing it out there, but isn't the price point of a product also a big
director in consumer expectations? Not that I support making a crappy product,
but consumers who pay a lot more generally have higher expectations about what
they're spending their money on (rightly so, at times). If you have a 1000
people who figure it's the price of a soda so who cares vs 10 people who won't
get off your case about some pet feature they want. It's all hypothetical, but
maybe something to keep in mind.

~~~
patio11
You'd be surprised! In my experience, folks who pay A WHOLE NINETY NINE CENTS
OF MY MONEY have very shockingly high expectations of polish / quality /
feature selection (but no desire to e.g. read what the software actually
does), whereas if someone signs e.g. a contract for $X0,000 for enterprise
software, it lacks a feature, and they ask for it, "Thanks for the feedback,
we'll consider adding that in a later release. In the meanwhile, I suggest ...
as a work around" makes them _absurdly happy_.

For more on this topic, go to HNsearch.com and look for [patio11 pathological
customers].

~~~
zorbo
Given that a 99c app will attract a _much_ larger user base, chances of
running into those users who expect to sit on the front row seat for free also
increases.

The nice thing is, they can be ignored, as long as you do it tactfully. If you
lose them as a customer, it's no big loss. A single extremely high demanding
big customer that pays in the ten to hundred thousands is hard to ignore. In
fact, their high demands can run your business into the ground, if you're not
careful.

------
herval
If your product needs zero rework for each sale (and scales easily), many
customers is the obvious way. If it requires a sales process (even if it's as
simple as signing a contract), less customers (paying more) is the way.

Personally, I prefer the "less customers" approach. I find it much easier to
pleas everyone and feel like I'm not "working for free" when "everyone" is a
relativelly small group and the payback is still high

------
rythie
$1,000/mo. is fine except if it becomes a mainstream need, then competition
turns up with it's $100/mo. product (or even free) and you can't drop the
price because the sales cycle costs too much, product requires individual
integrations etc.

------
kingrolo
I've definitely concluded that work hectic is proportional to the number of
clients to keep happy, but I imagine this only kicks in above a certain price
point.

~~~
tehayj
How clearly and "piss easy" your product or service works makes a big
difference too. I run e-learning ventures since a few years and just changing
the starting page of a course area can have dramatic influence on the amount
of customer support you have to take care of.

After some time having a rather expensive product that is still popular is the
best of both worlds and it can work out, especially if you are in a market
where people need what you offer.

------
blhack
Many customers gives you more flexibility. Your incremental return goes up
with fewer customers, meaning losing 1 hurts more the fewer you have.

~~~
wensing
True, but keep in mind this logic has diminishing returns. What if we were
comparing 1,000 paying $1,000 per month or 100,000 paying $10?

------
chmike
The optimal price is obtained by maximizing price * number clients.

------
thomasloh
establishing a huge user base first is definitely better than scoring a few
customers, who might unsubscribe at anytime because of the high price

------
tomrod
It all depends on the elasticity of consumption.

------
shellox
I'm not an expert in this topic, but I would say that the many customers at
the low price-point are more important than the few high-price one. If you
have only 5 high-price customers, which generate the most of your income and
they decide to break up the business relations with you, than you have
probably a big problem and loose a lot of money. So, I think it's better to
have a lot of low price customers, because if some of them break up the
business relations with you, then it doesn't matter that much. You have enough
low-price customers left, which generate the most of your money and some high-
price customers on the top of it, which generate a lot of money as well. So
the risk to loose money is probably lower. SAP is a good example. They first
produced products for the big and important companies, but they figured out
that the middle-class customers generate a lot of money as well. I guess it
can differ, but I think it's probably the better decision.

